<PAGE>
As filed with the Securities and Exchange Commission on August 16, 1999
Registration No. 333-82511
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ORATEC INTERVENTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 3845 94-3180773
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
3700 Haven Court
Menlo Park, California 94025
(650) 369-9904
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
--------------
Kenneth W. Anstey
Chief Executive Officer
ORATEC Interventions, Inc.
3700 Haven Court
Menlo Park, California 94025
(650) 369-9904
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
--------------
Copies to:
Mark B. Weeks Patrick T. Seaver
Laurel Finch Charles R. Ruck
Brooke Campbell Shayne Kennedy
VENTURE LAW GROUP LATHAM & WATKINS
A Professional Corporation 650 Town Center Drive
2800 Sand Hill Road Costa Mesa, CA 92626
Menlo Park, California 94025
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered (1) Per Share (2) Offering Price (2) Registration Fee
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<S> <C> <C> <C> <C>
Common stock, par value $0.001 per
share.............................. 2,875,000 $17.00 $48,875,000 $13,588 (3)
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</TABLE>
(1) Includes 375,000 shares of Common Stock issuable upon the exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) and Rule 457(o) under the
Securities Act.
(3) Previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This preliminary prospectus +
+is not an offer to sell these securities and is not soliciting an offer to +
+buy these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated August 16, 1999
PROSPECTUS
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2,500,000 Shares
[ORATEC LOGO APPEARS HERE]
Common Stock
------------
This is ORATEC's initial public offering of common stock. All the shares of
common stock are being sold by ORATEC.
We expect the initial public offering price to be between $15.00 and $17.00.
Currently, no public market exists for the shares. We have applied to list our
common stock on the Nasdaq National Market under the symbol "OTEC."
Investing in our common stock involves risks which are described in the "Risk
Factors" section beginning on page 5 of this Prospectus.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.................................. $ $
Underwriting discount and commissions.................. $ $
Proceeds, before expenses, to ORATEC................... $ $
</TABLE>
The underwriters may also purchase up to an additional 375,000 shares of
common stock from us at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover over-
allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
------------
Merrill Lynch & Co.
J.P. Morgan & Co.
U.S. Bancorp Piper Jaffray
------------
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Prospectus................................................ 3
Risk Factors............................................................. 5
Special Note Regarding Forward-Looking Statements........................ 12
Use of Proceeds.......................................................... 13
Our Policy Regarding Dividends........................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 39
Transactions with Affiliates............................................. 48
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 55
Underwriting............................................................. 57
Legal Matters............................................................ 59
Experts.................................................................. 59
Where You Can Find More Information...................................... 60
Index to Financial Statements............................................ F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We have
not and the underwriters have not authorized any other person to provide you
with information different from that contained in this prospectus. We are
offering to sell, and seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
----------------
We own or have rights to trademarks or tradenames that we use in conjunction
with the sale of our products. The term "ORATEC" and our logo are registered
trademarks owned by us. We have also filed for trademark protection for the use
of the terms SpineCATH, IDET and ElectroThermal, which are used in conjunction
with the sale of our products. This prospectus also makes reference to
trademarks of other companies.
Our principal offices are located at 3700 Haven Court, Menlo Park, CA 94025
and our telephone number is (650) 369-9904. We were incorporated in May 1993 as
Dorsamed Incorporated, and we changed our name to ORATEC Interventions, Inc. in
October 1995.
i
<PAGE>
SUMMARY OF THE PROSPECTUS
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to those statements.
ORATEC Interventions, Inc.
ORATEC Interventions is a leader in the development of medical devices that
use controlled thermal energy to treat spine and joint disorders. We currently
market two minimally invasive systems, the SpineCATH IntraDiscal ElectroThermal
Therapy, or IDET, system and the ElectroThermal Arthroscopy System. Our
proprietary systems use heat to shrink and repair damaged or stretched soft
tissue. We market our products to orthopedic surgeons, neurosurgeons,
anesthesiologists, radiologists and physiatrists.
Our SpineCATH IDET system offers a minimally invasive outpatient alternative
to patients suffering from chronic low back pain caused by degenerative disc
disease. The IDET system enables physicians to navigate to the location of
damaged tissue within a spinal disc using a self-guiding single use catheter.
Physicians can then apply heat directly to the disc wall, causing the tissue to
contract and thicken. We believe that the application of heat desensitizes
nerve fibers and results in a stiffening of the disc wall. Following the IDET
procedure, many patients experience significant pain reduction and improved
overall quality of life, and reduce or eliminate pain medication. In addition,
the procedure does not require general anesthesia or extended hospitalization
and does not subject the patient to the post-operative complications often
associated with spine surgery. The IDET system was formally launched in October
1998, and we estimate that, as of June 30, 1999, over 250 physicians had
performed the IDET procedure on approximately 4,000 patients.
The treatment of back pain costs the U.S. health care system as much as $100
billion annually and represents the second most common reason for doctor
visits. Conditions related to back pain account for more hospitalizations
annually than any other orthopedic condition. Specifically, it is estimated
that, at any given time, five million individuals in the U.S. suffer from low
back pain. Many of these cases are resolved within three months using non-
operative therapies ranging from physical therapy to spinal injections.
However, it is estimated that there are approximately 1.4 million people who
have failed to improve with non-operative therapies. Spine surgery is not
recommended for these individuals because the level of disc degeneration does
not yet warrant a spinal fusion. We believe these individuals are candidates
for our IDET procedure.
In addition to our spine products, we offer a proprietary ElectroThermal
Arthroscopy System, which treats joint disorders through the application of
controlled heat by shrinking soft tissue. The system provides a minimally
invasive outpatient treatment option for patients who suffer from joint
instability caused by loose or stretched ligaments and whose most viable option
is often open surgery. In addition, we believe our system can improve on
existing arthroscopic procedures, which may require tissue shrinkage in
combination with tissue anchoring, cutting and tissue removal, or ablation. The
ElectroThermal Arthroscopy System was launched in March 1997, and we estimate
that, as of June 30, 1999, over 1,500 physicians had used our arthroscopy
products in approximately 45,000 procedures.
Approximately 2.2 million arthroscopic procedures were performed in the U.S.
in 1998. However, many joint injuries and disorders are still treated using
open surgery because, for many of these conditions, arthroscopic techniques are
not available, not effective or are difficult to perform. Our products expand
arthroscopic treatment options for surgeons treating joint disorders.
We have a focused sales and marketing team for each of the spine and
arthroscopy markets in order to address the different physician groups in these
high growth areas. Our sales organizations include direct sales employees
complemented by select sales agencies. We have recently entered into an
exclusive distribution agreement with DePuy AcroMed, a division of Johnson &
Johnson, for the international marketing and sales of our spine products. The
marketing platform for both spine and arthroscopy is built on scientific and
clinical data and extensive surgeon training programs. The products we
currently market have received 510(k) premarket clearance from the FDA, and as
of June 30, 1999 we had six issued patents, eight notices of allowance and 40
U.S. and foreign patent applications pending.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by ORATEC....... 2,500,000 shares
Common stock to be outstanding after
the offering........................ 12,245,546 shares
Use of proceeds...................... Expanded sales and marketing activities,
future product development, repayment of
debt and general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market sym-
bol................................. "OTEC"
</TABLE>
This table is based on shares outstanding as of June 30, 1999 and excludes:
(a) 1,881,607 shares that were subject to outstanding options at a weighted
average exercise price of $3.39 as of June 30, 1999; (b) 127,745 shares that
were issuable upon exercise of outstanding warrants at a weighted average
exercise price of $5.48 per share as of June 30, 1999; and (c) an aggregate of
123,768 shares that were available for future issuance under our 1995 stock
plan as of June 30, 1999.
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
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1996 1997 1998 1998 1999
------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales........................ $ -- $ 2,600 $ 11,129 $ 4,106 $ 12,899
Gross profit................. -- 859 4,563 1,752 6,638
Total operating expenses..... 2,384 7,857 15,748 6,676 11,583
Net loss..................... (2,302) (6,832) (11,342) (4,800) (5,284)
Net loss per common share,
basic and diluted........... $ (1.00) $ (2.91) $ (4.72) $ (2.01) $ (2.16)
Shares used in computing net
loss per common share, basic
and diluted................. 2,304 2,347 2,403 2,393 2,447
Pro forma net loss per share,
basic and diluted
(unaudited)................. $ (1.51) $ (0.55)
Shares used in computing pro
forma net loss per share,
basic and diluted
(unaudited)................. 7,525 9,688
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short term investments...... $ 13,179 $49,279
Total assets........................................... 25,020 61,120
Long term obligations, net of current portion.......... 5,951 5,951
Redeemable convertible preferred stock................. 35,816 --
Common stock, additional paid-in capital, deferred
stock compensation and accumulated deficit............ (25,642) 46,274
</TABLE>
The as adjusted numbers in the table above are adjusted to give effect to
receipt of the net proceeds from the sale of shares of common stock offered by
us at an assumed offering price of $16.00 per share, after deducting the
estimated underwriting discount and commissions and estimated offering expenses
payable by us. See also "Use of Proceeds," "Capitalization" and "Underwriting."
Except as otherwise indicated, all information in this prospectus is based on
the following assumptions: (a) the completion of our three for five reverse
stock split prior to the completion of this offering, (b) the conversion of
each outstanding share of redeemable preferred stock into one share of common
stock immediately before the completion of this offering, (c) no exercise of
the underwriters' overallotment option, (d) our reincorporation in Delaware
before the effectiveness of this offering and (e) the filing of our amended and
restated certificate of incorporation immediately prior to the closing of the
offering.
4
<PAGE>
RISK FACTORS
If you purchase our common stock and become an ORATEC stockholder, you will
be subject to risks inherent in our business. Our stock price will fluctuate
for many reasons, including how our business performs relative to, among other
things, competition, market conditions and general economic and industry
conditions. You should carefully consider the following risk factors as well as
other information in this prospectus before purchasing our common stock. The
risks and uncertainties described below are intended to be the ones that are
specific to us but are not the only ones that we face. Additional material
risks and uncertainties that are specific to our industry or to companies going
public may also impair our business.
Because we are a new company operating largely in markets that we are creating,
we may fail to gain market acceptance for our products and our business could
suffer.
We have developed products for spine and joint disorders that we believe are
not effectively addressed by existing medical devices. Because no established
market exists for our products, we face the challenge of establishing the
viability of this market, as well as gaining widespread acceptance of our
products. If we fail at either task, we may not achieve expected revenues and
may never become profitable.
If we fail to achieve significant sales growth of our SpineCATH IDET system, we
may never become profitable.
Because the market for our spine products is new and evolving, we cannot
accurately predict either the future growth rate, if any, or the ultimate size
of the spine market. Physicians will not use our spine products unless they
determine, based on experience, clinical data and recommendations from
prominent physicians and mentors, that the SpineCATH IDET system is an
effective means of treating spine disorders. In addition, physicians tend to be
slow to change their medical treatment practices because of perceived liability
risks arising from the use of new spine products and the uncertainty of third
party reimbursement for the SpineCATH IDET system.
If physicians and payors do not support the use of our products, we may not
achieve future sales growth.
Our product sales have mainly been to a group of early adopting physicians
who are receptive to minimally invasive techniques. Further sales may require
us to convince physicians who currently favor existing techniques to switch to
our minimally invasive procedures. Many physicians will not purchase our
products until there is sufficient, long term clinical evidence to convince
them to alter their existing treatment methods. In addition, some payors
require the publication of peer reviewed clinical data before authorizing
payment. There has been no published clinical data for our spine products. We
have been collecting clinical data on patients for only two years for our spine
products and three years for our arthroscopy products. Thus, continued
publication of positive clinical data and longer term patient follow-up are
necessary for us to achieve significant sales growth.
Because we have a history of losses, we may never become profitable.
Our sales may not continue to grow, and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses each year
since inception. In particular, we incurred losses of $11.3 million in 1998 and
$5.3 million in the six months ended June 30, 1999. As of June 30, 1999, we had
an accumulated deficit of approximately $26.3 million. We anticipate that our
operating expenses will increase substantially in absolute dollars for the
foreseeable future as we expand our sales and marketing, manufacturing, product
development and administrative staff.
5
<PAGE>
You may have a difficult time evaluating an investment in our stock because we
have a limited operating history.
You can only evaluate our business based on a limited operating history
because we began selling arthroscopy products in 1997 and spine products in
1998. This short history may not be adequate to enable you to fully assess our
ability to successfully develop our products, achieve market acceptance of our
products and respond to competition.
Because we lack sufficient long term data regarding the efficacy of our
products, we could find that our long term data does not support our current
clinical results.
Because our spine products are supported by only two years of patient follow
up and our arthroscopy products are supported by only three years of patient
follow up, some physicians may not purchase our products until longer term data
is available. If longer term patient studies indicate that treatments with our
products do not provide patients with sustained benefits, our sales could
decline. If longer term patient studies indicate that our procedures cause
tissue damage or other negative effects, we could be subject to significant
liability. Further, because our data has been produced in studies that are not
randomized and involve small patient groups our data may not be reproduced in
wider patient populations. In addition, we are aware of studies related to our
arthroscopy products that have produced bench data that is inconsistent with
our scientific findings. If we are unable to produce clinical data that is
supported by the independent efforts of other clinicians, our business could
suffer.
Because we face significant competition from companies with greater resources
than we have, we may be unable to compete effectively.
The market for our products is intensely competitive, subject to rapid change
and significantly affected by new product introductions and other market
activities of industry participants. We compete with many larger companies that
enjoy several competitive advantages, including:
. established distribution networks;
. established relationships with health care providers and payors; and
. greater resources for product development, sales and marketing and
patent litigation.
Competition in the Arthroscopy Market
Several larger companies sell products that compete directly with our
ElectroThermal Arthroscopy System. For example, ArthroCare Corporation and
Mitek, an Ethicon division of Johnson & Johnson, both offer tissue shrinkage
products. We also compete in the cutting and tissue removal, or ablation,
product market with ArthroCare, Mitek and CONMED Corporation.
Competition in the Spine Market
There are numerous treatments for low back pain, including physical therapy,
medication and spinal injections. Our IDET procedure is sometimes offered to a
patient as an alternative to spinal fusion, and thus spine implant companies,
such as Sofamor Danek, a division of Medtronic, Sulzer Spine-Tech, Surgical
Dynamics, a U.S. Surgical division of Tyco International, DePuy AcroMed, a
division of Johnson & Johnson, and SYNTHES-STRATEC may be viewed as
competitors. We are also aware that Radionics, a privately held medical device
company, offers a radiofrequency, or RF, probe which is designed for lesioning
in the spine. See "Business--Competition."
These and other large companies may decide to dedicate substantial resources
to develop more directly competitive products.
6
<PAGE>
Because of the importance of our patent portfolio to our business, we may lose
market share to our competitors if we fail to protect our intellectual property
rights.
Protection of our patent portfolio is key to our future success, particularly
because we compete in the medical device industry. We rely on patent
protection, as well as a combination of copyright, trade secret and trademark
laws, and nondisclosure and confidentiality agreements and other contractual
restrictions to protect our proprietary technology. However, these legal means
afford only limited protection and may not adequately protect our rights or
permit us to gain or keep any competitive advantage. For example, our patents
may be challenged, invalidated or circumvented by third parties. While we have
received notices of allowance with respect to some patent claims for our spine
products, none of these patents has issued. Our patent applications and the
notices of allowance we have received may not issue as patents in a form that
will be advantageous to us. Our patents and applications cover particular
aspects of our products and technology. There may be more effective
technologies, designs or methods. If the most effective treatment method is not
covered by our products or applications, it could have an adverse effect on our
sales. If we lose any key personnel, we may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or other trade
secrets by those former employees. Furthermore, the laws of foreign countries
may not protect our intellectual property rights to the same extent as the laws
of the U.S. Finally, even if our intellectual property rights are adequately
protected, litigation may be necessary to enforce our intellectual property
rights, which could result in substantial costs to us and result in a
substantial diversion of management attention. If our intellectual property is
not adequately protected, our competitors could use the intellectual property
that we have developed to enhance their products and compete more directly with
us, which could result in a decrease in our market share.
Because the medical device industry is litigious, we are particularly
susceptible to an intellectual property suit.
There is a substantial amount of litigation over patent and other
intellectual property rights in the medical device industry generally and in
the spine and arthroscopy market segments particularly. Infringement and other
intellectual property claims, with or without merit, can be expensive and time-
consuming to litigate and divert management's attention from our core business.
While we attempt to ensure that our products do not infringe other parties'
patents and proprietary rights, our products may infringe. Whether a product
infringes a patent involves complex legal and factual issues, the determination
of which is, in many cases, not certain. In addition, because patent
applications can take many years to issue, there may be applications now
pending of which we are unaware, which may later result in issued patents which
our products may infringe. There could also be existing patents that one or
more of our products may inadvertently be infringing of which we are unaware.
As the number of competitors in the markets for minimally invasive treatment of
spine and joint disorders grows, the possibility of a patent infringement claim
against us increases.
Our spine and arthroscopy products and the methods they employ may be covered
by U.S. patents held by our competitors. We have made a careful analysis in
consultation with our experts and, based on such analysis, we believe that
either such patents or claims are invalid or if valid that we do not infringe.
If the holder of patents brought an infringement action against us, the cost
of litigating the claim could be substantial. In addition, if the relevant
patent claims were upheld as valid and enforceable and our products were found
to infringe the patent, we could be prevented from selling the relevant product
unless we could obtain a license from the owner of the patent or were able to
redesign our product to avoid infringement. A license may not be available or
if available may be on terms unacceptable to us, or we may not be successful in
any attempt to redesign our products to avoid any infringement. Modification of
our products or development of new products may require us to conduct
additional clinical trials for these new or modified products and to revise our
filings with the FDA, which is time consuming and expensive. If we were not
successful in obtaining a license or redesigning our product, our business
could suffer.
7
<PAGE>
If health care providers cannot get reimbursed for the procedures using our
products, our sales may decline.
Physicians, hospitals and other health care providers are unlikely to
purchase our products if they do not receive reimbursement from third party
payors for the cost of the procedures using our products. Some payors have
refused to reimburse for the cost of procedures using our products until peer
reviewed clinical data has been published. In addition, even upon the
publication of peer reviewed data, a payor still may not reimburse for the
procedure. The advent of contracted rates per procedure has also made it
difficult to receive reimbursement for disposable products, even if the use of
these products improves clinical outcomes. See "Business--Third-Party
Reimbursement."
If we are sued in a product liability action, we could be forced to pay
substantial penalties.
We manufacture medical devices that are used on patients in surgery, and we
may be subject to a product liability lawsuit. In particular, the market for
spine products has a history of product liability litigation. We have reported
to the FDA a few instances in which the tip of our SpineCATH catheter broke
off in the patient's body as the catheter was being removed after the
procedure. We believe that these instances did not result in any negative
health effect and were not the result of a product malfunction.
Any product liability claim brought against us, with or without merit, could
result in the increase of our product liability insurance rates or the
inability to secure coverage in the future. In addition, we would have to pay
any amount awarded by a court in excess of policy limits. Our insurance
policies have various exclusions, and thus we may be subject to a product
liability claim for which we have no insurance coverage, in which case we may
have to pay the entire amount of any award. Even in the absence of a claim,
our insurance rates may rise in the future to a point where we decide not to
carry this insurance. Finally, even a meritless or unsuccessful product
liability claim would be time-consuming and expensive to defend and could
result in the diversion of management's attention from our core business. See
"--Complying with FDA and other regulations is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties."
Any failure to build and manage our sales organization may negatively affect
our market share and revenues.
We currently have two separate sales forces, one for each of our spine and
arthroscopy product lines, and we rely on a combination of direct sales
employees and sales agents to sell each product line in the U.S. We need to
expand the spine sales team substantially over the next twelve months to
achieve our market share and revenue growth goals. There are significant risks
involved in building and managing our spine and arthroscopy sales forces,
including:
. failure to manage the development and growth of two distinct sales
forces;
. failure to adequately train both our employees and our outside sales
agents in the use and benefits of our products; and
. dependence on outside agencies, over which we have limited or no control.
See "--If we fail to support our anticipated growth in operations, our
business could suffer." See also "Business--Sales and Marketing."
Any failure in our physician training efforts could significantly reduce
product sales.
It is critical to the success of our sales effort to train a sufficient
number of physicians and to provide them adequate instruction in the use of
our products. We rely on physicians to spend their time and money to attend
our training sessions. If physicians are not properly trained they may misuse
or ineffectively use our products. This may result in unsatisfactory patient
outcomes, patient injury, negative publicity or lawsuits against us, any of
which could have an adverse effect on our product sales.
8
<PAGE>
If we fail to support our anticipated growth in operations, our business could
suffer.
To succeed in the implementation of our business strategy, our management
team must rapidly execute our sales strategy and further develop products,
while managing anticipated growth by implementing effective planning and
operating processes. To manage anticipated growth in operations, we must
increase our manufacturing and quality assurance staff, expand our sales teams
and expand our manufacturing facility. Our systems, procedures and controls may
not be adequate to support our expected growth in operations.
We have a sole supplier of generators, and any disruption in supply could
result in decreased sales.
All of the generators we sell are currently manufactured according to our
specifications by a sole source third party supplier. We believe there are no
other third-party contractors who could readily assume this manufacturing
function. Any delay in production of generators could result in our failure to
meet customer demand.
If we fail to successfully transition the manufacture of our generators to
internal operations, we may experience a decrease in sales.
We intend to begin manufacturing generators internally in the second half of
1999, but have no experience in manufacturing generators. Any failure to
manufacture a sufficient number of generators to keep pace with demand, or any
failure to make generators of sufficient quality or at a commercially
reasonable cost, will lead to lower than expected generator placements and a
corresponding decrease in the sale of disposable products.
Because we have limited control over third-party distributors, we may be unable
to sell our products in international markets.
We intend to rely on third-party distributors, over whom we have limited
control, to sell our products in international markets. We have entered into an
exclusive agreement with, and are dependent upon, DePuy AcroMed for the
marketing and sales of our spine products internationally. We also have
exclusive distributor relationships for the sale of our arthroscopy products in
some foreign countries.
Because we compete with DePuy in the arthroscopy market, a conflict with them
could negatively affect our international spine sales effort.
Because our exclusive international spine product distributor is also a
competitor in the arthroscopy market, they may devote insufficient resources to
sales of our products or a conflict may arise which could disrupt international
sales. If DePuy fails to devote adequate resources to our products, we could
fail to achieve expected international sales. If a conflict arises which we
could not readily resolve, there could be a period of declining international
sales as we search for an alternative means of international product
distribution. See "Business--Competition."
Complying with FDA and other regulations is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.
We are subject to a host of federal, state, local and international
regulations regarding the manufacture and marketing of our products. In
particular, our failure to comply with FDA regulations could result in, among
other things, recalls of our products, substantial fines and/or criminal
charges against us and our employees. We received returns of approximately 500
TAC probes as a result of a March 1999 product recall, due to a faulty part
supplied to us by an outside vendor. No patient complaints or claims were
received by us. We informed the FDA about this recall, and the FDA determined
that it was not a reportable event as defined under FDA regulations. These
regulations require us to report any incident in which our products may have
contributed to a
9
<PAGE>
death or serious injury, or in which our products malfunctioned in a way that
would be likely to contribute to a death or serious injury. See "Business--
Government Regulation."
Product introductions or modifications may be delayed or canceled as a result
of the FDA regulatory process, which could cause our sales to decline.
Before we can sell a new medical device in the U.S., we must obtain FDA
approval, which can be a lengthy and time-consuming process. To date, all of
our products have either received clearances from the FDA through premarket
notification under Section 510(k) of the Federal Food, Drug and Cosmetic Act or
are exempt from the 510(k) clearance process. We have modified some of our
products, but we do not believe these modifications require us to submit new
510(k) applications. However, if the FDA disagrees with us and requires us to
submit a new 510(k) application for modifications to our existing products, or
if the FDA requires us to go through a lengthier, more rigorous examination
than we had expected, our product introductions or modifications could be
delayed or canceled, which could cause our sales to decline. In addition, the
FDA may determine that future products will require the more costly, lengthy
and uncertain premarket approval, or PMA, process. See "Business--Government
Regulation."
Off label use of our products could result in substantial penalties.
510(k) clearance only permits us to market our products for the uses
indicated on their labels. We may request additional label indications for our
current products, and the FDA may either deny those requests outright, require
additional expensive clinical data to support any additional indications or
impose limitations on the intended use of any cleared product as a condition of
clearance. We received a warning letter from the FDA in April 1999 regarding
information on our website which the FDA believed was broadening our label
indications. We removed some information from our website and responded that
the remaining information was not intended to expand label indications. In
addition, our disposable probes have been approved by the FDA for single use,
but we are aware that from time to time physicians reuse our disposable
products. We have strongly advised physicians against reuse of our products.
See "Business--Government Regulation."
Our stock price, like that of many early stage medical technology companies,
may be volatile.
If our future quarterly operating results are below the expectations of
securities analysts or investors, the price of our common stock would likely
decline. Stock price fluctuations may be exaggerated if the trading volume of
our common stock is low.
In the past, securities class action litigation has often been brought
against a company after a period of volatility in the market price of its
stock. Any securities litigation claims brought against us could result in
substantial expense and the diversion of management's attention from our core
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results of Operations."
We may need to raise additional capital in the future and may be unable to do
so on acceptable terms.
We may need to raise additional funds for operations and to execute our
business strategy. The sale of additional equity or convertible debt securities
could result in additional dilution to our stockholders. If additional funds
are raised through the issuance of debt securities, these securities could have
some rights senior to holders of common stock, and could contain covenants that
would restrict our operations. Any additional financing may not be available in
amounts or on terms acceptable to us, if at all.
Any year 2000 problems that our customers experience in their internal systems
could result in a delay in product orders or decrease in sales.
Any year 2000 problems that hospitals or other providers encounter in their
ordering and payment systems could result in the delay or cancellation of
purchase orders for our products or the delay in payment for our products, any
of which could result in a decline in our anticipated sales or cash flow. Any
slowdowns in
10
<PAGE>
processing insurance claims or pre-certifications for our products or
procedures by Medicare or other payors could result in a delay or cancellation
of orders or a delay in our collection of accounts receivable.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval after this offering.
Immediately after this offering, our executive officers and directors, and
their respective affiliates, will continue to own approximately 27.1% of our
outstanding common stock. Accordingly, these stockholders may, as a practical
matter, be able to exert significant influence over matters requiring approval
by our stockholders, including the election of directors and the approval of
mergers or other business combinations. This concentration could have the
effect of delaying or preventing a change in control.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could discourage a takeover.
Provisions of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. See "Management--Board Composition" and "Description of
Capital Stock--Delaware Anti-Takeover Law and Provisions of our Certificate of
Incorporation and Bylaws."
11
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements, such as "may," "plans," "expects" or "continue" and other similar
words. These statements relate to future events or our future financial
performance, and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. Such factors include those listed
under "Risk Factors" in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
such statements to actual results.
12
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 2,500,000 shares of common stock we are
offering are estimated to be $36,100,000 ($41,680,000 if the underwriters'
over-allotment option is exercised in full), assuming an offering price of
$16.00 per share, after deducting the estimated underwriting discount and
commissions and the estimated offering expenses.
We currently intend to use the net proceeds from this offering for expansion
of sales and marketing activities, future development of our product lines,
repayment of approximately $6.0 million of debt and general corporate purposes.
The debt being repaid was used primarily for purchasing generators and funding
the increased costs of operations as ORATEC's sales activities increased. We
may use a portion of the net proceeds to fund, acquire or invest in
complementary businesses or technologies, although we have no present
commitments with respect to any acquisition or investment. The amount of cash
that we actually expend for any of the described purposes will vary
significantly depending on a number of factors, including future sales growth,
if any, and the amount of cash we generate from operations. Thus, management
will have significant discretion in applying the net proceeds of this offering.
Pending the uses described above, we will invest the net proceeds in short
term, investment grade, interest bearing securities.
OUR POLICY REGARDING DIVIDENDS
We have never paid dividends on our common stock or preferred stock. We
currently intend to retain any future earnings to fund the development of our
business. In addition, there is a covenant in one of our loan agreements
restricting our ability to pay dividends. Therefore, we do not currently
anticipate paying any cash dividends in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. the actual capitalization of ORATEC as of June 30, 1999;
. the pro forma capitalization of ORATEC, after giving effect to the
automatic conversion of all outstanding shares of preferred stock
into 7,247,923 shares of common stock; and
. the as adjusted capitalization, after giving effect to the sale of
shares of common stock at an assumed initial public offering price of
$16.00 per share in this offering, after deducting the estimated
underwriting discount and commissions and estimated offering expenses
that ORATEC expects to pay in connection with this offering.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes to the Financial Statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------
Actual Pro Forma As Adjusted
------------ ------------ --------------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C>
Current portion of long term
obligations........................ $ 1,609 $ 1,609 $ 1,609
============ ============ ============
Long term obligations............... $ 5,951 $ 5,951 $ 5,951
Redeemable convertible preferred
stock, par value $0.001 per share;
7,440,000 shares authorized,
actual, 7,247,923 shares issued and
outstanding, actual; 5,000,000
shares authorized, none issued or
outstanding, pro forma and as
adjusted........................... 35,816 -- --
Common stock, par value $0.001 per
share, 11,940,000 shares authorized
actual, 2,497,623 shares issued and
outstanding, actual; 75,000,000
shares authorized, pro forma,
9,745,546 issued and outstanding,
pro forma; 75,000,000 shares
authorized, as adjusted, 12,245,546
shares issued and outstanding, as
adjusted........................... 2 10 12
Additional paid-in capital.......... 966 36,774 72,872
Deferred stock compensation......... (310) (310) (310)
Accumulated deficit................. (26,300) (26,300) (26,300)
------------ ------------ ------------
Total capitalization................ $ 16,125 $ 16,125 $52,225
============ ============ ============
</TABLE>
- --------
This table excludes the following shares (in thousands, except per share data):
. 1,881,607 shares that were issuable upon exercise of outstanding options
at a weighted average exercise price of $3.39 per share as of June 30,
1999,
. 127,745 shares that were issuable upon exercise of outstanding warrants
at a weighted average exercise price of $5.48 per share as of June 30,
1999, and
. an aggregate of 123,768 shares that were available for future issuance
under our 1995 Stock Plan as of June 30, 1999. See "Management--Stock
Plans" and Note 11 of Notes to Financial Statements.
14
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock on June 30, 1999
was $10,174,000, or $1.04 per share. Pro forma net tangible book value per
share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding,
assuming the conversion of all outstanding shares of preferred stock into
shares of common stock. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of our common stock in this offering and the net tangible book value per
share of our common stock immediately following this offering. After giving
effect to our sale of shares of common stock in this offering and after
deducting the estimated underwriting discount and commissions and our estimated
offering expenses, our pro forma net tangible book value as of June 30, 1999
would have been $46,274,000 or $3.78 per share of common stock. This represents
an immediate increase in net tangible book value of $2.74 per share to existing
stockholders and an immediate dilution of $12.22 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $16.00
Pro forma net tangible book value per share as of June 30,
1999........................................................... $1.04
Increase per share attributable to new investors................ 2.74
-----
Pro forma net tangible book value per share after the offering.. 3.78
------
Dilution per share to new investors............................. $12.22
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the differences between the existing stockholders and new investors with
respect to the number of shares of stock purchased from us, the total
consideration paid to us, and the average price per share paid.
<TABLE>
<CAPTION>
Shares
Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,745,546 79.6% $36,766,000 47.9% $ 3.77
New investors.............. 2,500,000 20.4 40,000,000 52.1 16.00
---------- ----- ----------- -----
Total.................... 12,245,546 100.0% $76,766,000 100.0%
========== ===== =========== =====
</TABLE>
This table excludes the following shares:
. 1,881,607 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $3.39 per share as of June 30,
1999,
. 127,745 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $5.48 per share as of June 30,
1999, and
. an aggregate of 123,768 shares available for future issuance under
our 1995 Stock Plan as of June 30, 1999. See "Management--Stock
Plans" and Note 11 of Notes to Financial Statements.
If the underwriters' over-allotment option is exercised in full, the
following will occur:
. the number of shares of common stock held by existing stockholders
will decrease to approximately 77.2% of the total number of shares of
our common stock outstanding after this offering; and
. the number of shares held by new investors will be increased to
2,875,000 or approximately 22.8% of the total number of shares of our
common stock outstanding after this offering.
15
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data should be read in conjunction with the
Financial Statements and Notes and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which are included elsewhere
in this prospectus. The statement of operations data for the years ended
December 31, 1996, 1997 and 1998, and the balance sheet data at December 31,
1997 and 1998, are derived from audited financial statements included elsewhere
in this prospectus. The statement of operations data for the years ended
December 31, 1994 and 1995, and the balance sheet data as of December 31, 1994,
1995 and 1996, are derived from audited financial statements not included in
this prospectus. The statement of operations data for the six months ended June
30, 1998 and 1999 and balance sheet data as of June 30, 1999 are derived from
unaudited financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales................... $ -- $ -- $ -- $ 2,600 $ 11,129 $ 4,106 $ 12,899
Cost of sales........... -- -- -- 1,741 6,566 2,354 6,261
------ ------ ------- ------- -------- -------- --------
Gross profit............ -- -- -- 859 4,563 1,752 6,638
Operating expenses:
Research and
development.......... 90 156 878 2,514 4,706 2,094 2,624
Sales and marketing... -- -- 561 2,622 8,318 3,390 7,494
General and
administrative....... 110 187 945 2,721 2,724 1,192 1,465
------ ------ ------- ------- -------- -------- --------
Total operating
expenses........... 200 343 2,384 7,857 15,748 6,676 11,583
------ ------ ------- ------- -------- -------- --------
Loss from operations.... (200) (343) (2,384) (6,998) (11,185) (4,924) (4,945)
Interest income
(expense), net......... -- 3 82 166 (157) 124 (339)
------ ------ ------- ------- -------- -------- --------
Net loss................ $ (200) $ (340) $(2,302) $(6,832) $(11,342) $ (4,800) $ (5,284)
====== ====== ======= ======= ======== ======== ========
Net loss per common
share, basic and
diluted................ $(0.20) $(0.17) $ (1.00) $ (2.91) $ (4.72) $ (2.01) $ (2.16)
====== ====== ======= ======= ======== ======== ========
Shares used in computing
net loss per common
share, basic and
diluted................ 1,015 1,947 2,304 2,347 2,403 2,393 2,447
Pro forma net loss per
share, basic and
diluted................ $ (1.51) $ (0.55)
======== ========
Shares used in computing
pro forma net loss per
share, basic and
diluted................ 7,525 9,688
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
----- ----- ------- ------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short term
investments............. $ 1 $ 64 $ 1,778 $ 9,185 $ 15,581 $13,179
Working capital.......... (78) (97) 1,545 8,717 13,997 12,852
Total assets............. 1 97 2,593 13,418 24,195 25,020
Long term obligations,
net of current portion.. -- 35 221 404 2,702 5,951
Redeemable convertible
preferred stock......... 120 474 4,792 20,324 35,816 35,816
Common stock, additional
paid-in capital,
deferred stock
compensation and
accumulated deficit..... (198) (536) (2,838) (9,646) (20,746) (25,642)
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
ORATEC Interventions is a leader in the development of medical devices that
use controlled thermal energy to treat spine and joint disorders. From
inception in 1993 until February 1997, our operations consisted primarily of
various start-up activities, including development of technologies central to
our business, recruiting personnel and raising capital. In December 1995 we
gained FDA clearance for our first product, our TAC probe for the treatment of
joint disorders. In March 1997, after 18 months of funding scientific and
clinical studies, we formally launched this product at the American Academy of
Orthopedic Surgeons convention. We received FDA clearance for our SpineCATH
product in March 1998 and formally launched this product at the North American
Spine Society, or NASS, conference in October 1998.
All of our revenues are generated from the sales of our spine and arthroscopy
products. For the six months ended June 30, 1999, 90% of our total sales were
derived from our disposable spine catheters and arthroscopy probes and 10% were
derived from sales of generators and accessories. We incurred net losses of
approximately $11.3 million in 1998 and $5.3 million during the six months
ended June 30, 1999. As of June 30, 1999, we had an accumulated deficit of
$26.3 million.
For the six months ended June 30, 1999, approximately 65% of our U.S. sales
was generated by our direct sales employees and the remainder of our revenues
was generated by independent sales agencies. These sales agencies do not
purchase our products, but are paid a commission at the time they generate a
product sale. We intend to continue building our direct sales force, and expect
that in the future an increasing percentage of U.S. sales will be generated by
our direct sales employees.
In the six months ended June 30, 1999, only 3% of our revenues was derived
from sales of products in markets outside the U.S., and we do not expect
international sales to increase significantly in the near future. In
international markets, we expect to rely exclusively on third-party
distributors. Our gross margins on sales through international third-party
distributors are less than our gross margins on U.S. sales as a result of price
discounts. In addition, we have limited or no control over the sales efforts of
these third-party distributors.
We recognize revenue upon shipment of products to customers, and in some
cases when inventory provided to customers has been used at their facilities as
evidenced by receipt of a purchase order. Our return policy allows customers to
return unopened products up to 90 days after a sale. To date, returns have been
insignificant. As is common in the arthroscopy market, we have retained title
to the majority of arthroscopy generators, which we have placed with customers
for their use with our disposable arthroscopy probes. In connection with the
market launch of our spine products, we have been placing spine generators with
customers for a demonstration period, after which we intend to convert these
placements to sales. We have limited experience in selling the spine generators
and may not be able to achieve spine generator sales for all placements.
We currently rely upon a single supplier of generators. We expect to begin
production of generators at our manufacturing facility prior to the end of 1999
to lower the risk related to our dependance on a sole supplier. If we are
unable to successfully transition the manufacture of generators to our in-house
operations or if there is a shortage of generators from our sole-source
manufacturer, we could experience a disruption in supply and decreased sales.
Our early product sales have mainly been to a group of early adopting
physicians who are receptive to minimally invasive techniques. As we gain
market share, our opportunity for further market penetration may slow and
require additional sales efforts, longer term supporting clinical data and
further training, in order to convince physicians who currently favor open
surgery or other treatment alternatives to switch to our minimally invasive
procedures.
17
<PAGE>
The medical device market is litigious and we may become a party to product
liability or patent proceedings. The costs of such lawsuits may be material and
could affect our earnings and financial position. If we were to lose a patent
lawsuit we may be forced to stop sales of affected products or to pay royalties
which could have a negative effect on our results of operations.
Our future growth depends on expanding our current markets and finding new
high growth markets in which we can leverage our core technologies of applying
thermal energy to treat soft tissue disorders. To the extent any current or
additional markets do not materialize in accordance with our expectations, our
revenues could be lower than expected.
Results of Operations
Six Months Ended June 30, 1999 and 1998
Sales
Overall sales increased 214% to $12.9 million for the six months ended June
30, 1999 from $4.1 million for the six months ended June 30, 1998, as a result
of the commercial launch of our spine products and increased sales of our
arthroscopy products.
Sales of spine products were $5.6 million for the six months ended June 30,
1999. These sales followed the commercial launch of our SpineCATH product in
October 1998 and the training of additional spine specialists in the use of the
product.
Sales of our arthroscopy products increased 83% to $7.3 million for the six
months ended June 30, 1999 from $4.0 million for the six months ended June 30,
1998. This increase in revenues was due primarily to higher unit sales of our
TAC probes due to an increase in the number of physicians trained, as well as
the enhancement of our product line through modifications to the probe tips and
sizes of our existing products.
Cost of sales
Cost of sales increased by 166%, to $6.3 million for the six months ended
June 30, 1999 from $2.4 million for the six months ended June 30, 1998. Cost of
sales consists of material, labor and overhead costs, as well as depreciation
on generators placed with customers for their use with our disposable probes.
The growth in cost of sales was attributable primarily to the significant
expansion of our manufacturing function, increased costs associated with
additional product shipments, and depreciation charges on a larger number of
generators placed with customers. For the six months ended June 30 , 1999,
gross margins expanded to 51% from 43% for the six months ended June 30, 1998
due to the increased leverage of higher sales over our manufacturing and
depreciation costs.
Research and development expenses
Research and development expenses increased 25% to $2.6 million for the six
months ended June 30, 1999 from $2.1 million for the six months ended June 30,
1998. This increase was attributable to increased headcount, new product
development, the expansion of our intellectual property rights and additional
clinical studies. Research and development expenses consist of costs related to
our research and development, regulatory, quality assurance and patent
functions, as well as costs associated with scientific and clinical studies. We
expect to continue to make substantial investments in research and development
and anticipate that research expenses will continue to increase in absolute
dollars.
Sales and marketing expenses
Sales and marketing expenses increased 121% to $7.5 million for the six
months ended June 30, 1999 from $3.4 million for the six months ended June 30,
1998. This increase reflected significantly increased
18
<PAGE>
personnel in both the spine and arthroscopy direct sales forces and the
reimbursement group, as well as higher total commission expenses from increased
unit sales. Sales and marketing expenses consist primarily of costs for sales,
marketing and reimbursement staff, sales commissions, medical conference
participation and physician training programs. We anticipate that sales and
marketing expenses will increase in absolute dollars as we continue to develop
our sales forces and expand our physician training programs.
General and administrative expenses
General and administrative expenses increased 23% to $1.5 million for the six
months ended June 30, 1999 from $1.2 million for the six months ended June 30,
1998. This increase was due primarily to the addition of finance personnel and
reserves for accounts receivable related to higher sales levels. General and
administrative expenses consist primarily of personnel costs, professional
service fees and general corporate expenses. We expect general and
administrative expenses to increase in absolute dollars as we add personnel and
incur additional expenses related to our operation as a public company.
Interest and other income (expense), net
Net interest and other expense was $339,000 for the six months ended June 30,
1999 and net interest and other income was $124,000 for the six months ended
June 30, 1998. The increase in overall interest expense was primarily
attributable to significantly increased debt balances outstanding as we
obtained equipment and other loans to fund operations during 1998. Net interest
and other income (expense) is comprised primarily of interest earned on short
term investments, offset by interest expense on equipment and debt obligations.
Quarterly Results of Operations
The following table sets forth our operating results for each of the six
quarters in the period ended June 30, 1999. This data has been derived from
unaudited financial statements that, in the opinion of our management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of such information when read in conjunction with our
annual audited financial statements and notes thereto appearing elsewhere in
this prospectus. These operating results are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C>
Sales................... $ 1,572 $ 2,535 $ 2,782 $ 4,240 $ 5,197 $ 7,702
Cost of sales........... 987 1,368 1,867 2,344 2,829 3,432
------- ------- ------- ------- ------- -------
Gross profit............ 585 1,167 915 1,896 2,368 4,270
Gross margin............ 37% 46% 33% 45% 46% 55%
Operating expenses:
Research and
development.......... 980 1,113 1,227 1,386 1,231 1,393
Sales and marketing... 1,512 1,879 2,284 2,643 3,254 4,240
General and
administrative....... 498 694 832 700 810 655
------- ------- ------- ------- ------- -------
Total operating
expenses........... 2,990 3,686 4,343 4,729 5,295 6,288
------- ------- ------- ------- ------- -------
Loss from operations.... (2,405) (2,519) (3,428) (2,833) (2,927) (2,018)
Interest and other
income (expense), net.. 56 68 (43) (238) (106) (233)
------- ------- ------- ------- ------- -------
Net loss................ $(2,349) $(2,451) $(3,471) $(3,071) $(3,033) $(2,251)
======= ======= ======= ======= ======= =======
</TABLE>
We have historically experienced seasonal fluctuations in our sales of
arthroscopy products. Sales of our arthroscopy products tend to flatten or
decrease during the summer months when people often defer elective
19
<PAGE>
surgeries until the fall. In addition, sales of arthroscopy products tend to
increase in the last quarter of the year as individuals seek to use health plan
coverage before the end of the insurance year.
For the quarter ended December 31, 1998, our revenues increased 52% to $4.2
million from $2.8 million for the quarter ended September 30, 1998 as a result
of the commercial launch of our spine products and the seasonal strength of
arthroscopy sales in the fourth quarter. This growth continued during the next
two quarters, with an increase of 23% in revenues during the quarter ended
March 31, 1999 and a further increase of 48% during the quarter ended June 30,
1999 as a result of increased sales of our spine products. We expect spine
sales to continue to account for a growing percentage of total sales for the
foreseeable future.
Gross margin percentage tended to increase over the six quarter period ending
June 30, 1999 as a result of the formal launch of our products and the
leveraging of these sales over our manufacturing cost base. We expect gross
margin to flatten or decline along with any leveling or decline in sales
growth. There was a decline in gross margin percentage in the quarter ended
September 30, 1998 due to a major investment in manufacturing infrastructure
and personnel to accommodate an expected increase in product demand.
The total number of our employees grew from 59 at December 31, 1997 to 162 at
June 30, 1999. As a result of the growth in the number of employees in our
sales and marketing, manufacturing, research and development, and general and
administrative organizations, all of the related operational expenses have
generally tended to increase on a quarter-to-quarter basis. Additionally, the
increased product sales on a quarter-to-quarter basis have caused commission
expenses paid to both employees and sales agents to increase. We have also
increased spending on clinical studies, physician training, medical conferences
and outside development costs during this six quarter period.
We believe that period-to-period comparisons of our operating results are not
necessarily meaningful. You should not rely on them to predict future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors. We face a
number of risks and uncertainties encountered by early stage companies,
particularly those in rapidly evolving markets such as the medical device
industry. In addition, although we have experienced revenue growth recently,
such revenue growth may not continue, and we may not achieve or maintain
profitability in the future.
Our quarterly revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter due to a number of factors,
some of which are outside of our control. These factors include, but are not
limited to:
. the timing of training physicians in the use of our products;
. the timing of publication of supporting clinical data;
. delays in obtaining pre-certification for insurance reimbursement from
payors;
. the introduction of new products by us or our competitors;
. possible intellectual property litigation;
. changes in our pricing policies or those of our competitors or customers;
. delays in introducing new products;
. timing of regulatory approvals or other FDA action; and
. delays in product orders or payment as a result of our customers' or
payors' year 2000 problems.
Most of our expenses, such as employee compensation and lease payments for
facilities and equipment, are relatively fixed. In addition, our expense levels
are based, in part, on our expectations regarding future sales. As a result,
any shortfall in sales relative to our expectations could cause significant
changes in our operating results from quarter-to-quarter.
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Years Ended December 31, 1998, 1997 and 1996
Sales
Sales increased by 328% to $11.1 million in 1998 from $2.6 million in 1997.
We formally launched our spine products during the fourth quarter of 1998, and
sales of these products were $1.2 million in 1998. Sales of our arthroscopy
products increased 280% to $9.9 million in 1998 from $2.6 million in 1997. This
increase in arthroscopy sales was due primarily to increased unit shipments to
an increased number of physicians who were trained in the use of our products
and the higher level of staffing and overall effectiveness of the direct sales
force in 1998. There were no sales of any products in 1996.
Cost of sales
Cost of sales increased by 277% to $6.6 million in 1998 from $1.7 million in
1997. The growth in cost of sales was attributable primarily to higher
material, labor and overhead costs on increased unit shipments, higher
depreciation costs for generators placed with customers and additional
manufacturing and other support personnel.
Research and development expenses
Research and development expenses increased 87% to $4.7 million in 1998 from
$2.5 million in 1997, and increased 186% in 1997 from $878,000 in 1996. These
increases were attributable primarily to increased headcount in all functional
areas of research and development, including product development and regulatory
compliance, as well as increased numbers of clinical studies and payments to
outside contractors for the development of generators.
Sales and marketing expenses
Sales and marketing expenses increased 217% to $8.3 million in 1998 from $2.6
million in 1997, and increased 367% in 1997 from $561,000 in 1996. This
increase reflected increased headcount expenses as we developed a direct field
sales force in each of the spine and arthroscopy markets, as well as greater
spending for physician training, medical conferences and higher commission
expenses on an increased number of product shipments.
General and administrative expenses
General and administrative expenses remained constant at $2.7 million in 1998
compared with 1997, but increased 188% in 1997 from $945,000 in 1996. The
increase from 1996 to 1997 was due primarily to hiring and relocating executive
officers.
Interest and other income (expense), net
Net interest and other expense was $157,000 in 1998. Net interest and other
income was $166,000 in 1997 and $82,000 in 1996. The year-to-year changes
resulted from earnings on short term investment balances, which varied as a
result of the timing of our private placement financings, and increased
interest expense as a result of our drawdown of debt.
Income Taxes
As of December 31, 1998, we had net operating loss carryforwards of
approximately $20.0 million for federal and $6.4 million for California income
tax purposes. We also had research and development credit carryforwards of
$200,000 for federal income tax purposes. The net operating loss and credit
carryforwards will expire at various dates beginning in 2009 through 2018, if
not utilized. Utilization of the net operating losses and credits may be
subject to a substantial annual limitation due to the ownership change
limitations of the
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Internal Revenue Service Code of 1986. The annual limitation may result in the
expiration of the net operating losses before utilization. See Note 12 of Notes
to Financial Statements.
Liquidity and Capital Resources
From inception through June 30, 1999, we financed our operations primarily
through private sales, net of expenses, of $35.8 million of redeemable
convertible preferred stock. To a lesser extent, we also financed our
operations through equipment financing and other loans, which totaled $8.7
million in principal outstanding at June 30, 1999. As of June 30 1999, we had
$10.2 million of cash and cash equivalents, $3.0 million of short term
investments and $12.9 million of working capital.
Net cash used for operating activities was $5.5 million in the six months
ended June 30, 1999, $9.3 million in 1998, $6.2 million in 1997 and $2.3
million in 1996. Cash used for operating activities was attributable primarily
to net losses after adjustment for non-cash depreciation and amortization
charges and increases in accounts receivable and inventories, resulting from
higher revenues on increasing unit shipments in all periods. There was also a
$754,000 increase in prepaid and other current assets related to ORATEC's
increasing operating activities during this period. This increase in use of
cash for operating activities was offset in part by increases in accounts
payable, accrued compensation and other accrued liabilities also resulting from
the upward trend in business activities in all periods.
Net cash used in investing activities was $347,000 in the six months ended
June 30, 1999, compared to $4.0 million in 1998, $5.3 million in 1997 and $1.2
million in 1996. For each of these periods, cash used in investing activities
reflected purchases of property and equipment and net purchases or sales of
short term investments.
Net cash provided by financing activities was $4.4 million in the six months
ended June 30, 1999, $19.4 million in 1998, $15.8 million in 1997 and $4.7
million in 1996. Cash provided during these periods was attributable to
proceeds from the issuance of stock and debt obligations.
As of June 30, 1999, our principal debt and other commitments consisted of
$3.6 million outstanding under our equipment loans, $1.2 million under our
accounts receivable credit line, $4.0 million under our subordinated debt
facility and amounts payable under various operating leases. As of June 30,
1999, we had a commitment to purchase generators in the amount of $2.4 million
from a third party supplier. We expect to increase capital expenditures
consistent with our anticipated growth in manufacturing, infrastructure and
personnel. We also may increase our capital expenditures as we expand our
product lines or invest to address new markets.
As of June 30, 1999, we had available debt facilities totaling $1.3 million
under our asset-based line of credit. Some of our loan agreements require the
lenders' consent before we can incur additional debt. One of our loan
agreements contains financial covenants including a maximum debt to tangible
net worth ratio of 2:1. We received a waiver from the lender for our failure to
comply with all of these financial covenants during the third quarter of 1998.
From December 1998 to the present, we have been in compliance with all
financial covenants.
We believe that the net proceeds from this offering, together with our
current cash and investment balances and cash generated from operations, will
be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 18 months. If existing cash and cash
generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or
obtain an additional credit facility. The sale of additional equity or
convertible debt securities could result in dilution to our stockholders. If
additional funds are raised through the issuance of debt securities, these
securities could have some rights senior to holders of common stock, and could
contain covenants that would restrict our operations. Any additional financing
may not be available in amounts or on terms acceptable to us, if at all. If we
are unable to obtain this additional financing, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our results of operations and financial condition.
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Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish between twentieth and twenty-first century dates. This may result
in software failures or the creation of erroneous results.
Our products are not date-sensitive, and therefore they are not affected by
year 2000 issues. We are in the process of testing all of our significant
internal systems for year 2000 compliance and anticipate completing this
process in the third quarter of 1999. We have purchased almost all of our
internal systems within the last three years, and we have not discovered, and
do not expect, material year 2000 problems.
We have contacted all of our major suppliers, and service and system
providers. They have assured us that their products and operations are year
2000 compliant or will be compliant by 2000. Despite our testing and assurances
from developers of software used in our operations, our business may be
disrupted by year 2000 problems.
We do not have any information concerning the year 2000 compliance status of
hospitals or other providers or the payors who reimburse those providers for
our procedures and products. Any year 2000 compliance problems that providers
or payors encounter in their internal systems could result in the delay or
cancellation of purchase orders for our products or the delay in payment for
our products. These delays could cause significant declines in sales in 2000
and longer accounts receivable collection cycles.
To date, expenses related to year 2000 compliance have not been and are not
expected to be material. We have not yet fully developed a contingency plan to
address situations that may result if we are unable to achieve year 2000
readiness of our critical operations, but we intend to have a contingency plan
in place in the fourth quarter of 1999. Finally, we are also subject to
external forces that might generally affect industry and commerce, such as year
2000 compliance failures by utility or transportation companies and related
service interruptions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk at December 31, 1998 related to our
investment portfolio and our borrowings. Fixed rate investments and borrowings
may have their fair market value adversely impacted from changes in interest
rates. Floating rate investments may produce less income than expected if
interest rates fall, and floating rate borrowings will lead to additional
interest expense if interest rates increase. Due in part to these factors, our
future investment income may fall short of expectations, and our interest
expense may be above our expectations due to changes in U.S. interest rates.
Further, we may suffer losses in investment principal if we are forced to sell
securities which have declined in market value due to changes in interest
rates.
We invest our excess cash in debt instruments of the U.S. government and its
agencies, and in high quality corporate issuers. The average contractual
duration of all of our investments in 1998 was approximately two months. Due to
the short term nature of these investments, we have assessed that there is no
material exposure to interest rate risk arising from our investments.
We enter into loan arrangements with banks and financial institutions when
available on favorable terms. At December 31, 1998, we had bank borrowings of
$1.2 million outstanding, which bear interest at 1% above the prime rate. This
bank facility is being extended from its initial expiration date of June 30,
1999. We have determined that there is no material exposure to interest rate
risk arising from these borrowings.
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BUSINESS
Overview
ORATEC Interventions is a leader in the development of medical devices that
use controlled thermal energy to treat spine and joint disorders. We currently
market two minimally invasive systems, the SpineCATH IntraDiscal ElectroThermal
Therapy, or IDET, system and the ElectroThermal Arthroscopy System. These
proprietary systems deliver heat to shrink and repair damaged or stretched
tissue.
Our SpineCATH IDET system is a minimally invasive treatment for low back pain
caused by degenerative disc disease. The SpineCATH IDET system enables
physicians to navigate a self-guiding catheter within a spinal disc to the
location of damaged tissue and apply heat to tighten and stiffen the disc wall.
We believe IDET is a new and effective solution for many patients facing few
options to treat their chronic discogenic pain.
Our ElectroThermal Arthroscopy System is a minimally invasive treatment for
joint disorders. Our proprietary tissue temperature control technology enables
physicians to treat damaged tissue in joints by shrinking tissue. We believe
that this minimally invasive treatment not only complements existing
arthroscopic procedures, but is a viable alternative to many open surgical
procedures.
All of the products we currently market have received 510(k) clearance from
the FDA, and as of June 30, 1999 we had six issued patents, eight notices of
allowance and 40 U.S. and foreign patent applications.
For the remainder of 1999 and the first six months of 2000, we plan to
continue to devote substantial resources to physician training programs, to our
sales and marketing efforts, to the continued establishment of clinical and
scientific support of our products and to our research and development efforts.
Our goal is to establish and maintain technology leadership by meeting the
needs of the spine and arthroscopy markets, two of the fastest growing segments
of the medical device industry.
Spine Market Opportunity
The treatment of back pain costs the U.S. health care system as much as $100
billion annually and represents the second most common reason for doctor
visits. Conditions related to back pain account for more hospitalizations
annually than any other orthopedic condition. It is estimated that at any given
time, five million individuals in the U.S. suffer from pain in the lumbar
region, commonly known as low back pain. The prescribed treatment for low back
pain depends on the severity and duration of the pain and the success or
failure of non-operative therapies. Non-operative therapies include bed rest,
medication, lifestyle modification, exercise, physical therapy, chiropractic
care and steroid injections. It has been estimated that physicians are able to
effectively treat most low back pain cases within three months using non-
operative therapies. However, it is estimated that there are approximately 1.4
million people in the U.S. for whom non-operative therapies have not been
successful and for whom spine surgery is not recommended because the level of
disc degeneration does not yet warrant a spiral fusion. We believe these
individuals are candidates for our IDET procedure.
Spinal Anatomy and Back Pain
The spinal column is segmented into 24 separate bones called vertebrae that
are connected together to permit a normal range of motion, including forward,
backward, lateral and twisting movement. The spinal cord, the body's central
nerve column, is enclosed within the spinal column.
Between each vertebra of the spine is a disc which allows for flexible
movement between the vertebra. Discs act as shock absorbers that protect the
spinal column during normal activities. Each disc consists of a "jelly-like"
internal mass, known as the nucleus. The layered fibrous wall, known as the
annulus, which surrounds the nucleus is composed primarily of collagen. In a
healthy spine, the nucleus is elastic and is surrounded by a strong disc wall
which allows the vertebra to be well supported and move normally.
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Everyday motion of our backs causes repeated stress on the spine. Over time,
and after repeated stress, the wall of the disc may weaken and develop cracks
and fissures. This condition is known as degenerative disc disease. The cracks
and fissures may allow the nucleus to seep into the disc wall, which can
sensitize nerve fibers and cause severe back pain. In addition, small blood
vessels and tiny nerve fibers grow into the fissures, causing ongoing pain. The
weakened disc wall may also bulge or rupture under the pressure of the seeping
nucleus, resulting in a disc herniation. This bulging or rupturing of the disc
can injure the spinal nerve roots causing leg and hip pain, also known as
sciatica.
Existing Surgical Alternatives
Spine surgery is highly invasive and complex due to the proximity of major
muscle groups, nerves, blood vessels and organs. The spinal cord, branching
nerves and major muscle groups surround the rear portion of the spine, while
blood vessels, nerves and organs surround the front portion of the spine.
Discectomies, which involve the removal of a portion of the affected disc
tissue, are the most commonly performed surgical treatment to treat severe leg
pain caused by disc herniation. However, for patients suffering from chronic
back pain caused by degenerative disc disease, spinal fusion is the most viable
surgical treatment option.
Spinal fusion involves the fusing together of adjoining vertebrae in cases
where the patient has advanced disc degeneration or spine instability. This
invasive procedure involves a surgical incision in the patient's back or
abdomen. Fusions frequently require the removal of the affected disc material
and the surgical attachment of a metal implant or a spinal fusion cage to join
the two surrounding vertebrae. In addition, this procedure often involves a
second incision to remove bone from the patient's hip for implantation as a
bone graft for insertion into the disc space.
The operating time for low back spinal fusion surgeries utilizing metal
implants and spine cages averages over three hours with a post-operative
hospital stay for the patient which averages over four days. The patient also
generally requires significant post-operative pain medication. While the cost
of these procedures varies widely, we estimate that the total cost of most
spinal fusion surgeries is approximately $45,000.
We estimate that approximately 170,000 low back pain sufferers in the U.S.
undergo spinal fusion surgery annually. Only a small percentage of patients
with chronic low back pain actually undergo spinal fusion because it is
permanent, highly invasive and generally limited to the treatment of severe
conditions which could not be treated with a minimally invasive procedure. In
addition, clinical data has indicated that spinal fusion often causes further
deterioration of the discs on either side of the fusion site and only reduces
pain in approximately 60% of patients treated. Further, there are spine
disorders for which spinal fusion is not the medically indicated treatment. We
believe that the overall invasiveness of available therapies, as well as the
uncertainty of the alleviation of pain, leads many patients to defer surgery
until surgery is their only option, and continue to live with their chronic
pain.
The ORATEC Catheter-Based Spine Solution
Our SpineCATH IntraDiscal ElectroThermal Therapy, or IDET, system offers a
minimally invasive outpatient alternative to patients suffering from chronic
low back pain caused by degenerative disc disease.
The Procedure
The SpineCATH IDET system uses thermal energy technology to treat the
degenerated disc wall in a minimally invasive manner. The procedure begins with
the insertion of our proprietary single use SpineCATH catheter through an
introducer needle into the center of the disc. As the surgeon inserts the
catheter into the spine, the catheter guides itself along the disc wall. The
position of the catheter is confirmed by the physician using real time X-rays.
The physician begins to treat the disc by applying controlled levels of heat to
the disc wall. In response to the application of heat, the collagen in the disc
shrinks, causing the wall to contract and thicken. We believe that the
application of heat during the procedure desensitizes nerve fibers and that
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following the procedure the contracted collagen acts as a scaffold which
supports the growth of new collagen, stiffening and repairing the disc wall. In
contrast to spine surgery, our procedure does not remove or destroy disc
tissue.
IDET is performed in an outpatient setting using local anesthesia and mild
sedation. The patient is responsive during the procedure to enable the
physician to closely monitor his or her condition. Depending on the condition
of the disc, the procedure may require the insertion of more than one catheter
for more complete treatment of the affected area of the disc wall. Multiple
discs may be treated in a single IDET procedure. Once the therapy is completed,
the catheter and needle are removed and an antibiotic is injected into the disc
to prevent infection. The patient is sent home with a bandaid over the needle
insertion site. The procedure costs approximately $8,000.
During the three to four month healing period following the procedure,
patients must exercise caution in the amount of stress the treated disc
endures. Patients are often advised by the physician to wear back support for
the first six weeks and to adhere to activity and physical rehabilitation
guidelines. Because we only have two years of patient follow-up data for our
spine products, we do not have sufficient data to determine if the pain relief
provided by the IDET procedure is permanent, but the procedure can be repeated
if longer-term patient follow up indicates that patients experience a
recurrence in pain.
Benefits of IDET
Clinical and scientific experience to date has indicated that IDET has the
following benefits:
. Minimally invasive treatment option: With the IDET procedure, patients
suffering from chronic low back pain have a new, minimally invasive
alternative if non-operative therapies have failed. IDET treats the
affected area of a specific disc in the lower back without the removal or
destruction of tissue or the permanent alteration of spinal anatomy
associated with conventional surgical treatments. Our procedure can be
repeated and does not preclude physicians from subsequently prescribing
more invasive surgical alternatives in the future.
. IDET may be reparative: Clinical results indicate that the IDET enables
physicians to apply controlled levels of heat to the disc wall causing
the collagen in the disc wall to contract and thicken. We believe the
contracted collagen, heated during the IDET procedure, acts as a scaffold
for the growth of new collagen, stiffening and repairing the disc wall.
Scientific studies are currently underway to investigate the healing
process following the IDET therapy.
. Significant reduction in reported patient pain levels and improvement in
overall quality of life: Clinical data has indicated that 60%-85% of
patients treated with IDET report a significant reduction in pain and a
significant improvement in physical function, as measured by the Visual
Analog Scale, or VAS, pain score system and the SF-36 patient outcomes
questionnaire. IDET benefits also include increased sitting tolerance and
ability to return to work. Over 70% of patients report that they reduced
or eliminated their intake of pain medication following the IDET
procedure.
. Significant decrease in overall time and cost: IDET takes approximately
one hour to perform in an outpatient setting under local anesthesia. In
contrast, spinal fusions are inpatient procedures performed under general
anesthesia, cost significantly more than the IDET procedure, require a
prolonged hospital stay and may result in post-operative complications.
Arthroscopy Market Opportunity
Arthroscopy is the minimally invasive treatment of joint tissue assisted with
a miniaturized camera, or arthroscope. Approximately 2.2 million arthroscopic
procedures were performed in the U.S. in 1998. We
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believe the number of arthroscopic procedures is growing due to technological
advancements, physician and patient demand for less invasive procedures, the
increasing incidence of joint injuries caused by a greater emphasis on physical
fitness, and an aging population.
While we believe that shoulder arthroscopy is the fastest-growing portion of
the market, with 450,000 procedures performed last year, knee arthroscopy
continues to represent the greatest number of arthroscopic procedures,
accounting for approximately 1.5 million of arthroscopic procedures performed
in 1998. In addition, there were approximately 250,000 elbow, ankle, wrist and
hip joint arthroscopic procedures performed last year.
Joint Anatomy and Soft Tissue Disorders
Human joints are formed at the juncture of two or more bones and permit
motion of the otherwise rigid human skeleton. The bones of the joints are
joined by ligaments and separated by cartilage. The cartilage in the joints
acts as a cushion and the ligaments work to stabilize the joints when they are
stressed. As a result of injury or repetitive motion, soft tissue of the
ligaments and cartilage can be damaged, become worn and begin to stretch,
loosen or tear. This tissue damage can result in a wide range of joint
disorders from joint instability to severe ligament tears.
Existing Surgical Alternatives
Many joint injuries and disorders, including loose shoulder ligaments, severe
ankle sprains and torn and stretched knee ligaments, are treated using open
surgery. Open surgery involves large incisions, a prolonged hospital stay,
extensive rehabilitation over an extended recovery period and high overall
costs. Many of these conditions are not treated arthroscopically either because
arthroscopic techniques are not available, not effective, or are too difficult
to perform.
Arthroscopic surgery allows surgeons direct access to and a magnified view of
most areas of the joint through several small incisions. Using existing
electrosurgical tools, surgeons are able to cut and ablate damaged tissue.
However, research indicates that for some conditions which involve stretched or
loose tissue, the ability to shrink tissue could produce better patient
outcomes. Existing electrosurgical tools are capable of cutting and ablating
soft tissue because feedback on tissue temperature is not required for these
procedures. We believe that for tissue shrinkage physicians must be able to
monitor tissue temperature within an optimal temperature range. The
invasiveness of open surgery and the lack of effective arthroscopic procedures
to shrink tissue has led many patients to elect to live with their condition
until pain or loss of motion becomes unmanageable.
The ORATEC Temperature Control Arthroscopy Solution
Our ElectroThermal Arthroscopy System for tissue shrinkage offers a minimally
invasive solution to patients whose alternatives are open surgery or a less
effective arthroscopic procedure.
The Procedure
Our ElectroThermal Arthroscopy System utilizes the TAC probe, a single use
device which applies heat to soft tissue in the joints utilizing our
proprietary temperature control system. The procedure begins with the insertion
of several small tubes into the joint. An irrigant is then flushed through the
joint to permit clear visualization through the arthroscope and expand the
space in the joint for the surgical procedure. The surgeon inserts the TAC
probe into the joint and begins to paint the surface of the tissue with the tip
of the probe, controlling the energy level and monitoring tissue temperature.
In response to the application of heat, the collagen in the tissue of the
joints shrinks and tightens.
Our procedure is usually performed under general anesthesia, and the patient
is sent home the same day with the joint immobilized by a brace or a sling. The
post-operative healing period can extend to four months.
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Benefits of the ElectroThermal Arthroscopy System
Clinical and scientific experience to date has indicated that our
ElectroThermal Arthroscopy System has the following benefits:
. Superior treatment option: Existing arthroscopic procedures do not allow
physicians to effectively monitor the temperature of the treated tissue.
Our proprietary temperature control feature allows physicians to
effectively shrink tissue by heating it to an optimal temperature range.
. Minimally invasive solution: The ElectroThermal Arthroscopy System
offers physicians a minimally invasive alternative for patients who might
otherwise avoid or delay open surgery. Compared to patients who undergo
open procedures, clinical data indicates that patients treated with our
products require significantly less post-operative pain medication,
experience a decreased risk of post-operative recovery complications and
require less extensive rehabilitation. Open surgical treatments require
large incisions and often result in a loss of range of motion and reduced
athletic function.
. Improvement of existing arthroscopic procedures: By combining our
shrinkage technology with other arthroscopic tools, physicians can more
completely treat certain joint disorders. For example, in connection with
the arthroscopic repair of a torn ligament, the application of our
shrinkage technology can improve patient outcomes by tightening the joint
tissue after the tear is repaired.
. Significant decrease in overall cost and time: For physicians, our
products offer less technically demanding procedures that significantly
reduce operating times. For patients, our procedures cost significantly
less than comparable open surgical procedures and allow them to leave the
hospital within two hours of the procedure as compared to open surgery
which requires hospitalization.
Business Strategy
Our strategy is to be the leading provider of minimally invasive devices for
the treatment of chronic back pain and joint injuries and disorders. The key
elements of our strategy include:
Target Large and Growing Markets. We target the spine and arthroscopy
markets, two of the fastest growing segments of the medical device industry. In
1998, these segments represented U.S. product sales in excess of $1 billion.
Provide Proprietary Minimally Invasive Techniques to Meet Unmet Medical
Needs. We focus on providing proprietary minimally invasive products to
overcome the limitations of existing treatment options, which can be highly
invasive and expensive and can result in sub-optimal patient outcomes.
Maintain Technology Leadership in Target Markets. We have an aggressive
product development program designed to enhance our current products and
develop new products for our target markets. Our ongoing focus will be to
design products that improve patient outcomes, simplify techniques, shorten
procedure and rehabilitation time and reduce costs.
Expand Clinical Leadership to Promote Use of Our Products. We will continue
to make substantial investments in the development of scientific and clinical
research to support market acceptance of our innovative minimally invasive
therapies. We have established strong relationships with leading physicians and
have developed an extensive physician training and education program.
Establish Sales Leadership. We are investing in, and marketing our products
through, separate spine and arthroscopy sales forces. In the U.S. market, we
have direct sales employees in most major markets and sales agents elsewhere.
We also provide reimbursement support for our customers. Internationally, we
use distributors to market our arthroscopy products and have an exclusive
distribution agreement with DePuy Acromed for the sale of our spine products.
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Technology
Our proprietary SpineCATH IDET system and ElectroThermal Arthroscopy System
apply temperature-controlled thermal energy to achieve controlled contraction
of soft tissue. Collagen, the fibrous tissue that composes all human ligaments,
tendons and connective tissue, reacts to heat by shrinking. At optimal
temperatures, collagen fibers shrink, yet the mechanical and structural
integrity of the collagen is preserved so that it grows back in a reparative
way, as opposed to charring or forming scar tissue. Heating the tissue above
this range damages the collagen, making it weak and preventing optimal growth
of new collagen. Our SpineCATH IDET system utilizes our proprietary technology
to control the temperature of the catheter. The ElectroThermal Arthroscopy
System includes the only products in the market that monitor tissue
temperature. We believe our systems result in safer and more effective
treatments than competing technologies.
Technology--SpineCATH IDET
Our IDET system is based on the application of resistive heat, which is
thermal energy generated by an electric heating coil. This resistive heat is
delivered through a proprietary self-guiding spine catheter to achieve
controlled contraction of collagen in the affected areas of the spinal disc.
The thermal delivery system is a five-centimeter heating tip at the end of the
catheter. The tip of the catheter contains a thermal monitoring mechanism,
which continually measures and relays catheter temperature back to the energy
source, the generator. Our research indicates that the optimal heating protocol
for many procedures requires a 149(degrees)F initial catheter temperature,
which then rises by 2(degrees)F every 30 seconds for 17 minutes until the
temperature of the catheter reaches 194(degrees)F, where it remains for four
additional minutes. Our temperature feedback mechanism enables the generator to
continually adjust heat to achieve catheter temperatures consistent with these
predetermined heating protocols.
Technology--ElectroThermal Arthoscopy System
Physicians use our patented electrothermal arthroscopy products to apply
controlled radiofrequency energy to joint tissue. Radiofrequency, or RF, energy
is a portion of the electromagnetic spectrum, in which the alternating current
flow produces molecular friction and thus heat in soft tissue. All
electrosurgical systems contain two electrodes for directing energy: an active
electrode and a return electrode. In monopolar electrosurgery, the active
electrode is located at the tip of a hand-held probe and the return electrode
is a dispersive pad, which rests on the patient's body. In bipolar
electrosurgery, both active and return electrodes are located at the tip of the
probe. Consequently, in bipolar systems, the current travels through only a
shallow portion of target tissue before traveling back through the probe. We
have based our arthroscopic system for tissue shrinkage on monopolar technology
because we believe that monopolar technology allows for more effective and
consistent temperature control as well as deeper penetration of target tissue,
allowing more complete shrinkage of soft tissue. Scientific and clinical
studies indicate that heating the tissue to a range of 149(degrees)F to
167(degrees)F produces optimal shrinkage in the arthroscopic setting. The tip
of our probe contains a thermostat which records tissue temperature and relays
it back to the generator, enabling the generator to adjust energy output 50
times per second to maintain optimal tissue temperatures.
Products
We currently manufacture and sell the SpineCATH IntraDiscal ElectroThermal
Therapy system for the treatment of spine disorders and the ElectroThermal
Arthroscopy System for the treatment of joint injuries and disorders. Each of
these systems utilizes controlled thermal energy to enable physicians to
perform minimally invasive treatments of these disorders. In addition, we
market the ORAflex ElectroThermal Spine Probe for the treatment of spine
disorders.
SpineCATH IDET System
Our SpineCATH IDET system provides a non-surgical alternative for patients
suffering from degenerative disc disease in the lower back. Our SpineCATH IDET
system received 510(k) premarket clearance from the
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FDA in March 1998 and was formally launched in October 1998. Our SpineCATH IDET
system consists of the following products:
. the SpineCATH IntraDiscal Catheter;
. the ORA-50 S ElectroThermal Generator; and
. an introducer needle and needle bender.
Our SpineCATH IntraDiscal disposable spine catheter is a 1.0 mm flexible,
self-guiding catheter designed to deliver resistive thermal energy to affected
disc walls in the lower back. Our proprietary SpineCATH product has the
following features:
. a broad five centimeter heating section for the delivery of thermal heat;
. a temperature sensing and control system;
. a pre-curved navigation tip, designed to automatically follow the
curvature of the human disc;
. an ergonomic handle, which controls catheter direction; and
. radiopaque indicators, which enable physicians to verify optimal catheter
placement through the use of real time X-rays.
The list price of this product is $795 per catheter. We estimate that
approximately 1.5 catheters are used per procedure.
Our ORA-50 S ElectroThermal Generator is the source of the resistive heat,
which the SpineCATH catheter delivers to the affected disc. Our spine generator
has the following features:
. software that enables the physician to program optimal treatment
temperatures, so that the catheter temperature is automatically elevated
according to the pre-determined heating protocols;
. a proprietary temperature feedback and control system, which monitors
temperature in the tip of the catheter; and
. an easy-to-read graphic display, which enables the physician to monitor
catheter temperatures, delivered power and total treatment time.
The list price of this product is $12,995.
ORAflex ElectroThermal Spine Probe
Our ORAflex electrothermal disposable spine probe is used for treating disc
herniations by shrinking the nucleus using RF energy. The ORAflex is used with
an endoscope and has the following main features:
. a deflectable tip, which improves access to affected disc tissue; and
. a thermostat, which provides direct temperature feedback during
treatment.
The list price of the ORAflex probe is $595.
ElectroThermal Arthroscopy System
Our ElectroThermal Arthroscopy System provides a minimally invasive
alternative for patients suffering from joint injuries. Our first TAC probe and
generator received 510(k) premarket clearance from the FDA in December 1995,
and this system was formally launched in March 1997. We received 510(k)
premarket clearance from the FDA for our ligament chisels in February 1997, and
began marketing these products in September 1997. Our arthroscopy system
consists of the following products:
. the Temperature Control, or TAC, family of probes, which includes the
MiniTAC-S probe and MicroTAC-S probe.
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<PAGE>
. the Ligament Chisel family of electrosurgical cutting probes, which
includes the MicroLigament Chisel, angled and MicroLigament Chisel,
curved; and
. the ORA-50 ElectroThermal Generator.
Our disposable temperature control probes have been designed to treat a
variety of joint disorders through low energy, soft tissue shrinkage. The main
features of our TAC probes are:
. a malleable tip, which can be bent up to 90 degrees for improved access
and maneuverability in difficult-to-reach areas;
. a thermostat in the tip of the probe, which measures and monitors actual
tissue temperature; and
. a variety of probe shapes and sizes for optimal tissue access.
The list price for each disposable TAC probe is $295.
Our line of disposable Ligament Chisel electrosurgical cutting probes is
designed to treat a variety of joint pathologies that require treatment of
small shallow tissue areas. The Ligament Chisel cutting probes cut and ablate
soft tissue while simultaneously cauterizing bleeding vessels. Our disposable
cutting probes allow physicians to use higher voltage energy and have the
following features:
. a malleable tip for improved access and maneuverability in difficult-to-
reach joint areas;
. four different tip designs to allow precise matching of energy delivery
to specific anatomy and procedures; and
. a tip design that enhances tactile feedback for optimal control and
access.
Our cutting probes can be used with all irrigation fluids. The list price for
each disposable Ligament Chisel is $95. We also sell a line of Micro Chisels
for use in small joints at a list price of $110.
Our ORA-50 ElectroThermal Generator is a dual mode generator, that provides
the electromagnetic RF energy source and control mechanism required for
temperature-controlled arthroscopic procedures. These two modes enable
physicians to either precisely shrink affected tissue or to rapidly cut and
ablate tissue with concurrent cauterization. The ORA-50 arthroscopy generator
has the following features:
. a proprietary temperature feedback and control mode, which automatically
adjusts the power 50 times per second for precise, consistent temperature
control of the target tissue;
. a power mode, which provides a constant power source for high temperature
tissue cutting and ablation with concurrent cauterization; and
. an easy-to-read numeric display, which enables physicians to monitor
actual tissue temperatures, total treatment time and delivered energy
during treatment.
The list price of ORA-50 generator is $8,995.
We believe that our current product liability insurance coverage provides us
with adequate protection against the risks associated with product liability
claims.
Sales and Marketing
We market our products in the U.S. directly to physicians who perform spine
and arthroscopic procedures. For our spine products, these physicians include
orthopedic spine surgeons, neurosurgeons, pain management specialists,
anesthesiologists, interventional radiologists and physiatrists. For our
arthroscopy products, these physicians are orthopedic surgeons, including
sports medicine specialists. We estimate that there are approximately 8,500
spine specialists in the U.S. and 7,000 orthopedic surgeons who consider
arthroscopy to be their major practice area.
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We have focused sales and marketing teams for each of the spine and
arthroscopy markets in order to address the different physician groups in each
of these two areas. Each of these two sales organizations includes sales
employees covering most major markets, complemented by select sales agencies.
We believe that a direct sales force is better able to attain in-depth
expertise on the clinical benefits of our products. Sales agents typically
support the direct sales strategy by covering more rural areas. Agents
representing our product lines concurrently handle other related products and
have been selected based on their stature and performance in their respective
markets.
The marketing platform for both spine and arthroscopy is built on scientific
and clinical data and extensive surgeon training programs. To date, we have
trained over 500 physicians in the use of the IDET procedure and plan to
increase that number to over one thousand by the end of 1999. We expect to
provide spine and arthroscopy product-related training for approximately 1,500
physicians during 1999. Course faculty is comprised of physicians with
extensive procedure experience using our products. We expect to have scientific
data presented at over 30 specialty meetings during 1999.
Our spine products are marketed domestically by 12 direct sales employees,
one national director, three regional sales managers and 14 independent sales
agencies. We plan to significantly increase our sales force by the end of 1999.
Our arthroscopy products are marketed domestically by 21 direct sales
employees, one national director, four regional managers, one national training
manager and 23 sales agencies.
We have focused our resources on the rapid development of the U.S. market for
our products. International sales have not been significant to date. Our
arthroscopy products are distributed in select countries by exclusive
distributors in those countries. With the market introduction of the SpineCATH
product, we have entered into an exclusive distribution agreement with DePuy
AcroMed for the marketing and sales of our spine products internationally. The
initial term of the agreement is five years and is automatically renewable
subject to termination in some circumstances. We have the right to terminate
the agreement if DePuy fails to meet negotiated minimum purchase requirements
commencing in the year 2000.
Third-Party Reimbursement
Establishing reimbursement for any new technology is a challenge in the
current environment of cost containment and managed care. The cost reduction
orientation of the payor community makes it exceedingly difficult for new
medical technologies and surgical techniques to be covered for reimbursement.
We have a dedicated reimbursement group which:
. assists physicians and surgery centers with obtaining pre-determination
of procedures;
. screens each case to determine that the procedure is appropriate for the
patient's condition; and
. assists physicians and providers in claim collections.
We have been working with various medical associations responsible for
determining reimbursement coding to develop our coding and reimbursement
strategy. The codes define reimbursement levels and are used for billing
purposes by health care providers. We have also introduced a new service for
physicians. Based on physician authorization, we obtain payment pre-
determination for the IDET procedure by contacting payors on behalf of the
physician practice. The service is free to physicians and outpatient facilities
and has proven to be effective. Our reimbursement staff of eight individuals
educates the payor community on the IDET procedure from the local case managers
to the national policy makers. To date, over 85% of pre-determination requests
have been approved by the payors, however several large insurance plans have
yet to approve payment for the procedure. It is our belief that published
clinical data in peer reviewed journals will facilitate further acceptance by
payors.
Arthroscopy procedure costs, including the cost of our products, have been
covered under the customary payment policies of most payors. Reimbursement for
the incremental cost of our temperature control probes has
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been an issue for ambulatory surgical centers. We have assisted these
facilities in understanding how to receive reimbursement for the incremental
cost.
Competition
The medical device industry is subject to intense competition. Accordingly,
our future success will depend on our ability to meet the clinical needs of
physicians, improve patient outcomes, and remain cost-effective for payors.
There are a number of medical treatments for low back pain ranging from
medication and physical therapy to spinal injections and interbody spine
fusion. Our IDET procedure is typically offered to a patient after medications,
injections and physical therapy have failed, usually after six months of
unresolved symptoms.
The spinal fusion market is highly competitive. Spinal fusion is not
considered directly competitive with our product because it treats severe disc
degeneration, which the IDET procedure is not designed to treat. However, spine
implant companies including Sofamor Danek, Sulzer Spine-Tech, Surgical
Dynamics, DePuy AcroMed and SYNTHES-STRATEC may consider us to be a competitor
because our IDET system may, if used preemptively, delay or eliminate the need
for a spinal fusion for some patients. We are also aware that Radionics offers
a probe which is designed for lesioning, or destroying tissue cells, in the
spine, not for tissue shrinkage.
Several larger companies sell competitive products to our ElectroThermal
Arthroscopy System. These competitors, ArthroCare, Mitek and CONMED, are
focused on the tissue ablation market and offer directly competitive cutting
and ablating products. ArthroCare and Mitek also have low energy tissue
coagulation products which compete directly with our shrinkage products and, we
believe based on current estimates, currently control 10% of the tissue
shrinkage market.
We believe that the principal competitive factors in the markets for the
treatment of spine and joint disorders include:
.improved patient outcomes;
.the publication of peer reviewed clinical studies;
.acceptance by leading physicians;
.ease of use for physicians;
.sales and marketing capability;
.timing and acceptance of product innovation;
.patent protection;
.product quality; and
.cost effectiveness.
The cost of our IDET procedure is approximately $8,000 compared to spinal
fusion, which costs approximately $45,000.
Patents and Proprietary Technology
We believe that in order to have a competitive advantage we must develop and
maintain the proprietary aspects of our technologies. To this end, we file
patent applications to protect technology, inventions and improvements that we
believe are significant to the growth of our business. As of June 30, 1999, we
had five issued U.S. patents, one issued foreign patent, eight notices of
allowance, 20 pending U.S. patent applications and 20 pending foreign patent
applications. None of our issued patents is spine specific. The issued and
allowed patents cover, among other things, method and apparatus claims for
directing energy to and sealing
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fissures in the spinal discs, including navigation within a disc and devices
with a functional element at the tip, and the controlled contraction of tissue
in all joints and spinal discs. Our patents also cover our temperature feedback
system, probe tip technology, ligament shrinkage and controlled depth ablation.
We require our employees, consultants and advisors to execute confidentiality
agreements in connection with their employment, consulting or advisory
relationships with us. We also require our employees, consultants and some
advisors to agree to disclose and assign to us all inventions conceived during
the ORATEC work day, using our property or which relate to our business.
Despite any measures taken to protect our intellectual property, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Finally, our competitors may
independently develop similar technologies. See "Risk Factors--Because of the
importance of our patent portfolio to our business, we may lose market share to
our competitors if we fail to protect our intellectual property rights."
The medical device industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants into our market increases, the
possibility of an infringement claim against us grows. Our spine and
arthroscopy products and the methods they employ may be covered by U.S. patents
held by our competitors. We have made a careful analysis in consultation with
our experts and, based on such analysis, we believe that either such patents or
claims are invalid or if valid we do not infringe. See "Risk Factors--Because
the medical device industry is litigious, we are particularly susceptible to an
intellectual property suit."
Research and Development
We have an aggressive product development program to develop and enhance
products for the spine and arthroscopy markets. The ongoing focus of our
research and development group is to design products that improve patient
outcomes, simplify techniques, shorten procedure and rehabilitation time and
reduce costs. As of June 30, 1999, we employed 29 people in our research and
development organization. Our probe and generator development group consisted
of 18 people. We also had two people focused on the management of intellectual
property, four responsible for clinical and regulatory affairs and five in
quality assurance.
New Product Development
We are committed to leveraging our existing technologies into new orthopedic
applications and responding to the clinical needs of physicians and patients in
cost effective ways. We have a number of new projects and product enhancements
under development by the research and development group. Product line
extensions include:
. the development of a spine catheter for the upper spine;
. a line of probes designed for use in arthroscopic hip procedures;
. variations of existing probes for improved access in the arthroscopic
environment;
. enhanced software and firmware elements for our electrothermal generators
to provide improved temperature control functions; and
. a new generation of electrothermal generators with enhanced capabilities.
Clinical Research
The clinical research department supports our development efforts by
conducting in-house cadaveric and bench testing for the development and
evaluation of products and managing the numerous scientific and clinical
studies conducted by investigators and institutions studying the effects of our
technologies. To date, there are seven clinical studies involving 651 patients
using our spine products and 13 clinical studies involving 925 patients using
our arthroscopy products. Some of these studies are still underway, and their
outcomes are not yet determined. In addition to administrative support and
funding, the department assists investigators in writing protocols and
collecting data, when necessary, as well as by providing site monitoring and
research support.
To date there have been eight published reports in peer reviewed journals
discussing the effects of our technologies. An additional seven manuscripts are
pending publication, and 35 abstracts have been presented at
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medical conferences by both physicians affiliated with us as clinical and
scientific advisors and unaffiliated physicians.
Manufacturing
Our manufacturing operations are focused primarily on the manufacture of
disposable products. The manufacturing process includes the inspection,
assembly, testing, packaging and sterilization of components that have been
manufactured by us or to our specifications by outside contractors. We inspect
each lot of components and finished products to determine compliance with our
specifications.
We have established quality assurance systems in conformance with the Quality
System Regulation, or QSR, as mandated by the FDA. Our Menlo Park, California
facility received ISO 9001/EN 46001 certification in March 1998 and is in
conformance with the Medical Device Directive, or MDD, for sale of products in
Europe. We inspect incoming components, and inspect and test products both
during and after the manufacturing process. We also inspect packaged products
and test the sterilization process to produce quality products.
We subcontract the manufacture of the electrothermal generators to a single
source supplier. The generators are tested by both the contract manufacturer
and us before shipment to customers. We are currently preparing for in-house
assembly of the generators in order to reduce the risk of a single source
supplier, to control the quality and availability of the product and to
leverage fixed costs. See "Risk Factors--We have a sole supplier of generators,
and any disruption in supply could result in decreased sales" and "Risk
Factors--If we fail to successfully transition the manufacture of our
generators to internal operations, we may experience a decrease in sales."
Most purchased components and services are available from more than one
supplier. For some components and services, there are relatively few alternate
sources of supply and establishment of additional or replacement suppliers for
such components and services could not be accomplished quickly. As of June 30,
1999, we had a purchase order for $2.4 million in generators. Except for this
purchase order, there are no contractual obligations by suppliers to continue
to supply to us nor are we contractually obligated to purchase from a
particular supplier.
We utilize a gas plasma sterilization system that has been used extensively
in hospital settings but only recently for industrial applications. The system
received 510(k) clearance from the FDA in 1993. A contract sterilizer provides
gas plasma sterilization services as a backup to our system. We also utilize a
contract sterilizer that provides gamma sterilization services for those
products that cannot be sterilized with gas plasma. Sterilization indicators
for all products sterilized at our facilities are processed at an outside
certified laboratory to verify the effectiveness of the sterilization process
prior to the release of the product for distribution.
Government Regulation
Our products are regulated in the U.S. as medical devices by the FDA under
the Federal Food, Drug, and Cosmetic Act and require clearance of a premarket
notification under Section 510(k) of the FDC Act or approval of a PMA under
Section 515 of the FDC Act by the FDA prior to commercialization. Material
changes or modifications to medical devices are also subject to FDA review and
clearance or approval. The FDA regulates the research, clinical testing,
manufacturing, safety, labeling, storage, record keeping, advertising,
distribution, sale and promotion of medical devices in the U.S. Non-compliance
with applicable requirements can result in, among other actions, warning
letters, fines, injunctions, civil and criminal penalties against us, our
officers, and our employees, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals,
and recommendation that we not be permitted to enter into government contracts.
To date, all of our products have received 510(k) clearances or are exempt
from the 510(k) clearance process. It generally takes three to 12 months from
the date of the submission to obtain clearance of a 510(k) submission, but may
take longer. Recently, the FDA has begun requiring a more rigorous
demonstration of substantial equivalence, including clinical trials for some
devices. While we have been successful to date in
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obtaining regulatory clearance of our products through the 510(k) notification
process, our future products may not meet the requirements for 510(k)
clearance. If the FDA concludes that any product does not meet the requirements
for 510(k) clearance, then a PMA would be required and the time required for
obtaining regulatory approval would be significantly lengthened.
Once 510(k) clearance has been received, any products that we manufacture or
distribute are subject to extensive and continuing regulation by the FDA.
Modifications to devices cleared via the 510(k) process may require a new
510(k) submission. We have made modifications to some of our devices which we
believe do not require the submission of new 510(k) notifications. If the FDA
requires us to submit a new 510(k) notification for any device modification, we
may be prohibited from marketing the modified device until the 510(k) is
cleared by the FDA.
We have been an FDA registered medical device facility since 1996 and
obtained our manufacturing license from the California Department of Health
Services, or CDHS, in 1997. We are inspected by both the FDA and CDHS for
compliance with GMP, QSR and other applicable regulations. Our manufacturing
processes are required to comply with GMP and QSR regulations, which cover the
methods and documentation of the design, testing, production, control, quality
assurance, labeling, packaging and shipping of our products.
We are also required to comply with Medical Device Reporting regulations that
require us to report to the FDA any incident in which our product may have
caused or contributed to a death or serious injury, or in which our product
malfunctioned and, if the malfunction were to recur, it would be likely to
cause or contribute to a death or serious injury. To date, we have filed two
Medical Device Reports, or MDRs, with the FDA for burns caused by improperly
applied patient grounding pads, and six MDRs relating to breakage of the
SpineCATH IntraDiscal catheter upon its removal after the completion of the
procedure. In addition, 456 TAC probes were returned to us as a result of a
March 1999 voluntary recall for a faulty part supplied to us by an outside
vendor, however no patient complaints or claims were received. We informed the
FDA about this recall, and the FDA determined that it was not a reportable
event under FDA regulations. In addition, we received a warning letter from the
FDA in April 1999 regarding information on our website which the FDA believed
was broadening our label indications, which means it interpreted some
statements on our website to inform readers that our products could be used for
indications that are not FDA approved. We removed some information from our
website and responded that the remaining information was not intended to expand
label indications.
We are also subject to regulations and product registration requirements in
many of the foreign countries in which we sell our products, in the areas of
product standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing a
product in a foreign country may differ significantly from FDA requirements.
Either we or our distributors have received registrations and approvals to
market the ORA-50 ElectroThermal Generator and arthroscopy probes and
accessories in Canada, the United Kingdom, Belgium, Italy, Spain, Australia and
Taiwan. Registration for market approval for our spine products is in process
in several international markets. We are seeking or intend to seek regulatory
approvals in other international markets. We may not obtain these foreign
approvals on a timely basis, or at all.
The European Union has promulgated rules, under the MDD 93/42/EEC, which
require medical devices to bear the "CE mark" by June, 1998. The CE mark is an
international symbol of adherence to quality assurance standards. Our
ISO9001/EN46001 registration and conformance with the MDD have allowed us to
affix the CE mark to our devices and export our devices to any EC-member
country.
Employees
As of June 30, 1999, we had 162 full-time employees, including 29 in research
and development, 56 in manufacturing, 62 in sales and marketing and 15 in
general and administrative functions. From time to time, we also employ
independent contractors to support our engineering, marketing, sales and
support and administrative organizations.
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Facilities
We are headquartered in Menlo Park, California, where we lease two buildings
with approximately 25,000 square feet of office, research and development and
manufacturing space under leases expiring between September 2000 and July 2003.
Beginning in the third quarter of fiscal 1999 we will lease an additional 5,000
square feet of manufacturing space. We also maintain an office for our
reimbursement function in Dallas, Texas. We believe that our existing
facilities are adequate to meet our current and foreseeable requirements for
the next 12 months or that suitable additional or substitute space will be
available as needed.
Legal Proceedings
From time to time we are a party to various legal proceedings arising in the
ordinary course of our business. We are not currently subject to any material
legal proceedings.
Scientific and Clinical Advisory Boards
Our scientific and clinical advisory boards work collaboratively with ORATEC
to provide advice, assistance and consultation in the spine and arthroscopy
fields. We consider our advisory board members to be opinion leaders in their
fields, and they offer us advice regarding the applicability of our products to
procedures and feedback on both existing products and products under
development.
The following individuals sit on our advisory boards for spine.
Scientific Advisory Board
<TABLE>
<CAPTION>
Name Position and Affiliation
---- ------------------------
<C> <S>
Howard An, M.D. ............ Professor of Orthopedic Surgery, Rush
Presbyterian St. Luke's Medical Center, Chicago,
IL
Gunnar Anderson, M.D. ...... Orthopedic Spine Surgeon, Rush Presbyterian St.
Luke's Medical Center, Chicago, IL
Charles Aprill, M.D. ....... Radiologist and Medical Director, Magnolia
Diagnostics, New Orleans, LA
David Casper, M.D. ......... Clinician of Orthopedic and Spine Surgery,
Oklahoma Sports Science and Orthopedics, Oklahoma
City, OK
Richard Derby, M.D. ........ Medical Director, Spinal Diagnostics & Treatment
Center, Daly City, CA
Neil Kahanovitz, M.D. ...... Orthopedic Surgeon, Anderson Orthopedic Clinic,
Arlington, VA
Jeffrey Saal, M.D. ......... Associate Clinical Professor, Stanford University
School of Medicine, Palo Alto, CA
Joel Saal, M.D. ............ Assistant Clinical Professor, Stanford University
School of Medicine, Palo Alto, CA
Robert Watkins, M.D. ....... Orthopedic Spine Surgeon, Center for Orthopedic
Spinal Surgery, Los Angeles, CA
Hansen Yuan, M.D. .......... Professor of Orthopedic and Neurological Surgery,
State University of New York, Syracuse, NY
Clinical Advisory Board
<CAPTION>
Name Position and Affiliation
---- ------------------------
<C> <S>
Arnold Criscitiello, M.D. .. Assistant Professor, University Hospital Health
Science Center, Syracuse, NY
Steve Garfin, M.D. ......... Orthopedic Surgeon, Spine; Professor and Chair in
the Department of Orthopedics, University of
California, San Diego, CA
Steve Hochschuler, M.D. .... Chairman, Texas Back Institute, Plano, TX
Dennis Karasek, M.D. ....... Physician, Northwest Spine Group, Eugene, OR
Michael Karasek, M.D. ...... President, Northwest Spine Group, Eugene, OR
Casey Lee, M.D. ............ Clinical Professor, Department of Orthopedics,
New Jersey Medical School, Newark, NJ
John Peloza, M.D............ Clinical Assistant Professor, University of
Texas, Southwestern Medical School, Department of
Orthopaedic Surgery, Dallas, TX; Spine Surgeon,
Center for Spine Care, Dallas, TX
Ralph Rashbaum, M.D. ....... Clinical Medical Director, Texas Back Institute,
Plano, TX
John Regan, M.D. ........... Associate, Texas Back Institute, Plano, TX
Kerry Thompson, M.D. ....... Neuroradiologist, Anne Arundel General Hospital,
Annapolis, MD
Todd Wetzel, M.D. .......... Associate Professor of Surgery, Section of
Orthopedic Surgery and Rehabilitation, University
of Chicago, Chicago, IL
</TABLE>
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The following individuals sit on our advisory boards for arthroscopy.
Scientific Advisory Board
<TABLE>
<CAPTION>
Name Position and Affiliation
---- ------------------------
<S> <C>
David Drez, M.D .......... Clinical Professor of Orthopedics, Louisiana State University School of Medicine,
Lake Charles, LA
Lawrence Lemak, M.D. ..... Orthopedic Surgeon, Alabama Sports Medicine Orthopedic Center, Birmingham, AL
Mark Markel, M.D. ........ Chair, Department of Medical Sciences, University of Wisconsin, Madison, WI
Gary Poehling, M.D. ...... Chairman of Orthopedics, Wake Forest School of Medicine, Winston-Salem, NC
Felix Savoie, M.D. ....... Director, Upper Extreme Service, Mississippi Sports Medicine, Jackson, MS
James Tibone, M.D. ....... Orthopedic Surgeon, Kerlan-Jobe Orthopedic Clinic, Inglewood, CA
Russell Warren, M.D. ..... Surgeon in Chief, Hospital for Special Surgery, New York, NY
Clinical Advisory Board
<CAPTION>
Name Position and Affiliation
---- ------------------------
<S> <C>
Jeffrey Abrams, M.D. ..... Associate Medical Director, Princeton Orthopedic and Rehabilitation Associates,
Princeton, NJ
James Andrews, M.D. ...... Medical Director, American Sports Medicine Institute, Birmingham, AL
James Bradley, M.D. ...... Director, Pittsburgh Center for Sports Medicine, Shadyside Hospital, Pittsburgh, PA
Brian Cole, M.D. ......... Assistant Professor of Orthopedics, Sports Medicine, Rush Presbyterian St. Luke's
Medical Center, Chicago, IL
Michael Dillingham, M.D... Partner, Sports Orthopedic and Rehabilitation, or S.O.A.R., Medicine Associates,
Menlo Park, CA
Robert Eppley, M.D. ...... Orthopedic Consultant, University of California, Berkeley, CA
Gary Gartsman, M.D........ Orthopedic Surgeon, Fondren Orthopedic Group, Houston, TX
Jeffrey Halbrecht, M.D. .. Medical Director, Women's Professional Ski Tour; California Pacific Medical Center,
San Francisco, CA
Richard Hawkins, M.D. .... Orthopedic Surgeon, Steadman Hawkins Clinic, Vail, CO
Darryl Kan, M.D. ......... Orthopedic Team Physician, University of Hawaii, Honolulu, HI
Michael Krinsky, M.D. .... Chief of Staff, Health Surgery Center of Castro Valley, CA
Craig Levitz, M.D. ....... Attending Physician, Long Island Jewish Hospital; Director, OCOA Cartilage Repair
and Sports Medicine Center, Long Island, NY
Walter Lowe, M.D. ........ Associate Clinical Professor, Baylor College of Medicine, Department of Orthopaedic
Surgery, Houston, TX
Bruce Moseley, M.D. ...... Clinical Associate Professor, Baylor College of Medicine, Houston, TX
Lawrence Oloff, D.P.M. ... D.P.M. Surgeon, S.O.A.R., Menlo Park, CA
Jeffrey Schubiner, M.D. .. Orthopedic Surgeon, Consultant, San Bruno, CA
Pierce Scranton, M.D. .... Orthopedic Surgeon, Orthopedics International LTD P.S., Seattle, WA
Eric Stahl, M.D. ......... Orthopedic Surgeon, Lakewood Orthopedic Clinic, Lakewood, CO
George Thabit, M.D. ...... Orthopedic Surgeon, S.O.A.R., Menlo Park, CA
Eric Verploeg, M.D. ...... Orthopaedics Surgeon, Orthopaedics of Steamboat Springs, CO
Kenneth Zaslov, M.D. ..... Clinical Assistant Professor of Orthopaedic Surgery, Virginia Commonwealth University;
Director of Sports Medicine, Advanced Orthopaedic Centers, Richmond, VA
</TABLE>
38
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth specific information regarding our executive
officers and directors as of June 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kenneth W. Anstey....... 53 President, Chief Executive Officer and Director
Hugh R. Sharkey......... 49 Executive Vice President, Chief Technical Officer and Director
Nancy V. Westcott....... 46 Chief Financial Officer and Vice President, Administration
Roger H. Lipton......... 41 Vice President, Sales and Marketing
Calvin K. Lee........... 45 Vice President, Operations
Richard M. Ferrari
(1)(2)................. 45 Chairman of the Board
Stephen Brackett (1).... 36 Director
Gary S. Fanton, M.D.
(2).................... 47 Director
Patrick F. Latterell
(1).................... 41 Director
Jeffrey A. Saal, M.D.
(2).................... 49 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Kenneth W. Anstey joined ORATEC in April 1996 as a director and has served as
President and Chief Executive Officer of ORATEC since July 1997. From December
1995 to March 1997, Mr. Anstey was the Chief Executive Officer of Biofield
Corporation, a cancer diagnostic company. From August 1991 to December 1995, he
served as President and Chief Executive Officer of Mitek Surgical Products, an
orthopedic implant company, which was subsequently acquired by Johnson &
Johnson. He currently serves as a director of Vision Sciences, a medical device
company. Mr. Anstey holds a B.A. degree in Advertising and an M.B.A. degree
from Michigan State University.
Hugh R. Sharkey co-founded ORATEC and has served as a director since
inception. From July 1995 until July 1997, he served as Chief Executive
Officer, President and Chief Financial Officer, and in June 1997 he became
Executive Vice President and Chief Technical Officer. In March 1994, Mr.
Sharkey co-founded ZoMed International (now RITA Medical Systems), a
radiofrequency ablation company. In 1992, Mr. Sharkey co-founded VIDAMed, a
urology company, and in 1987, he co-founded Danforth Biomedical, a medical
device company. From May 1988 to May 1989, he served as Vice President and
General Manager of EP Technologies, a cardiac electrode company, which was
acquired by Boston Scientific, a minimally invasive medical device company. Mr.
Sharkey is listed as an inventor on over 53 patents for medical devices. He
holds an A.A. degree in Nursing and a B.S. degree in Business Administration
from the University of Phoenix.
Nancy V. Westcott joined ORATEC as its Chief Financial Officer and Vice
President, Administration in November 1997. From November 1992, she served as
Vice President of Corporate Communications for Caremark International, a health
care services company, until its acquisition in September 1996. From June 1978
to November 1992, she held a number of management positions with Baxter
International in pension management and international and domestic treasury.
Ms. Westcott holds a B.A. degree in German from the University of Idaho and a
Masters of International Management degree from the American Graduate School of
International Management (Thunderbird). She earned her Professional Accounting
Certificate at the J.L. Kellogg Graduate School of Management at Northwestern
University.
Roger H. Lipton joined ORATEC in January 1996 as Vice President, Sales and
Marketing. From January 1989 to November 1995, Mr. Lipton held management
positions in marketing and business development at AME Orthofix, an orthopedic
and spine implant company. Prior to working at AME Orthofix, he served as a
principal of Martek, a marketing consulting firm, and as Director of Sales and
Marketing of Medmax, a start-up cardiovascular company. Mr. Lipton holds a B.S.
degree in Business Administration from the University of Hartford.
39
<PAGE>
Calvin K. Lee joined ORATEC as Vice President, Manufacturing in October 1996,
and was promoted to Vice President, Operations in June 1999. From November 1987
to September 1996, Mr. Lee worked at Cardiometrics, a manufacturer of blood-
flow monitors, most recently as Vice President of Manufacturing. Prior to
working at Cardiometrics, Mr. Lee held several manufacturing management
positions with Advanced Cardiovascular Systems, a cardiovascular device
company. Mr. Lee holds a B.S. degree in Business Administration from California
State University at San Jose.
Richard M. Ferrari has served as a director of ORATEC since May 1996 and was
elected Chairman of the Board in January 1997. Since June 1995, Mr. Ferrari has
served as Chief Executive Officer of CardioThoracic Systems, a minimally
invasive coronary bypass company. From January 1991 to September 1995, Mr.
Ferrari was President and Chief Executive Officer of CVIS, a cardiovascular
medical device company, which was recently acquired by Boston Scientific. From
April 1990 to January 1991, he served as President and Acting Chief Executive
Officer of Medstone International, a shockwave therapy company, and from
January 1986 to April 1990, he was an Executive Vice President with ADAC
Laboratories, a nuclear medical imaging and healthcare information systems
company. Mr. Ferrari also serves as a director and advisor for several start-up
companies in the medical device industry. Mr. Ferrari holds a B.S. degree in
Health and Education from Ashland University and an M.B.A. from the University
of South Florida.
Stephen Brackett has served as a director of ORATEC since December 1998. Mr.
Brackett founded MF Private Capital, Inc., a merchant bank and registered
broker-dealer, in 1998 and currently serves as a managing director. From
February 1995 to December 1997, Mr. Brackett managed the Corporate Advisory and
Investment Banking services for The Bank of Tokyo-Mitsubishi Capital
Corporation. From March 1994 to February 1995 Mr. Brackett was President and
Chief Operating Officer of State Street Business Group, an investment banking
firm. Mr. Brackett also serves on the board of directors of several private
companies. Mr. Brackett holds a B.A. degree in Political Science from Bates
College.
Gary S. Fanton, M.D. is a co-founder of ORATEC and has served as a director
since August 1995. Since, 1983, Dr. Fanton has been conducting his medical
practice with Sports Orthopedic and Rehabilitation, or S.O.A.R., Medicine
Associates. In addition, Dr. Fanton has been an Assistant Clinical Professor at
Stanford University since 1983, the head orthopedic surgeon for the Stanford
University football team since 1992 and the associate team physician for the
San Francisco 49ers since 1984. Dr. Fanton founded the International
Musculoskeletal Laser Society and has done extensive research on the effects of
thermal energy on soft tissue. He is a member of the Orthopedic Research
Society and the American Orthopedic Society for Sports Medicine. Dr. Fanton
holds a B.S. degree in Zoology from the University of Michigan and an M.D.
degree from the Medical College of Wisconsin, and completed his orthopedic
residency training at the Cleveland Clinic and his fellowship training in
sports medicine at the Kerlan-Jobe Orthopedic Clinic. Dr. Fanton is board
certified in Orthopedic Surgery.
Patrick F. Latterell has served as a director of ORATEC since October 1997,
and previously served as a director and Chairman of the Board from August 1996
to January 1997. Mr. Latterell has been a general partner at Venrock
Associates, a venture capital firm, since April 1989. Mr. Latterell also serves
as a director of Vical, a gene-based pharmaceutical company, as well as several
private companies. He holds S.B. degrees in both Biology and Economics from the
Massachusetts Institute of Technology and an M.B.A degree from the Stanford
University Graduate School of Business.
Jeffrey A. Saal, M.D. is a co-founder of ORATEC and has been a director since
August 1995. Since 1981, Dr. Saal has been conducting his medical practice with
the S.O.A.R. Physiatry Medical Group. Since 1992, he has been an Associate
Clinical Professor at Stanford University, and since 1981 he has served as team
physician to various college sports teams. Dr. Saal is on the editorial boards
of several peer review journals, including Spine. Dr. Saal holds several
positions with professional societies, including Founding Chairman of PASSOR,
the Physiatric Association of Spine Sports and Occupational Rehabilitation. He
was also a former President of the North American Spine Society, or NASS. Dr.
Saal holds a B.A. degree in Biology from the
40
<PAGE>
State University of New York, Oneonta and an M.D. degree from Tulane Medical
School. He completed his residency training at the Boston VA Hospital and
Stanford University. Dr. Saal is board certified in Physical Medicine, Internal
Medicine and Electrodiagnostic Medicine.
Board Composition
Our bylaws currently provide for a board of directors consisting of seven
members. Following the offering and beginning at the first annual meeting of
stockholders after the date on which we shall have had at least 800
stockholders, the board of directors will be divided into three classes, each
serving staggered three year terms: Class I, which is anticipated to consist of
directors Fanton and Ferrari, whose term will expire at the first annual
meeting of stockholders after the date on which we have 800 stockholders; Class
II, which is anticipated to consist of directors Latteral, Saal and Sharkey,
whose term will expire at the second annual meeting of stockholders after the
date on which we have 800 stockholders; and Class III, which is anticipated to
consist of directors Anstey and Brackett, whose term will expire at the third
annual meeting of stockholders after the date on which we have 800
stockholders. As a result, only one class of directors will be elected at each
annual meeting of stockholders of ORATEC, with the other classes continuing for
the remainder of their terms. Messrs. Latterell and Brackett were elected to
the board of directors pursuant to voting agreements between us and certain
principal stockholders. These voting agreements will terminate upon completion
of this offering. Our officers are appointed by the board of directors and
serve at the discretion of the board of directors.
Board of Directors Compensation
Our directors do not currently receive compensation for their services as
members of the board of directors. Employee directors are eligible to
participate in our 1995 Stock Plan and will be eligible to participate in our
1999 Employee Stock Purchase Plan. Nonemployee directors are eligible to
participate in our 1995 Stock Plan and will be eligible to participate in our
1999 Directors' Stock Option Plan. See "--Stock Plans."
Board Committees
The compensation committee currently consists of Gary Fanton, M.D., Richard
Ferrari and Jeffrey Saal, M.D. The compensation committee:
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plan; and
. makes recommendations to the board of directors regarding such matters.
The audit committee consists of Stephen Brackett, Richard Ferrari and Patrick
Latterell. The audit committee:
. makes recommendations to the board of directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided by
our independent auditors; and
. reviews and evaluates our audit and control functions.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of the board of directors are
currently Gary Fanton, M.D., Richard Ferrari and Jeffrey Saal, M.D., none of
whom has ever been an officer or employee of ORATEC.
41
<PAGE>
Executive Compensation
Summary Compensation. The following table sets forth the compensation
received for services rendered to us during the fiscal year ended December 31,
1998 by our Chief Executive Officer and the four other most highly compensated
executive officers who earned more than $100,000 during the fiscal year ended
December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------- ------------------------
All Other Restricted Securities
Compensation Stock Underlying
Name and Principal Position Salary ($) Bonus ($) ($) Awards ($) Options (#)
- --------------------------- ---------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Kenneth W. Anstey,......
President and Chief
Executive Officer $200,000 $38,000 $101,629(1) $40,001(4) --
Hugh R. Sharkey,........
Executive Vice
President and Chief
Technical Officer $150,000 $37,500 $ 6,000(2) -- --
Nancy V. Westcott,......
Chief Financial Officer
and Vice President,
Administration $150,000 $50,000 $103,738(3) -- --
Roger H. Lipton,........
Vice President, Sales
and Marketing $150,000 $45,000 $ 3,600(2) -- 3,000
Calvin K. Lee,..........
Vice President,
Operations $135,000 $10,000 -- -- 6,000
</TABLE>
- --------
(1) Consists of $95,629 in payments for moving and relocation costs and $6,000
car allowance.
(2) Consists of car allowance.
(3) Consists of $63,366 in payments for moving and relocation costs and $40,372
in tax reimbursement in connection with relocation.
(4) Represents 5,647 shares of common stock valued at the December 31, 1998
fair market value of $7.08. These shares were fully vested on the date of
grant. No dividends will be paid on these shares.
Option Grants. The following table shows information regarding stock options
granted to our executive officers during the year ended December 31, 1998. No
stock appreciation rights were granted to these individuals during the year.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates
Number of of Stock Price
Shares Percentage of Appreciation for
Underlying Total Options Option Term(2)
Options Granted to Exercise Price Expiration -----------------
Name Granted(1) Employees per Share Date 5% 10%
---- ---------- ------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Roger H. Lipton......... 3,000 0.7% $2.92 1/18/08 $ 69,420 $115,740
Calvin K. Lee........... 6,000 1.4% $2.92 1/18/08 $138,840 $231,480
</TABLE>
- --------
(1) These stock options, which were granted under our 1995 plan, become
exercisable at the rate of 1/48th of the total number of shares on the
monthly anniversary of the date of grant, as long as the optionee remains
an employee with, consultant to, or director of ORATEC.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the Securities and Exchange Commission and are based on the
assumption that the assumed initial public offering price of $16.00 was the
fair market value of the common stock on the date of grant. There is no
assurance provided to any executive officer or any other holder of our
securities that the actual stock price appreciation over the 10-year option
term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers.
42
<PAGE>
Aggregate Option Exercises and Holdings. The following table provides summary
information concerning the shares of common stock represented by outstanding
stock options held by each of our executive officers as of December 31, 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Number of Options at at December 31, 1998
Shares Value December 31, 1998 (#) ($)(2)
Acquired on Realized ------------------------- -------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth W. Anstey....... -- -- 137,250 162,750 $2,076,436 $2,400,563
Hugh R. Sharkey......... -- -- 24,000 -- $ 379,999 --
Nancy V. Westcott....... -- -- 24,375 65,625 $ 329,063 $ 885,938
Roger H. Lipton......... -- -- 46,187 27,313 $ 729,745 $ 427,411
Calvin K. Lee........... -- -- 33,875 32,125 $ 497,360 $ 466,120
</TABLE>
- --------
(1) The amount set forth represents the difference between the fair market
value of the shares on the date of exercise as determined by the Board of
Directors and the exercise price of the option.
(2) The amount set forth represents the difference between the fair market
value of the underlying common stock at December 31, 1998, using an assumed
initial public offering price of $16.00 per share as the fair market value,
and the exercise price of the option.
Employment Agreements. We have entered into employment agreements with some
of our executive officers, which provide for the payment of severance or the
acceleration of unvested stock, options and warrants in some circumstances.
Mr. Anstey's agreement provides that if he is involuntarily terminated
without cause, including his constructive termination, he will receive a
severance payment, paid in two installments, equal to 12 months of his base
salary and target bonus earned, as well as acceleration of vesting on 50% of
his unvested options. If, as a result of a change of control of ORATEC, Mr.
Anstey is involuntarily terminated other than for cause, all of his unvested
options and stock shall vest immediately.
Mr. Sharkey's agreement provides that if we terminate him without cause, he
will receive continued payment of his base salary and a pro rata amount of his
prior year's annual bonus for a period of six months after his termination
date. In addition, upon a change of control of ORATEC, his unvested stock and
options shall immediately vest.
Ms. Westcott's agreement provides that if we terminate her without cause, she
will receive continued payment of base salary on a monthly basis for (a) 12
months, if the termination occurs on or before October 30, 1999, (b) six
months, if the termination occurs after October 30, 1999, or (c) 12 months, if
she is involuntarily terminated, including her constructive termination, in
connection with a change of control. In addition, if Ms. Westcott is
involuntarily terminated, including her constructive termination, within 12
months after a change of control of ORATEC, 100% of her unvested options will
vest immediately.
Mr. Lipton's agreement provides that, upon a change of control of ORATEC,
100% of his unvested options will vest immediately.
Stock Plans
1995 Stock Plan. Our 1995 plan provides for the grant of incentive stock
options to employees, including employee directors, and of nonstatutory stock
options and stock purchase rights to employees, directors, including employee
and non-employee directors, and consultants. The purposes of the 1995 plan are
to attract and retain the best available personnel, to provide additional
incentives to our employees and
43
<PAGE>
consultants and to promote the success of our business. The 1995 plan was
originally adopted by our board of directors in July 1995 and approved by our
stockholders in September 1995. Our board of directors approved amendments to
the 1995 plan to increase the number of shares reserved under the 1995 plan in
April 1996, July 1997 and November 1998, and our stockholders approved these
amendments to the 1995 plan in May 1996, July 1997 and November 1998. As of
June 30, 1999, an aggregate of 2,250,000 shares was reserved for issuance under
the 1995 plan. The 1995 plan was amended by our board of directors on July 1,
1999 to increase the total number of shares reserved for issuance by 750,000
shares, and to incorporate some other changes, after which a total of 3,000,000
shares of common stock was reserved for issuance under the 1995 plan. In
addition, the 1995 plan was amended to provide for an automatic annual increase
on the first day of each of our fiscal years beginning in 2000, 2001 and 2002
equal to the lesser of 750,000 shares, 4% of our outstanding common stock on
the last day of the immediately preceding fiscal year, or such lesser number of
shares as the board of directors determines. This amendment to the 1995 plan
will be submitted to our stockholders for approval prior to the completion of
this offering. Unless terminated earlier by the board of directors, the 1995
plan will terminate in July 2005.
As of June 30, 1999, options to purchase 1,881,607 shares of common stock
were outstanding under the 1995 plan at a weighted average exercise price of
$3.39 per share, 244,625 shares had been issued upon exercise of outstanding
options or pursuant to restricted stock purchase agreements and 123,768 shares
remained available for future grant.
The 1995 plan may be administered by the board of directors or a committee of
the board, each known as the administrator. The administrator determines the
terms of options and stock purchase rights granted under the 1995 plan,
including the number of shares subject to the award, the exercise or purchase
price, and the vesting and/or exercisability of the award and any other
conditions to which the award is subject. In no event, however, may an employee
receive awards for more than 1,000,000 shares under the 1995 plan in any fiscal
year. Incentive stock options granted under the 1995 plan must have an exercise
price of at least 100% of the fair market value of the common stock on the date
of grant, and not less than 110% of the fair market value in the case of
incentive stock options granted to an employee who holds more than 10% of the
total voting power of all classes of our stock or any parent or subsidiary's
stock. Prior to this offering, nonstatutory stock options and stock purchase
rights granted under the 1995 plan were required to have an exercise or
purchase price of at least 85% of the fair market value of the common stock on
the date of grant, and grants vested at the rate of at least 20% per year.
After the date of this offering, the exercise price of nonstatutory stock
options and the purchase price of stock purchase rights will no longer be
subject to these restrictions, although nonstatutory stock options and stock
purchase rights granted to our Chief Executive Officer and our four other most
highly compensated officers will generally equal at least 100% of the fair
market value on the grant date if we intend that awards to those individuals
will qualify as performance-based compensation under applicable tax law.
Payment of the exercise or purchase price may be made in cash or other
consideration as determined by the administrator.
With respect to options granted under the 1995 plan, the administrator
determines the term of options, which may not exceed 10 years, or five years in
the case of an incentive stock option granted to an employee who holds more
than 10% of the total voting power of all classes of our stock or a parent or
subsidiary's stock. Generally, an option granted under the 1995 plan is
nontransferable other than by will or the laws of descent and distribution, and
may be exercised during the lifetime of the optionee only by such optionee.
However, the administrator may in its discretion provide for the limited
transferability of nonstatutory stock options granted under the 1995 plan under
some circumstances. Stock issued pursuant to stock purchase rights granted
under the 1995 plan is generally subject to a repurchase right at the
purchaser's original purchase price exercisable by ORATEC upon the termination
of the holder's employment or consulting relationship with us for any reason,
including death or disability. This repurchase right will lapse in accordance
with the terms of the stock purchase right determined by the administrator at
the time of grant.
If we sell all or substantially all of our assets or if we are acquired by
another corporation, each outstanding option and stock purchase right may be
assumed or an equivalent award substituted by the acquiror
44
<PAGE>
or purchaser. However, if the acquirer does not agree to this assumption or
substitution, then outstanding options will terminate. Upon the closing of the
transaction, outstanding repurchase rights will terminate unless assigned to
the acquiror or purchaser. The administrator has the authority to amend or
terminate the 1995 plan, but no action may be taken that impairs the rights of
any holder of an outstanding option or stock purchase right without the
holder's consent. In addition, we must obtain stockholder approval of
amendments to the plan as required by applicable law.
1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan was
adopted by the board of directors in July 1999 and will be submitted for
approval by our stockholders prior to completion of this offering. A total of
250,000 shares of common stock has been reserved for issuance under the 1999
purchase plan, none of which have been issued as of the date of this offering.
The number of shares reserved for issuance under the 1999 purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001, 2002 and 2003 equal to the lesser of 250,000 shares,
2% of our outstanding common stock on the last day of the immediately preceding
fiscal year, or such lesser number of shares as the board of directors
determines. The 1999 purchase plan becomes effective upon the date of this
offering. Unless terminated earlier by the board of directors, the 1999
purchase plan shall terminate in 2009.
The 1999 purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by a series of offering periods of
approximately six months' duration, with new offering periods, other than the
first offering period, commencing generally on May 1 and November 1 of each
year. At the end of each offering period an automatic purchase will be made for
participants. The initial offering period is expected to commence on the date
of this offering and end on April 30, 2000. The 1999 purchase plan will be
administered by the board of directors or by a committee appointed by the
board. Employees, including officers and employee directors of ORATEC or of any
majority-owned subsidiary designated by the board, are eligible to participate
in the 1999 purchase plan if they are employed by us or any subsidiary for at
least 20 hours per week and more than five months per year. The 1999 purchase
plan permits eligible employees to purchase common stock through payroll
deductions, which in any event may not exceed 15% of an employee's base salary.
The purchase price is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
offering period. Employees may end their participation in the 1999 purchase
plan at any time during an offering period, and participation ends
automatically on termination of employment.
An employee cannot be granted an option under the 1999 purchase plan if
immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or stock of our subsidiaries, or if
the option would permit an employee's rights to purchase stock under the 1999
purchase plan to accrue at a rate that exceeds $25,000 of the fair market value
of the stock for each year in which the option is outstanding. In addition, no
employee may purchase more than 2,000 shares of common stock under the 1999
purchase plan in any one offering period.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
purchase plan will be assumed or an equivalent right substituted by the
successor corporation. However, the board of directors will shorten any ongoing
offering period so that employees' rights to purchase stock under the 1999
purchase plan are able to be exercised prior to the transaction if the
successor corporation refuses to assume each purchase right or to substitute an
equivalent right. The board of directors has the power to amend or terminate
the 1999 purchase plan and to change or terminate an offering period as long as
this action does not adversely affect any outstanding rights to purchase stock.
However, the board of directors may amend or terminate the 1999 purchase plan
or an offering period even if it would adversely affect outstanding options in
order to avoid our incurring adverse accounting charges.
1999 Directors' Stock Option Plan. The 1999 directors' stock option plan was
adopted by the board of directors in July 1999 and will be submitted to our
stockholders for approval prior to completion of this offering. It will become
effective upon the date of this offering. A total of 200,000 shares of common
stock has been reserved for issuance under the 1999 directors' plan, all of
which remain available for future grants. The directors' plan provides for the
grant of nonstatutory stock options to our nonemployee directors. The
directors'
45
<PAGE>
plan is designed to work automatically without administration; however, to the
extent administration is necessary, it will be performed by the board of
directors. To the extent a conflict of interest arises, it will be addressed by
abstention of any interested director from both deliberations and voting
regarding matters in which the director has a personal interest. Unless
terminated earlier, the directors' plan will terminate in July 2009.
The directors' plan provides that each person who becomes a nonemployee
director after the completion of this offering will be granted a nonstatutory
stock option to purchase 20,000 shares of common stock on the date on which the
individual first becomes a member of our board of directors. Thereafter, on the
date of each annual shareholder meeting, each nonemployee director will be
granted a nonstatutory stock option to purchase 5,000 shares of common stock,
if on the date of that meeting, the nonemployee director has been a member of
the board of directors for at least six months.
All options granted under the directors' plan will have a term of 10 years
and an exercise price equal to the fair market value of the common stock on the
date of grant and will generally be nontransferable. All options granted under
the directors' plan shall be vested and exercisable in full immediately upon
grant of such option. If a nonemployee director ceases to serve as a director
for any reason other than death or disability, he or she may, but only within
60 days after the date he or she ceases to be a director, exercise options
granted under the directors' plan. If he or she does not exercise the option
within this 60-day period, the option shall terminate. If a director's service
terminates as a result of his or her disability or death, or if a director dies
within three months following termination for any reason, the director or his
or her estate will have 12 months after the date of termination or death, as
applicable, to exercise options that were vested as of the date of termination.
If we are acquired by another corporation, each option outstanding under the
directors' plan will be assumed by the acquiror or equivalent options
substituted, unless our acquiror does not agree to such assumption or
substitution, in which case the options will terminate upon consummation of the
acquisition to the extent not previously exercised. Our board of directors may
amend or terminate the directors' plan as long as such action does not
adversely affect any outstanding option and we obtain stockholder approval for
any amendment to the extent required by applicable law.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derives an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and employees and other
agents to the fullest extent permitted by law. We believe that indemnification
under our bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in this capacity, regardless of whether the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements provide, among other things, for indemnification
46
<PAGE>
of our directors and executive officers for expenses specified in the
agreements, including attorneys' fees, judgments, fines and settlement amounts
incurred by any director or officer in any action or proceeding arising out of
his or her services as a director or executive officer of ORATEC, any
subsidiary of ORATEC or any other entity to which the person provides services
at our request. In addition, we maintain directors' and officers' insurance. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
47
<PAGE>
TRANSACTIONS WITH AFFILIATES
From October 1, 1995 through June 30, 1999, we issued shares of preferred
stock in private placement transactions as follows:
. an aggregate of 2,034,356 shares of Series B preferred stock at $2.25 per
share in October 1995, February 1996, April 1996 and February 1999;
. an aggregate of 865,511 shares of Series C preferred stock at $5.00 per
share in March 1997 through December 1997;
. an aggregate of 1,937,133 shares of Series D preferred stock at $5.83 per
share in November 1997 and December 1997; and
. an aggregate of 2,254,678 shares of Series E preferred stock at $7.08 per
share in December 1998.
The following table summarizes the shares of preferred stock purchased since
October 1, 1995 and held as of June 30, 1999 by our executive officers,
directors, holders of more than 5% of our outstanding stock and their
affiliates:
<TABLE>
<CAPTION>
Series B Series C Series D Series E
Name Preferred Preferred Preferred Preferred
---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Entities affiliated with Venrock Associates(1).......... 555,554 342,857 105,881
Entities affiliated with Delphi Ventures................ 555,555 257,142
Entities affiliated with Pequot Private Equity Fund,
L.P.................................................... 685,714 141,179
Gerlach & Co. as nominee for The Manufacturers Life
Insurance Company (U.S.A.)(2).......................... 564,705
Hugh R. Sharkey......................................... 27,554 21,000
Gary S. Fanton, M.D..................................... 19,999 9,000
Jeffrey A. Saal, M.D.................................... 26,666
Roger H. Lipton......................................... 20,470(3)
Calvin K. Lee........................................... 6,000 7,200
</TABLE>
- --------
(1) Patrick Latterell, a general partner of Venrock Associates, is a director
of ORATEC.
(2) Stephen Brackett, a managing director of MF Private Capital, an affiliate
of The Manufacturers Life Insurance Company, is a director of ORATEC.
(3) Issued on exercise of a warrant to purchase shares of Series B preferred
stock.
Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
See "Management--Executive Compensation" for description of employment
agreements with some of our executive officers, which provide for the payment
of severance or the acceleration of unvested stock and options in some
circumstances.
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against some liabilities that may arise by
reason of their status or service as officers or directors, other than
liabilities arising from willful misconduct of a culpable nature, and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
48
<PAGE>
The following table summarizes the options granted to, and the shares of
common stock purchased since January 1, 1996 and held as of June 30, 1999 by,
our executive officers, directors, holders of more than 5% of our outstanding
stock and their affiliates:
<TABLE>
<CAPTION>
Common Issuance Vesting
Name Stock Options Price Date Schedule
---- ------ ------- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
Kenneth W. Anstey.................. 5,647(1) $ 7.08 Aug. 1998
48,000 $ 0.17 April 1996 (2)
252,000 $ 1.25 July 1997 (3)
60,000 $ 7.08 Feb. 1999 (4)
Gary S. Fanton, M.D................ 24,000 $ 0.17 April 1996 (2)
6,000 $ 2.92 Feb. 1998 (2)
6,000 $ 7.08 Mar. 1999 (2)
Richard M. Ferrari................. 48,000 $ 1.25 Aug. 1996 (2)
6,000 $ 7.08 Mar. 1999 (2)
Patrick F. Latterell............... 3,000(5) $ 1.25 Sept. 1996
Calvin K. Lee...................... 60,000 $ 1.25 Dec. 1996 (3)
6,000 $ 2.92 Jan. 1998 (4)
Roger H. Lipton.................... 16,500(6) $0.002 Jan. 1997
15,000 $ 0.17 June 1996 (7)
6,000 $ 1.25 June 1997 (2)
3,000 $ 2.92 Jan. 1998 (4)
Jeffrey A. Saal, M.D............... 24,000 $ 0.17 April 1996 (2)
6,000 $ 2.92 Feb. 1998 (2)
6,000 $ 7.08 Mar. 1999 (2)
Hugh R. Sharkey.................... 24,000(6) $ 0.17 April 1999
Nancy V. Westcott.................. 28,125(6) $ 2.50 Feb. 1999
7,500(6) $ 2.50 June 1999
54,375 $ 2.50 Nov. 1997 (7)
</TABLE>
- --------
(1) Shares were issued as a bonus to Mr. Anstey.
(2) Shares vest at the rate of 1/24th per month after the vesting commencement
date.
(3) Shares vest at the rate of 6/48ths six months after the vesting
commencement date and 1/48th per month thereafter.
(4) Shares vest at the rate of 1/48th per month after the vesting commencement
date.
(5) Shares were purchased with cash.
(6) Shares were purchased with cash pursuant to an option exercise.
(7) Shares vest as follows: 1/4th of the total shares vest on the one year
anniversary of the vesting commencement date and 1/48th of the total shares
vest on the monthly anniversary thereafter.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of June 30, 1999, as adjusted to
reflect the sale of common stock offered hereby, by:
. each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock,
. each director,
. our Chief Executive Officer and our four other most highly
compensated executive officers, and
. all directors and officers as a group.
<TABLE>
<CAPTION>
Percent Beneficially
Owned(2)
--------------------
Number of Before After
Name Shares Offering Offering(1)
---- --------- -------- -----------
<S> <C> <C> <C>
Patrick F. Latterell(3)......................... 1,007,292 10.3% 8.2%
Entities Associated with Venrock Associates(4).. 1,004,292 10.3% 8.2%
30 Rockefeller Plaza, Suite 5508
New York, NY 10112
Entities Associated with Pequot Private Equity 826,893 8.5% 6.8%
Fund, L.P.(5)..................................
500 Nayala Farm Road
Westport, CT 06880
Entities Associated with Delphi Ventures(6)..... 812,697 8.3% 6.6%
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Stephen Brackett(7)............................. 564,705 5.8% 4.6%
Gerlach & Co. as nominee for The Manufacturers 564,705 5.8% 4.6%
Life Insurance
Company (U.S.A.)...............................
45 Milk Street, Suite 600
Boston, MA 02109-5105
Hugh R. Sharkey(8).............................. 548,761 5.6% 4.5%
Gary S. Fanton, M.D.(9)......................... 392,248 4.0% 3.2%
Jeffrey A. Saal, M.D.(10)....................... 368,915 3.8% 3.0%
Kenneth W. Anstey(11)........................... 202,396 2.0% 1.6%
Roger H. Lipton(12)............................. 98,657 1.0% *
Calvin K. Lee(13)............................... 58,075 * *
Richard M. Ferrari(14).......................... 49,250 * *
Nancy V. Westcott(15)........................... 39,375 * *
All directors and officers as a group (ten
persons)(16)................................... 3,329,674 34.1% 27.1%
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Assumes no exercise of the underwriters' over-allotment option. Except
under applicable community property laws or as indicated in the footnotes
to this table, to our knowledge, each stockholder identified in the table
possesses sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by that stockholder.
(2) Options vested as of August 29, 1999 are included as shares beneficially
owned. For the purposes of calculating percent ownership, as of June 30,
1999, 9,745,546 shares were issued and outstanding, and, for any
individual who
50
<PAGE>
beneficially owns shares represented by options vested as of August 29,
1999, these shares are treated as if outstanding for that person, but not
for any other person. Unless otherwise indicated, the address of each of
the individuals named below is: c/o ORATEC Interventions, Inc., 3700 Haven
Court, Menlo Park, CA 94025.
(3) Includes 1,004,292 shares held by entities associated with Venrock
Associates, of which Mr. Latterell is a general partner. Mr. Latterell
disclaims ownership of the shares held by the entities except to the
extent of his pecuniary interest therein.
(4) Consists of 477,176 shares held by Venrock Associates II, L.P. and
527,116 shares held by Venrock Associates. The general partners of these
funds who share voting and dispositive power over these shares are
Anthony B. Evnin, Ted H. McCourtney and Anthony Sun.
(5) Consists of 608,652 shares held by Pequot Private Equity Fund, L.P. and
218,241 shares held by Pequot Offshore Private Equity Fund, Inc. The
beneficial owner of these shares is Pequot Capital Management, Inc. The
investment committee of Pequot Capital Management consists of Mark
Broach, Lawrence Lenihan, Gerald A. Poch and Arthur J. Samberg, all of
whom share voting and dispositive power over these shares.
(6) Consists of 798,325 shares held by Delphi Ventures III, L.P. and 14,372
shares held by Delphi Bioinvestments III, L.P. The general partner of
these funds is Delphi Management Partners III, L.L.C., and the managing
members of Delphi Management Partners, all of whom share voting and
dispositive power over these shares, are James J. Bochnowski, David L.
Douglass and Donald J. Lothrop.
(7) Consists of 564,705 shares held by Gerlach & Co. as nominee for The
Manufacturers Life Insurance Company (U.S.A.), of which Mr. Brackett is a
managing director. Mr. Brackett disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest therein. The other
managing directors of MF Private Capital, Inc., with whom Mr. Brackett
shares voting and dispositive power over these shares, are David Alpert,
Raymond Britt, Myles Gilbert and William Sheehan. In addition, Richard
Coles, an Executive Vice President of The Manufacturers Life Insurance
Company, also shares voting and dispositive power over these shares.
(8) Includes 32,153 shares held in trust for Mr. Sharkey's children and
281,400 shares held by the Sharkey-Daly Family Trust.
(9) Includes 29,750 shares issuable upon exercise of options vested as of
August 29, 1999.
(10) Includes 29,750 shares issuable upon exercise of options vested as of
August 29, 1999 and 69,600 shares held in trust for Mr. Saal's children.
(11) Includes 186,750 shares issuable upon exercise of options vested as of
August 29, 1999.
(12) Includes 61,687 shares issuable upon exercise of options vested as of
August 29, 1999.
(13) Includes 44,875 shares issuable upon exercise of options vested as of
August 29, 1999.
(14) Consists of 49,250 shares issuable upon exercise of options vested as of
August 29, 1999.
(15) Includes 3,750 shares issuable upon exercise of options vested as of
August 29, 1999.
(16) Includes 405,812 shares issuable upon exercise of options vested as of
August 29, 1999 held by all directors and officers.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
Common Stock
As of June 30, 1999, there were 9,745,546 shares of common stock outstanding,
held of record by approximately 324 stockholders, which reflects the conversion
of all outstanding shares of preferred stock into common stock. In addition, as
of June 30, 1999, there were 1,881,607 shares of common stock subject to
outstanding options and 127,745 shares of common stock subject to outstanding
warrants. Upon completion of this offering, there will be 12,245,546 shares of
common stock outstanding, assuming no exercise of the underwriters'
overallotment option or additional exercise of outstanding options under our
stock option plan and warrants.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by stockholders. Subject to preferences that may be applicable
to any outstanding preferred stock, holders of common stock are entitled to
receive ratably dividends as may be declared by the board of directors out of
funds legally available for that purpose. See "Our Policy Regarding Dividends."
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive or conversion rights, other
subscription rights, or redemption or sinking fund provisions. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and non-assessable.
Preferred Stock
Immediately before the closing of the offering, all outstanding shares of
preferred stock will be converted into 7,247,923 shares of common stock and
automatically retired. Thereafter, the board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to designate the rights,
preferences, privileges and restrictions of each such series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock or delaying or preventing our change in control
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock.
Warrants
As of June 30, 1999 there were the following warrants outstanding:
. a warrant to purchase 33,333 shares of Series B preferred stock with an
exercise price of $2.25, which expires on March 20, 2001;
. warrants to purchase an aggregate of 21,000 shares of Series C preferred
stock with an exercise price of $5.00, which expire five years after the
closing of this initial public offering; and
. a warrant to purchase 73,412 shares of Series E preferred stock with an
exercise price of $7.08, which expire two years after the closing of this
initial public offering.
All of these warrants become exercisable for shares of common stock upon the
closing of this initial public offering.
Registration Rights
The holders of 7,247,923 shares of common stock, the "registrable
securities," are entitled to have their shares registered by us under the
Securities Act under the terms of an agreement between us and the holders of
52
<PAGE>
the registrable securities. Subject to limitations specified in the agreement,
these registration rights include the following:
. The holders of at least 40% of the registrable securities may require, on
two occasions beginning six months after the date of this prospectus,
that we use our best efforts to register the registrable securities for
public resale, provided that the aggregate offering price for such
registrable securities is more than $5,000,000. This right is subject to
the ability of the underwriters to limit the number of shares included in
the offering in view of market conditions.
. If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable securities
are entitled to include their registrable securities in such
registration. This right is subject to the ability of the underwriters to
limit the number of shares included in the offering in view of market
conditions.
. The holders of at least 30% of the then outstanding registrable
securities may require us to register all or a portion of their
registrable securities on Form S-3 when use of such form becomes
available to us, provided that the proposed aggregate offering price is
more than $1,000,000. The holders of registrable securities may only
exercise these Form S-3 registration rights twice, and may not exercise
this right within six months after the effective date of a previous
registration.
Holders of warrants exercisable for a total of 127,745 shares of common stock
have the right to include these shares in a piggyback or Form S-3 registration.
We will bear all registration expenses other than underwriting discounts and
commissions, except that we shall only pay registration expenses for one Form
S-3 registration in any twelve month period. All registration rights terminate
on the date five years after the closing of this offering, or, with respect to
each holder of registrable securities, at such time as the holder owns less
than 1% of the voting stock, or can sell all of his or her shares in any three
month period under Rule 144 of the Securities Act.
Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation
and Bylaws
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult our acquisition by a third-party and the removal of
our incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of ORATEC to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation could result in an improvement of
their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a business combination with an
interested stockholder for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
53
<PAGE>
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. Our certificate of incorporation permits
the board of directors to issue preferred stock with voting or other rights
without any stockholder action. Our bylaws provide that, upon our stock being
listed on the Nasdaq National Market and upon our having at least 800
shareholders of record at an annual meeting, shareholders will no longer be
able to call special shareholder meetings. Our certificate of incorporation
provides that at our first annual meeting of stockholders following the date on
which we have at least 800 stockholders, the board of directors shall be
divided into three classes, with staggered three year terms. As a result, only
one class of directors will be elected at each annual meeting of stockholders.
The other classes of directors will continue to serve for the remainder of
their three year terms. These provisions, which require the vote of
stockholders holding at least 66 2/3% of the outstanding common stock to amend,
may have the effect of deterring hostile takeovers or delaying changes in our
management. In addition, a director may be removed from office:
. for cause, by a vote of the holders of a majority of the outstanding
shares, and
. without cause, by a vote of the holders of at least 66 2/3% of the
outstanding shares.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company, and its address and telephone number are 40 Wall
Street, New York, NY 10005 (tel.) (212) 936-5100.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, only 31,200
shares currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and impair our ability to
raise equity capital in the future.
Upon completion of the offering, we will have 12,245,546 outstanding shares
of common stock. Of these shares, the 2,500,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' overallotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our affiliates as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors and 10%
stockholders.
The remaining 9,745,546 shares outstanding are "restricted securities" within
the meaning of Rule 144. Restricted securities may be sold in the public market
only if they are registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which are summarized below. Sales of the restricted securities in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock.
Our directors, officers and security holders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Merrill Lynch & Co.
Notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be
salable until such agreements expire or are waived by each of Merrill Lynch &
Co. and ORATEC. Taking into account the lock-up agreements, and assuming
Merrill Lynch & Co. and we do not release stockholders from these agreements,
the following shares will be eligible for sale in the public market at the
following times:
. Beginning on the effective date of this prospectus, the 2,500,000 shares
sold in the offering and 31,200 additional shares will be immediately
available for sale in the public market.
. Beginning 180 days after the effective date, approximately 8,109,813
shares will be eligible for sale, 2,947,862 of which will be subject to
volume, manner of sale and other limitations under Rule 144.
. The remaining 1,604,533 shares will be eligible for sale pursuant to Rule
144 upon the expiration of various one-year holding periods during the
six months following 180 days after the effective date.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding
which will equal approximately shares immediately after the offering;
or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
anytime during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
55
<PAGE>
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144 but without compliance
with specific restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirement and that non-affiliates may sell such shares in reliance on Rule
144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 1995 plan, the 1999 employee stock purchase plan,
the 1999 directors' stock option plan or any other benefit plan after the
effectiveness of the registration statements will also be freely tradable in
the public market. However, shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701. As of June
30, 1999 there were outstanding options for the purchase of 1,881,607 shares of
common stock, of which options to purchase 846,342 shares were exercisable.
56
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of each
of the underwriters named below. Subject to the terms and conditions described
in a purchase agreement among us and the underwriters, we have agreed to sell
to the underwriters, and each of the underwriters severally and not jointly has
agreed to purchase from us, the number of shares of common stock listed
opposite its name below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
J.P. Morgan Securities Inc......................................
U.S. Bancorp Piper Jaffray Inc..................................
---------
Total......................................................... 2,500,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions described in the purchase agreement, to purchase all
of the shares of common stock being sold pursuant to this agreement if any of
the shares of common stock being sold pursuant to the agreement are purchased.
In the event of a default by an underwriter, the purchase agreement provides
that the purchase commitments of the nondefaulting underwriters may be
increased or the purchase agreement may be terminated.
We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make.
Commission and Discounts
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public
offering price described on the cover page of this prospectus, and to some
dealers at that price less a concession not in excess of $ per share of
common stock. The underwriters may allow, and those dealers may reallow, a
discount not in excess of $ per share of common stock to other dealers. After
the initial public offering, the public offering price, concession and discount
may change.
The following table shows the per share and total public offering price, the
underwriting discount we will pay to the underwriters and the proceeds we will
receive before expenses. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Total Without Total With
Share Option Option
----- ------------- ----------
<S> <C> <C> <C>
Public offering price............................ $ $ $
Underwriting discount............................ $ $ $
Proceeds, before expenses, to ORATEC............. $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ million and are payable by us.
The shares of common stock are being offered by the underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of some legal matters by counsel for the underwriters and other conditions. The
underwriters reserve the right to withdraw, cancel or modify their offer and to
reject orders in whole or in part.
57
<PAGE>
Over-allotment Options
We have granted options to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 375,000
additional shares of common stock at the public offering price described on the
cover page of this prospectus, less the underwriting discount. The underwriters
may exercise these options solely to cover over-allotments, if any, made on the
sale of the common stock. To the extent that the underwriters exercise these
options, each underwriter will be obligated, subject to some conditions, to
purchase a number of additional shares of common stock proportionate to that
underwriter's initial amount reflected in the above table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares to be sold to directors,
officers, employees, business associates and related persons of ORATEC. The
number of shares of common stock available for sale to the general public will
be reduced to the extent those persons purchase reserved shares. Any reserved
shares which are not orally confirmed for purchase within one day of the
pricing of the offering will be offered by the underwriters to the general
public on the same terms as the other shares offered hereby. Reserved shares
will be sold at the initial public offering price.
No Sales of Similar Securities
We and our executive officers and directors and almost all of existing
stockholders have agreed, with some exceptions, not to directly or indirectly,
for a period of 180 days after the date of this prospectus:
. offer, sell, contract to sell, grant any option or warrant for the sale
of, register, or otherwise transfer, dispose of, loan, pledge or grant
any rights with respect to any shares of capital stock of ORATEC or
securities convertible into or exchangeable or exercisable for, or any
rights to purchase or acquire, shares of capital stock of ORATEC,
including, without limitation, common stock which may be deemed to be
beneficially owned by the stockholder in accordance with the rules and
regulations of the SEC.
The foregoing restriction is expressly agreed to preclude stockholders from
engaging in any hedging or other transaction which is designed to result in a
disposition of securities during the 180-day lock-up period, even if such
securities would be disposed of by someone other than the stockholder.
Initial Public Offering Price
Prior to the offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us and the representatives. The factors considered in determining the
initial public offering price, in addition to prevailing market conditions, are
. price-earnings ratios of publicly traded companies that the
representatives believe to be comparable to ORATEC;
. financial information about us and the industry in which we compete; and
. an assessment of our management, our past and present operations, our
prospects for, and timing of, future revenue, and the present state of
our development.
An active trading market for our common stock may not develop and the price
at which our stock trades after the offering may be below the initial public
offering price.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and some selling group members to bid for and purchase the common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
58
<PAGE>
If the underwriters create a short position in the common stock in connection
with the offering, i.e., if they sell more shares of common stock than are set
forth on the cover page of this prospectus, the representatives may reduce that
short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment options described above.
The representatives may also impose a penalty bid on other underwriters and
selling group members, which means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases. The imposition of a penalty bid
might also have an effect on the price of the common stock to the extent that
it discourages resales of the common stock.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in any stabilizing transactions or that these transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for
ORATEC by Venture Law Group, A Professional Corporation, 2800 Sand Hill Road,
Menlo Park, California 94025. Mark Weeks, a director of Venture Law Group, is
the Secretary of ORATEC. Legal matters with respect to information contained in
this prospectus under the captions "Risk Factors--Because the medical device
industry is litigious, we are particularly susceptible to an intellectual
property suit" and "--Because of the importance of our patent portfolio to our
business, we may lose market share to our competitors if we fail to protect our
intellectual property rights" and "Business--Patents and Proprietary
Technology" will be passed upon for ORATEC by Wilson Sonsini Goodrich & Rosati,
a Professional Corporation, patent counsel to ORATEC. Legal matters in
connection with this offering will be passed upon for the underwriters by
Latham & Watkins, 650 Town Center Drive, 20th floor, Costa Mesa, CA 95626. As
of the date of this prospectus, an investment partnership controlled by Venture
Law Group beneficially owns 20,133 shares of ORATEC'S common stock. As of the
date of this prospectus, partners of Wilson Sonsini Goodrich & Rosati, a
Professional Corporation, beneficially own 27,000 shares of ORATEC's common
stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
The statements set forth in this prospectus under the captions "Risk
Factors--Because the medical device industry is litigious, we are particularly
susceptible to an intellectual property suit" and "--Because of the importance
of our patent portfolio to our business, we may lose market share to our
competitors if we fail to protect our intellectual property rights" and
"Business--Patents and Proprietary Technology" have been reviewed and approved
by Wilson Sonsini Goodrich & Rosati, a Professional Corporation, patent counsel
to ORATEC, as experts in such matters, and are included herein in reliance upon
its review and approval.
59
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement, which includes any amendments to the registration statement, on Form
S-1 under the Securities Act with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement. Some items are contained in exhibits to the
registration statement as permitted by the rules and regulations of the
Securities and Exchange Commission. For further information with respect to
ORATEC and the common stock offered by this prospectus, reference is made to
the registration statement and its exhibits, and the financial statements and
notes filed as a part of the registration statement. Statements made in this
prospectus concerning the contents of any document are not necessarily
complete. With respect to each document filed with the Securities and Exchange
Commission as an exhibit to the registration statement, reference is made to
the exhibit for a more complete description of the matter involved. The
registration statement, including the exhibits, financial statements and notes
filed as a part of the registration statement, as well as reports and other
information filed with the Securities and Exchange Commission, may be inspected
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Securities and Exchange Commission located at
Seven World Trade Center, 13th Floor, New York, New York, 10048, and the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part thereof may be obtained from the Securities and
Exchange Commission upon payment of fees prescribed by the Securities and
Exchange Commission. These reports and other information may also be inspected
without charge at a website maintained by the Securities and Exchange
Commission. The address of the SEC site is http://www.sec.gov.
60
<PAGE>
ORATEC INTERVENTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statement of Redeemable Convertible Preferred Stock and Stockholders'
Equity................................................................... F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ORATEC Interventions, Inc.
We have audited the accompanying balance sheets of ORATEC Interventions, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
cash flows, and statement of redeemable convertible preferred stock and
stockholders' equity for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of ORATEC's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ORATEC Interventions, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Palo Alto, California
February 25, 1999
The foregoing report is in the form that will be signed upon the completion
of the stock split described in Note 14 to the financial statements.
/s/ Ernst & Young LLP
Palo Alto, California
February 25, 1999
F-2
<PAGE>
ORATEC INTERVENTIONS, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, Pro forma at
----------------- June 30, June 30,
1997 1998 1999 1999
------- -------- -------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents......... $ 5,535 $ 11,583 $ 10,157
Short term investments............ 3,650 3,998 3,022
Accounts receivable, less
allowance for doubtful accounts
of $106 in 1997, $216 in 1998,
and $287 in 1999................. 897 2,905 4,961
Inventories....................... 502 1,421 2,340
Prepaid expenses and other current
assets........................... 593 513 1,267
------- -------- --------
Total current assets............ 11,177 20,420 21,747
Property and equipment, net......... 2,241 3,775 3,273
------- -------- --------
$13,418 $ 24,195 $ 25,020
======= ======== ========
Liabilities and stockholders' equity
Current liabilities:
Bank borrowings................... $ -- $ 1,178 $ 1,178
Accounts payable.................. 1,469 1,672 2,116
Accrued compensation and
benefits......................... 276 1,327 1,498
Other accrued liabilities......... 432 1,637 2,494
Current portion of notes payable.. -- -- 750
Current portion of equipment
financing obligations............ 283 609 859
------- -------- --------
Total current liabilities....... 2,460 6,423 8,895
Long term notes payable............. -- -- 3,250
Long term equipment financing
obligations........................ 404 2,702 2,701
Commitments
Redeemable convertible preferred
stock, $0.001 par value, issuable
in series; 5,400,000 shares
authorized in 1997, 7,440,000
shares authorized in 1998 and 1999
(5,000,000 shares pro forma);
4,972,775, 7,227,453, and 7,247,923
shares issued and outstanding in
1997, 1998, and 1999, respectively
(none pro forma); aggregate
redemption value of $36,380 at
December 31, 1998 and $36,426 at
June 30, 1999 (none pro forma)..... 20,324 35,816 35,816 $ --
Common stock, $0.001 par value;
9,600,000 shares authorized in
1997, 11,940,000 shares authorized
in 1998 and 1999 (75,000,000 shares
pro forma); 2,370,632, 2,415,805,
and 2,497,623 shares issued and
outstanding in 1997, 1998, and
1999, respectively (9,745,546
shares pro forma).................. 2 2 2 10
Additional paid-in capital.......... 26 268 966 36,774
Deferred stock compensation......... -- -- (310) (310)
Receivable from stockholder......... (124) -- -- --
Accumulated deficit................. (9,674) (21,016) (26,300) (26,300)
------- -------- --------
$13,418 $ 24,195 $ 25,020
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ORATEC INTERVENTIONS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months
Years ended December 31, ended June 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Sales............................ $ -- $ 2,600 $ 11,129 $ 4,106 $12,899
Cost of sales.................... -- 1,741 6,566 2,354 6,261
------- ------- -------- ------- -------
Gross profit..................... -- 859 4,563 1,752 6,638
Operating expenses:
Research and development....... 878 2,514 4,706 2,094 2,624
Sales and marketing............ 561 2,622 8,318 3,390 7,494
General and administrative..... 945 2,721 2,724 1,192 1,465
------- ------- -------- ------- -------
Total operating expenses......... 2,384 7,857 15,748 6,676 11,583
------- ------- -------- ------- -------
Loss from operations............. (2,384) (6,998) (11,185) (4,924) (4,945)
Interest and other income........ 100 196 265 168 341
Interest and other expense....... (18) (30) (422) (44) (680)
------- ------- -------- ------- -------
Net loss......................... $(2,302) $(6,832) $(11,342) $(4,800) $(5,284)
======= ======= ======== ======= =======
Net loss per common share, basic
and diluted..................... $ (1.00) $ (2.91) $ (4.72) $ (2.01) $ (2.16)
======= ======= ======== ======= =======
Shares used in computing net loss
per common share, basic and
diluted......................... 2,304 2,347 2,403 2,393 2,447
Pro forma net loss per share,
basic and diluted (unaudited)... $ (1.51) $ (0.55)
======== =======
Shares used in computing pro
forma net loss per share, basic
and diluted (unaudited)......... 7,525 9,688
</TABLE>
See accompanying notes.
F-4
<PAGE>
ORATEC INTERVENTIONS, INC.
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Redeemable
Convertible
Preferred Stock Common Stock Additional Deferred
----------------- ---------------- Paid-In Stock Receivable from Accumulated
Shares Amount Shares Amount Capital Compensation Stockholder Deficit
--------- ------- --------- ------ ---------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... 255,933 $ 474 2,298,000 $ 2 $ 2 $-- $ (45) $ (540)
Cash payments on
receivables from
stockholders........... -- -- -- -- -- -- 45 --
Issuance of common stock
upon exercise of stock
options, net........... -- -- 21,450 -- 1 -- -- --
Issuance of Series B
redeemable convertible
preferred stock........ 1,914,198 4,307 -- -- -- -- -- --
Issuance of warrants to
purchase 30,000 shares
of Series B redeemable
convertible preferred
stock.................. -- 11 -- -- -- -- -- --
Net and comprehensive
loss................... -- -- -- -- -- -- -- (2,302)
--------- ------- --------- --- ---- ----- ----- --------
Balances at December 31,
1996................... 2,170,131 4,792 2,319,450 2 3 -- -- (2,842)
Issuance of Series C
redeemable convertible
preferred stock........ 865,511 4,328 -- -- -- -- -- --
Issuance of Series D
redeemable convertible
preferred stock (net of
issuance costs of
$96)................... 1,937,133 11,204 -- -- -- -- (124) --
Issuance of common stock
upon exercise of stock
options................ -- -- 51,182 -- 23 -- -- --
Net and comprehensive
loss................... -- -- -- -- -- -- -- (6,832)
--------- ------- --------- --- ---- ----- ----- --------
Balances at December 31,
1997................... 4,972,775 20,324 2,370,632 2 26 -- (124) (9,674)
Warrants to purchase
73,412 shares of Series
E preferred stock for
loan arrangement....... -- 146 -- -- -- -- -- --
Compensation expense for
non-employee options... -- -- -- -- 102 -- -- --
Issuance of common stock
upon exercise of
options, net........... -- -- 39,526 -- 100 -- -- --
Grant of common stock in
lieu of compensation... -- -- 5,647 -- 40 -- -- --
Cash payments on
receivable from
stockholders........... -- -- -- -- -- -- 124 --
Issuance of Series E
preferred stock (net of
issuance costs of
$625).................. 2,254,678 15,346 -- -- -- -- -- --
Net and comprehensive
loss................... -- -- -- -- -- -- -- (11,342)
--------- ------- --------- --- ---- ----- ----- --------
Balances at December 31,
1998................... 7,227,453 35,816 2,415,805 2 268 -- -- (21,016)
Issuance of common stock
upon exercise of
options (unaudited).... -- -- 78,818 -- 132 -- -- --
Compensation expense for
non-employee options
(unaudited)............ -- -- -- -- 216 -- -- --
Grant of common stock in
lieu of compensation
(unaudited)............ -- -- 3,000 -- 40 -- -- --
Deferred stock
compensation related to
options granted to
employees and
consultants
(unaudited)............ -- -- -- -- 310 (310) -- --
Exercise of warrants for
Series B redeemable
convertible preferred
stock (unaudited)...... 20,470 -- -- -- -- -- -- --
Net and comprehensive
loss (unaudited)....... -- -- -- -- -- -- -- (5,284)
--------- ------- --------- --- ---- ----- ----- --------
Balances at June 30,
1999 (unaudited)....... 7,247,923 $35,816 2,497,623 $ 2 $966 $(310) $ -- $(26,300)
========= ======= ========= === ==== ===== ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ORATEC INTERVENTIONS, INC.
STATEMENTS OF CASH FLOWS
Increase in cash and cash equivalents
(In thousands)
<TABLE>
<CAPTION>
Six months
Years ended December 31, ended June 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss........................ $(2,302) $(6,832) $(11,342) $(4,800) $(5,284)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................. 69 573 2,097 949 1,825
Compensation expense for
options granted to non-
employees.................... -- -- 102 -- 216
Issuance of equity for non-
cash benefits................ -- -- 186 -- 36
Changes in operating assets
and liabilities:
Accounts receivable......... -- (897) (2,008) (1,386) (2,056)
Inventories................. (84) (419) (919) (729) (919)
Prepaid expenses and other
current assets............. (93) (491) 80 (164) (754)
Accounts payable............ 138 1,654 203 1,438 444
Accrued compensation and
benefits................... (13) 228 1,051 (40) 171
Other accrued liabilities... -- -- 1,205 (379) 857
------- ------- -------- ------- -------
Net cash used in operating
activities..................... (2,285) (6,184) (9,345) (5,111) (5,464)
------- ------- -------- ------- -------
Investing activities
Purchases of short term
investments.................... (561) (3,500) (3,998) (1,374) (2,998)
Sales of short term
investments.................... -- 411 3,650 4,003 3,974
Capital expenditures............ (674) (2,183) (3,631) (2,351) (1,323)
------- ------- -------- ------- -------
Net cash (used in) provided by
investing activities........... (1,235) (5,272) (3,979) 278 (347)
------- ------- -------- ------- -------
Financing activities
Proceeds from issuance of
preferred stock................ 4,318 15,408 15,346 -- --
Proceeds from issuance of common
stock.......................... 1 23 100 48 136
Receipts from stockholder
receivables.................... 45 -- 124 124 --
Payment of note payable......... (35) -- -- -- --
Proceeds from bank borrowings... -- -- 1,178 889 --
Proceeds from notes payable..... -- -- -- -- 4,000
Proceeds from equipment
financing obligations.......... 395 506 3,000 456 386
Repayment of equipment financing
obligations.................... (51) (163) (376) (137) (137)
------- ------- -------- ------- -------
Net cash provided by financing
activities..................... 4,673 15,774 19,372 1,380 4,385
------- ------- -------- ------- -------
Net increase (decrease) in cash
and cash equivalents........... 1,153 4,318 6,048 (3,453) (1,426)
Cash and cash equivalents at
beginning of period............ 64 1,217 5,535 5,535 11,583
------- ------- -------- ------- -------
Cash and cash equivalents at end
of period...................... $ 1,217 $ 5,535 $ 11,583 $ 2,082 $10,157
======= ======= ======== ======= =======
Supplemental schedule of noncash
investing and financing
activities
Issuance of stock to
stockholders for receivables... $ -- $ 124 $ -- $ -- $ --
======= ======= ======== ======= =======
Deferred stock compensation..... $ -- $ -- $ -- $ -- $ 310
======= ======= ======== ======= =======
Supplemental disclosure of cash
flow information
Cash payments for interest...... $ 18 $ 30 $ 272 $ 44 $ 680
======= ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
1. Organization and Summary of Significant Accounting Policies
The Company
ORATEC Interventions, Inc. was incorporated in the State of California on May
26, 1993 to develop medical devices which use controlled thermal energy to
treat spine and joint disorders. ORATEC's products use heat to shrink and
repair damaged or stretched soft tissue.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from these estimates.
Interim Financial Information
The financial information at June 30, 1999 and for the six months ended June
30, 1998 and 1999 is unaudited but, in the opinion of management, has been
prepared on the same basis as the annual financial statements and includes all
adjustments (consisting only of normal recurring adjustments) that ORATEC
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for such periods. Results for the
six months ended June 30, 1999 are not necessarily indicative of the results to
be expected for any subsequent period.
Unaudited Pro Forma Redeemable Convertible Preferred Stock and Stockholders'
Equity
If ORATEC's initial public offering as described in Note 14 is consummated,
all of the redeemable convertible preferred stock outstanding will
automatically be converted into common stock. The unaudited pro forma
redeemable convertible preferred stock and stockholders' equity at June 30,
1999 has been adjusted for the assumed conversion of redeemable convertible
preferred stock based on the shares of redeemable convertible preferred stock
outstanding at June 30, 1999.
Cash Equivalents and Short Term Investments
ORATEC considers all highly liquid investments purchased with original
maturities of three months or less at the date of purchase to be cash
equivalents.
In accordance with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," ORATEC classifies its debt securities as
"available-for-sale" securities for use in its current operations. Such debt
securities are carried at amortized cost which approximates fair value. The
cost of the securities sold is based on specific identification.
Fair Value of Financial Instruments
The fair values of marketable securities, as described in Note 5, are based
on quoted market prices and are not necessarily indicative of the amounts that
ORATEC could realize in a current market exchange. The carrying value of those
securities approximates their fair value.
F-7
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
The fair value of notes payable, as described in Note 10, are estimated by
discounting the future cash flows using the current interest rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. The carrying values of these obligations
approximate their respective fair values.
The fair value of short term and long term equipment financing obligations
and bank borrowings, as described in Notes 8 and 9, are estimated based on
current interest rates available to ORATEC for debt instruments with similar
terms, degrees of risk and remaining maturities. The carrying values of these
obligations approximate their respective fair values.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight line method over the estimated
useful lives of the respective assets, generally two to seven years. The cost
of generators in service is depreciated into cost of sales over an estimated
useful life of two years.
Impairment of Long-Lived Assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), ORATEC reviews long-lived
assets, including property and equipment, for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Under SFAS 121, an impairment loss would
be recognized when estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment, if any, is assessed using discounted cash flows.
Through June 30, 1999 there have been no such losses.
Revenue Recognition
ORATEC recognizes revenue upon shipment of products to customers, and, in
some cases, when inventory provided to customers has been used at their
facility as evidenced by receipt of a purchase order. If title to the products
does not pass until receipt by the customer, revenue is deferred until proof of
receipt is obtained. ORATEC's return policy allows customers to return new
products up to 90 days after a sale. To date, returns have been insignificant.
Title has been retained to the majority of arthroscopy generators, which have
been placed with customers for their use with ORATEC's disposable arthroscopy
probes. ORATEC is selling its spine generators following placement with
customers for a demonstration period. Revenue is recognized upon customer
acceptance evidenced by the issuance of a customer purchase order.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were not
material in 1996, 1997, 1998, and the six months ended June 30, 1999.
Dependence on Single Supplier
ORATEC purchases all of its electrothermal generators from a sole source
third party supplier. There are no other third party contractors who could
readily assume this manufacturing function. Any delay in production
F-8
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
of generators could result in the failure to meet customer demand. At June 30,
1999, ORATEC had a commitment of $2.4 million to purchase electrothermal
generators which are expected to be purchased from August through November
1999.
Product Liability and Patent Litigation Risks
The medical device market is litigious and ORATEC may become a party to
product liabilty or patent proceedings. The costs of such lawsuits may be
material and could effect our earnings and financial position.
Stock-Based Compensation
ORATEC accounts for grants of stock options and common stock purchase rights
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees and Related Interpretations." Information regarding
pro forma adjustments to net loss, as required by Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), is included in Note 11.
Comprehensive Income (Loss)
As of January 1, 1998, ORATEC adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires unrealized gains or losses on ORATEC's available-for-sale investments
to be included in other comprehensive income. For the year ended December 31,
1997 and 1998, and for the six months ended June 30, 1999, comprehensive loss
approximated net loss as other comprehensive income was not material.
Net Loss Per Share
Basic earnings per share is calculated based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share
gives effect to the dilutive effect of common stock equivalents consisting of
stock options and warrants (calculated using the treasury stock method).
The computation of pro forma net loss per share includes shares issuable upon
the conversion of outstanding shares of convertible preferred stock (using the
as-if converted method) from the original date of issuance.
A reconciliation of shares used in the calculations is as follows (in
thousands):
<TABLE>
<CAPTION>
Six months
Years ended ended June
December 31, 30,
----------------- -----------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Weighted-average shares of common stock
outstanding................................... 2,304 2,347 2,403 2,393 2,447
===== ===== ===== ===== =====
Pro forma basic and diluted:
Shares used above.............................. 2,403 2,447
Pro forma adjustment to reflect weighted-
average effect of assumed conversion of
redeemable convertible preferred stock........ 5,122 7,241
----- -----
7,525 9,688
===== =====
</TABLE>
F-9
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
The following outstanding options, warrants, and redeemable convertible
preferred stock (on an as converted basis and including a warrant to purchase
73,412 shares of Series E preferred stock due to be issued at December 31,
1998) were excluded from the computation of diluted net loss per share as they
had an antidilutive effect (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
----------------- -----------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Options and warrants.............................. 790 1,421 1,791 1,565 2,009
Redeemable convertible preferred stock............ 2,170 4,973 7,227 4,973 7,248
</TABLE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 1999 and is not anticipated to have an impact on
ORATEC's results of operations or financial condition when adopted as ORATEC
holds no derivative financial instruments and does not currently engage in
hedging activities.
2. Accounts Receivable
Accounts receivable is stated net of allowance for doubtful accounts. A
summary of movement in the allowance is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1996 1997 1998 1999
---- ---- ---- --------
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 20 $-- $106 $216
Additions charged to costs and expenses............ -- 106 151 71
Write-off of uncollectible accounts................ (20) -- (41) --
---- ---- ---- ----
Balance at end of period........................... $-- $106 $216 $287
==== ==== ==== ====
</TABLE>
3. Inventories
Inventories are stated at the lower of standard cost or market. Standard
costs approximate average actual costs. Inventories are summarized below (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------------- --------
<S> <C> <C> <C>
Raw materials......................................... $ 122 $ 432 $ 617
Work in-process....................................... 58 41 136
Finished goods........................................ 87 370 424
Electrothermal generators held for sale............... 235 578 1,163
----- ------- ------
$ 502 $ 1,421 $2,340
===== ======= ======
</TABLE>
F-10
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
4. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Electrothermal generators........................ $1,807 $ 4,692 $ 5,761
Computers, machinery, and equipment.............. 760 1,148 1,438
Furniture and fixtures........................... 224 459 411
Leasehold improvements........................... 95 218 230
------ ------- -------
2,886 6,517 7,840
Less accumulated depreciation and amortization... (645) (2,742) (4,567)
------ ------- -------
Property and equipment, net...................... $2,241 $ 3,775 $ 3,273
====== ======= =======
</TABLE>
5. Marketable Securities
Marketable securities consist of the following (in thousands):
<TABLE>
<CAPTION>
Amortized Cost and Fair Value at
---------------------------------
December 31,
--------------------- June 30,
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Certificates of deposit................... $ 150 $ 1,000 $ --
Corporate commercial paper................ 3,500 2,998 6,967
Asset-backed auction rate securities...... 900 4,500 4,000
---------- ---------- -----------
$ 4,550 $ 8,498 $ 10,967
========== ========== ===========
Reported as:
Cash equivalents........................ $ 900 $ 4,500 $ 7,945
Short term investments.................. 3,650 3,998 3,022
---------- ---------- -----------
$ 4,550 $ 8,498 $ 10,967
========== ========== ===========
</TABLE>
At December 31, 1998 and June 30, 1999, the average maturity of the
investments was approximately two months.
There were no material gross realized gains or losses from sales of
securities in the periods presented. Unrealized gains and losses on investments
were not material at December 31, 1997 and 1998, or June 30, 1999.
6. Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------------- --------
<S> <C> <C> <C>
Professional fees..................................... $ 50 $ 529 $ 620
Dealer commissions.................................... 156 138 221
Clinical and development costs........................ 200 452 654
Other................................................. 26 518 999
----- ------- ------
$ 432 $ 1,637 $2,494
===== ======= ======
</TABLE>
F-11
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
7. Operating Lease Commitments
ORATEC leases its facilities under various agreements expiring through July
2003. Rent expense was approximately $90,000, $230,000, and $320,000 for the
years ended December 31, 1996, 1997, and 1998. ORATEC has the option to extend
the term of its operating leases for three additional years. At December 31,
1998, minimum future rental payments under operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ended December 31,
1999................................................................. $ 476
2000................................................................. 425
2001................................................................. 246
2002................................................................. 255
2003................................................................. 130
------
$1,532
======
</TABLE>
8. Equipment Financing Obligations
In March 1996, a financial institution made available to ORATEC equipment
loans of up to $500,000 on which interest accrues at a rate of 8% per annum.
Final drawdown under this line was made in September 1997.
In October 1997, two financial institutions made available to ORATEC
equipment loans of up to an aggregate $1,000,000 on which interest is fixed at
the time of each drawdown. At December 31, 1998, approximately $924,000 had
been drawn down under three promissory notes with interest ranging between 7%
and 8%. Principal and interest under the notes must be repaid according to the
terms of each promissory note issued. In accordance with the loan agreements,
ORATEC granted the lenders perfected security interests in some specified
computer, manufacturing, laboratory and office equipment and furniture.
In August 1998, a financial institution made available to ORATEC an equipment
loan on which the interest is fixed at the time of each drawdown. The loan is
secured by a security interest in the equipment financed and a junior interest
in the other assets of ORATEC. At June 30, 1999, ORATEC had drawn down
$2,562,415 of the loan with interest rates of 12% to 13%.
Future minimum payments under equipment financing obligations are as follows
at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Fiscal year ended December 31,
1999............................................................... $ 965
2000............................................................... 1,359
2001............................................................... 1,936
------
Total minimum payments............................................... 4,260
Less amount representing interest.................................... (949)
------
Present value of minimum payments.................................... 3,311
Less current portion................................................. (609)
------
Long term portion.................................................... $2,702
======
</TABLE>
F-12
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
9. Bank Borrowings
In June 1998, ORATEC entered into a loan and security agreement for a
revolving line of credit of up to $2,500,000. The line of credit bears interest
at 1% above the prime rate and has a first priority security interest over the
assets of ORATEC. ORATEC is subject to some covenants under the terms of the
agreement including a maximum debt to tangible net worth ratio of 2:1, and was
not in compliance for the month of September 30, 1998 and the quarter then
ended, for which ORATEC received a waiver. At December 31, 1998 and June 30,
1999, the balance outstanding under this agreement was $1,177,579 and the
unused line of credit was $1,322,421. The facility is being extended from its
initial expiration date of June 30, 1999. The weighted-average interest rate
for 1998 was 9.2%.
In association with the loan and security agreement above, ORATEC received a
letter of credit for $75,000 which expires in August 2000 to secure a building
lease obligation. At December 31, 1998, no amount has been drawn against the
letter of credit.
10. Notes Payable
In December 1998, a financial institution made available to ORATEC a loan
facility of up to $4,000,000 which bears interest at 13.5% per annum, subject
to changes in the three year treasury rates. The loan is covered by a
subordinated security interest in the assets of ORATEC. In connection with set
up of the loan arrangement, ORATEC agreed to issue to the financial institution
a warrant to purchase 73,412 shares of ORATEC's Series E preferred stock at
$7.08 per share. For accounting purposes, the warrant was valued at $145,821
and has been fully expensed in 1998. At December 31, 1998, no amounts had been
drawn down against this loan.
At June 30, 1999, the total loan of $4,000,000 was outstanding in the form of
two notes payable of $2,000,000 each bearing interest at 13.1% per annum. The
notes are repayable over three years after an initial twelve months of
interest-only payments. The annual maturities of the notes at June 30, 1999
were as follows: zero through December 31, 1999, $1,705,000, $2,107,000 and
$188,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
11. Redeemable Convertible Preferred Stock and Common Stock
Redeemable Convertible Preferred Stock
A summary of redeemable convertible preferred stock ("preferred stock") is as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 June 30, 1999
---------------------------------- ---------------------------------- ----------------------------------
Redemption/ Redemption/ Redemption/
Issued and Liquidation Issued and Liquidation Issued and Liquidation
Authorized Outstanding Value Authorized Outstanding Value Authorized Outstanding Value
---------- ----------- ----------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series A........ 180,000 156,245 $ 250,000 156,245 156,245 $ 250,000 156,245 156,245 $ 250,000
Series B........ 2,222,222 2,013,886 4,531,268 2,077,234 2,013,886 4,531,268 2,077,234 2,034,356 4,577,326
Series C........ 900,000 865,511 4,327,638 886,531 865,511 4,327,638 886,531 865,511 4,327,638
Series D........ 1,971,428 1,937,133 11,299,998 1,937,133 1,937,133 11,299,998 1,937,133 1,937,133 11,299,998
Series E........ -- -- -- 2,382,457 2,254,678 15,970,680 2,382,857 2,254,678 15,970,680
Undesignated
preferred
stock.......... 126,350 -- -- -- -- -- -- -- --
--------- --------- ----------- --------- --------- ----------- --------- --------- -----------
5,400,000 4,972,775 $20,408,904 7,440,000 7,227,453 $36,379,584 7,440,000 7,247,923 $36,425,642
========= ========= =========== ========= ========= =========== ========= ========= ===========
</TABLE>
F-13
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
Each share of Series A, B, C, D, and E preferred stock is convertible, at the
option of the holder, into one share of common stock, subject to adjustments
for antidilution. Upon the approval of the holders of a majority of the
outstanding shares of the Series A, B, C, D, or E preferred stock, voting as a
single class, and a majority of the Series D and E preferred stock, together
voting as a single class, the Series A, B, C, D, or E preferred stock are
convertible to one share of common stock, subject to adjustments for
antidilution. Additionally, the preferred stock will automatically convert into
common stock concurrent with the closing of an underwritten public offering of
common stock under the Securities Act of 1933 in which ORATEC receives at least
$20,000,000 in gross proceeds and the price per share is at least $11.67
(subject to adjustment for a recapitalization, stock splits, or stock
dividends).
Series A, B, C, D, and E preferred stockholders are entitled to annual
noncumulative dividends at a rate of $0.13, $0.18, $0.40, $0.48, and $0.57 per
share, before and in preference to any dividends paid on common stock, when and
as declared by the board of directors. No dividends have been declared as of
December 31, 1998.
The Series A, B, C, D, and E preferred stockholders are entitled to receive,
upon liquidation or certain merger transactions, a distribution of $1.60,
$2.25, $5.00, $5.83, and $7.08 per share, (subject to adjustment for a
recapitalization) plus all declared but unpaid dividends. Thereafter, the
remaining assets and funds, if any, shall be distributed among the holders of
the Series D and E preferred stock and the common stock pro rata based on the
number of shares held by each until the Series D and E preferred stockholders
have received an aggregate of $17.50 per share. Thereafter, the remaining
assets and funds, if any, shall be distributed ratably on a per share basis
among the common stockholders.
If, upon liquidation, dissolution, or winding up of ORATEC, the assets and
funds distributed among the preferred stockholders are insufficient to permit
the payment to which they are entitled as set forth above, the entire assets
and funds of ORATEC legally available for distribution shall be distributed
ratably among the holders of Series A, B, C, D, and E preferred stock in
proportion to the aggregate preferential amounts owed to each such holder.
The Series A, B, C, D, and E preferred stockholders have voting rights
substantially equal to the common shares they would own upon conversion, with
additional protective provisions requiring a separate class vote of the
preferred stock.
As long as at least 600,000 shares of Series D preferred stock remains
outstanding, the Series D preferred stockholders shall have the right to elect
one member of the board of directors of the corporation. As long as at least
600,000 shares of Series E preferred stock remains outstanding, the Series E
preferred stockholders shall have the right to elect one member of the board of
directors of the corporation. All other members of the board of directors shall
be elected by the Series A, B, C, D, and E and common stockholders, voting as a
single class on an as-converted basis.
In accordance with the amended and restated Investor Rights Agreement that
ORATEC entered into in December 1998, holders of at least 40% of the common
stock issued or issuable upon conversion of the Series A, B, C, D, and E
preferred stock may request ORATEC to file a registration statement covering
the registration of those securities outstanding, if the aggregate offering
price to the public exceeds $5,000,000 after the earlier of December 31, 2000
or six months after the effective date of the first registration statement for
a public offering of ORATEC's securities. The Investor Rights Agreement also
contains additional registration and information rights for the benefit of the
holders of the Series A, B, C, D, and E preferred stock.
F-14
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
1995 Stock Plan
In July 1995, ORATEC adopted the 1995 Stock Plan (the "Plan") which provides
for the issuance of common stock options and common stock purchase rights to
employees and consultants of ORATEC. The Plan permits ORATEC to (i) grant
incentive stock options to employees at no less than 100% of fair value at date
of grant as determined by the board of directors; (ii) grant nonstatutory stock
options at no less than 85% of fair value; and (iii) sell common stock at no
less than 85% of fair value subject to stock purchase agreements. At December
31, 1998, ORATEC had issued 8,647 shares of common stock under the Plan.
Incentive stock options become exercisable ratably generally over four years
from the date of grant. Nonstatutory stock options become exercisable ratably
generally over two years from the date of grant. The term of the Plan is 10
years. At December 31, 1998, ORATEC had 454,054 options available for future
grant (123,768 at June 30, 1999).
F-15
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
A summary of option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------ Six months ended
1996 1997 1998 June 30, 1999
------------------ -------------------- -------------------- --------------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period....... 132,000 $0.002 727,050 $0.58 1,337,052 $1.12 1,633,098 $2.43
Granted................... 613,500 $ 0.70 734,760 $1.65 494,213 $5.77 397,200 $7.30
Canceled.................. -- -- (72,782) $0.47 (114,392) $3.13 (69,873) $5.11
Exercised................. (18,450) $ 0.03 (51,976) $0.38 (83,775) $1.27 (78,818) $1.67
------- --------- --------- ---------
Outstanding at
end of period............. 727,050 $ 0.58 1,337,052 $1.12 1,633,098 $2.43 1,881,607 $3.39
======= ========= ========= =========
Weighted-average
fair value of options
granted during the period.. $ 0.13 $0.25 $0.97 $1.28
====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------
Options
Options Outstanding Exercisable
------------------------------- -----------------
Weighted-
Average Weighted- Weighted-
Remaining Average Number Average
Number of Contractual Exercise of Exercise
Range of Exercise Prices Options Life Price Options Price
- ------------------------ --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.002 - $0.17 321,044 8.08 $ 0.13 277,184 $ 0.15
$1.25 - $4.17 1,026,571 9.72 $ 1.78 441,512 $ 1.53
$5.83 - $8.33 285,483 9.72 $ 7.37 13,364 $ 6.87
--------- -------
1,633,098 9.39 $ 2.43 732,060 $ 1.10
========= =======
<CAPTION>
June 30, 1999
-------------------------------------------------
Options
Options Outstanding Exercisable
------------------------------- -----------------
Weighted-
Average Weighted- Weighted-
Remaining Average Number Average
Number of Contractual Exercise of Exercise
Range of Exercise Prices Options Life Price Options Price
- ------------------------ --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.002 - $0.17 293,564 7.66 $ 0.14 268,214 $ 0.14
$1.25 - $4.17 943,022 9.22 $ 1.71 526,080 $ 1.55
$5.83 - $8.33 629,121 9.52 $ 7.21 46,648 $ 7.19
$12.50 - $12.50 15,900 9.90 $12.50 5,400 $12.50
--------- -------
1,881,607 9.08 $ 3.39 846,342 $ 1.49
========= =======
</TABLE>
Options exercisable at December 31, 1996 and 1997 were 153,857 and 457,098.
On May 14, 1999, ORATEC granted options to purchase 96,300 shares of common
stock at $7.08 per share. On May 24, 1999, ORATEC granted options to purchase
15,900 shares of common stock at $12.50 per share. Deferred compensation of
$310,000 has been recorded in the six months ended June 30, 1999 for these
F-16
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
option grants based on the deemed fair value of the common stock. The deferred
compensation will be amortized to expense over the four year average vesting
period of the options.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if ORATEC had accounted for its employee stock options
issued under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using the minimum value method and
assumptions for 1996, 1997, and 1998 as follows: risk-free interest rates of
6%, 6%, and 4.5%; weighted-average expected life of the options was
approximately 48 months and no dividends. The effect of applying SFAS 123 to
ORATEC's stock option awards would have resulted in a net loss of $11,487,000
(or $4.78 per common share) for the year ended December 31, 1998. The pro forma
effect for the years ended December 31, 1996 and 1997 were not materially
different from the actual net losses reported. The pro forma net loss is not
necessarily indicative of potential pro forma effects on results for future
years.
ORATEC has granted 52,382 options to nonemployees in 1998, which resulted in
compensation expense of $102,000 for the year. The options vest primarily over
a two-year period and, therefore, ORATEC will record additional expense related
to these options in 1999 and 2000.
Warrants
In February 1996, ORATEC issued to an employee a warrant to purchase 30,000
shares of Series B preferred stock at a purchase price of $2.25 per share. In
the six months ended June 30, 1999, these warrants were exercised or cancelled.
In March 1996, ORATEC issued a warrant to purchase 33,333 shares of Series B
preferred stock at a purchase price of $2.25 per share in conjunction with
obtaining equipment financing from a lender. The warrant expires in five years
from the issuance date.
In October 1997, ORATEC issued warrants to purchase 21,000 shares of Series C
preferred stock at $5.00 per share in conjunction with obtaining an equipment
financing facility. The warrants expire at the later of ten years from the
issuance date or five years after the closing of ORATEC's initial public
offering.
In December 1998, ORATEC entered into negotiations with a lender to obtain
debt financing (see Note 10). As an inducement to conduct negotiations, ORATEC
agreed to issue a warrant to purchase 73,412 shares of Series E preferred stock
at a purchase price of $7.08 per share. The warrant expires on the earlier of
(i) January 2004 or (ii) the earlier of the second anniversary of either
ORATEC's initial public offering or an acquisition of ORATEC by a publicly
traded company.
As of December 31, 1998, warrants to purchase a total of 63,333 shares of
Series B preferred stock and the warrants to purchase 21,000 shares of Series C
preferred stock were outstanding. The warrant to purchase 73,412 shares of
Series E preferred stock was due to be issued at December 31, 1998.
F-17
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
Reserved Stock
As of December 31, 1998, ORATEC has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Stock plan......................................................... 2,087,152
Redeemable convertible preferred stock and warrants................ 7,385,198
---------
9,472,350
=========
</TABLE>
In addition, ORATEC has reserved the following shares of preferred stock for
issuance upon exercise of stock warrants:
<TABLE>
<S> <C>
Series B preferred stock.............................................. 63,333
Series C preferred stock.............................................. 21,000
Series E preferred stock.............................................. 73,412
</TABLE>
12. Income Taxes
As of December 31, 1998, ORATEC had federal and state net operating loss
carryforwards of approximately $20,000,000 and $6,400,000. ORATEC also had
federal research and development tax credit carryforwards of approximately
$200,000. The net operating loss and credit carryforwards will expire at
various dates beginning in 2009 through 2018, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of
ORATEC's deferred tax assets and liabilities for federal and state income taxes
are as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $ 3,360,000 $ 7,200,000
Research credit carryforwards...................... 180,000 400,000
Capitalized research & development................. 110,000 300,000
Other-net.......................................... 50,000 100,000
----------- -----------
Net deferred tax assets............................ 3,700,000 8,000,000
Valuation allowance................................ (3,700,000) (8,000,000)
----------- -----------
TOTAL $ -- $ --
=========== ===========
</TABLE>
Because of ORATEC's lack of earnings history, the deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased
by $950,000, $2,500,000 and $4,300,000 during the years ended December 31,
1996, 1997 and 1998.
F-18
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the six months ended June 30, 1998 and 1999 is unaudited)
13. Segment Reporting
In 1998, ORATEC adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the reporting of selected financial
information about a company's operating segments and disclosures about a
company's products, geographical areas and major customers.
Since inception, ORATEC has been primarily engaged in one reportable
operating segment, providing medical devices which use controlled thermal
energy to treat spine and joint disorders. At the present time, ORATEC is
organized and managed along functional lines. ORATEC's President and Chief
Executive Officer evaluates performance and allocates resources based on the
operating results of the whole company. Revenues are tracked per product line
(spine and arthroscopy) but operating expenses are not allocated to individual
product lines so that no measure of profit or loss for any individual product
line is available. ORATEC attributes revenues from customers to individual
countries based on the location of the customer. Substantially all of ORATEC's
revenues to date have been derived from sales to customers in the U.S. Further,
all of ORATEC's assets have been located in the U.S. for all periods presented.
ORATEC's current products consist of two minimally invasive systems for the
treatment of spine and joint disorders.
ORATEC's spine and arthroscopy product sales are as follows (in thousands):
<TABLE>
<CAPTION>
Six months
Years ended ended
December 31, June 30,
------------------- --------------
1996 1997 1998 1998 1999
---- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Spine........................................ $-- $ -- $ 1,246 $ 132 $ 5,619
Arthroscopy.................................. -- 2,600 9,883 3,974 7,280
---- ------ ------- ------ -------
$-- $2,600 $11,129 $4,106 $12,899
==== ====== ======= ====== =======
</TABLE>
14. Initial Public Offering, Reincorporation in Delaware and Stock Split
(Unaudited)
In May 1999, ORATEC's board of directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
ORATEC to sell shares of its common stock to the public. Upon completion of
ORATEC's initial public offering, all of the outstanding redeemable convertible
preferred stock will be converted into 7,247,923 shares of common stock.
On July 1, 1999, ORATEC's board of directors authorized the reincorporation
of ORATEC in the State of Delaware. This reincorporation is to be effective
prior to ORATEC's initial public offering. Upon reincorporation and the closing
of the initial public offering, ORATEC will be authorized to issue 75,000,000
shares of common stock and 5,000,000 shares of preferred stock. The change in
authorized common stock has been reflected in the pro forma redeemable
convertible preferred stock and stockholders' equity as of June 30, 1999. The
accompanying financial statements have been adjusted retroactively to reflect
all other effects of the reincorporation.
On July 1, 1999, ORATEC's board of directors approved a reverse stock split
of three shares for every five shares of common and preferred stock then
outstanding. The reverse stock split will become effective prior to the time of
ORATEC's initial public offering. Accordingly, the accompanying financial
statements have been adjusted retroactively to reflect the reverse split.
F-19
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(Information for the three months ended March 31, 1998 and 1999 is unaudited)
15. Subsequent Events (Unaudited)
On July 1, ORATEC granted options to purchase 113,850 shares of common stock
at $12.50 to $13.33 per share. On July 22, ORATEC granted options to purchase
10,350 shares of common stock at $13.33 per share. Deferred compensation of
approximately $50,000 will be recorded in the quarter ended September 30, 1999
for these option grants based on the deemed fair value of the common stock. The
deferred compensation will be amortized to expense over the four year average
vesting period of the options.
On July 1, 1999, the board of directors approved an amendment to the 1995
Plan, subject to stockholder approval, to increase the number of shares
reserved for issuance by 750,000 shares. Further, the number of shares reserved
for issuance are subject to an automatic annual increase on January 1, 2000,
2001 and 2002 equal to the lesser of (i) 750,000 shares, (ii) 4% of the shares
of common stock outstanding on the last day of the immediately preceding fiscal
year, or (iii) such lesser number of shares as the board of directors
determines.
On July 1, 1999, the board of directors approved the adoption of the 1999
Employee Stock Purchase Plan (the "1999 Purchase Plan"), subject to stockholder
approval. A total of 250,000 shares of common stock has been reserved for
issuance under the 1999 Purchase Plan. The number of shares reserved for
issuance is subject to an automatic annual increase on January 1, 2001, 2002
and 2003 equal to the lesser of (i) 250,000 shares, (ii) 2% of the outstanding
common stock on the last day of the immediately preceding fiscal year, or (iii)
such lesser number of shares as the board of directors determines. The 1999
Purchase Plan permits eligible employees to acquire shares of ORATEC's common
stock through periodic payroll deductions of up to 15% of total compensation.
An employee may purchase no more than 2,000 shares during any given offering
period. Each offering period will have a maximum duration of approximately six
months. The price at which the common stock may be purchased is 85% of the
lesser of the fair market value of ORATEC's common stock at the beginning or
the end of each offering period. The initial offering period will commence on
the effectiveness of the initial public offering and will end on April 30,
2000.
On July 1, 1999 the board of directors, subject to stockholder approval,
approved the 1999 Directors' Option Plan (the "Directors' Plan"), which
provides for the grant of nonqualified stock options to nonemployee directors
of ORATEC. A total of 200,000 shares of common stock have been reserved for
issuance under the Directors' Plan.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO OF ORATEC(R)]
Common Stock
------------
PROSPECTUS
------------
Merrill Lynch & Co.
J.P. Morgan & Co.
U.S. Bancorp Piper Jaffray
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by ORATEC in connection with the
sale of common stock being registered. All amounts are estimates except the
Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Amount to
be Paid
----------
<S> <C>
Securities and Exchange Commission registration fee.............. $ 13,588
NASD filing fee.................................................. 5,388
Nasdaq National Market listing fee............................... 84,875
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 385,000
Accounting fees and expenses..................................... 350,000
Blue Sky qualification fees and expenses......................... 5,000
Transfer Agent and Registrar fees................................ 15,000
Miscellaneous fees and expenses.................................. 41,149
----------
Total.......................................................... $1,100,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
some circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act of 1933, as amended. Article XII of
ORATEC's certificate of incorporation (Exhibit 3.4) and Article VI of ORATEC's
Bylaws (Exhibit 3.7) provide for indemnification of ORATEC's directors,
officers, employees and other agents to the maximum extent permitted by
Delaware Law. In addition, ORATEC has entered into Indemnification Agreements
(Exhibit 10.11) with its officers and directors. The Underwriting Agreement
(Exhibit 1.1) also provides for cross-indemnification among ORATEC and the
underwriters with respect to some matters, including matters arising under the
Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since June 30, 1996, ORATEC has sold and issued the following securities:
(1) In March through December 1997, we issued and sold shares of Series C
preferred stock convertible into an aggregate of 865,511 shares of common
stock to a total of 120 investors for an aggregate purchase price of
$4,327,638.
(2) In October 1997, we issued warrants to purchase shares of Series C
preferred stock convertible into an aggregate of 21,000 shares of common
stock to two lenders.
(3) In November and December 1997, we issued and sold shares of Series D
preferred stock convertible into an aggregate of 1,937,133 shares of common
stock to a total of 60 investors for an aggregate purchase price of
$11,299,998.
(4) In December 1998, we issued and sold shares of Series E preferred
stock convertible into an aggregate of 2,254,678 shares of common stock to
a total of 59 investors for an aggregate purchase price of $15,970,680.
(5) In January 1999, we issued a warrant to purchase Series E preferred
stock convertible into an aggregate of 73,412 shares of common stock to one
lender.
(6) In February 1999, we issued and sold 20,470 shares of Series B
preferred stock to an executive officer upon his exercise of a warrant.
II-1
<PAGE>
(7) From July 1995 through June 30, 1999, under our 1995 Stock Plan,
232,978 shares of common stock had been issued upon exercise of options,
11,647 shares of common stock had been issued pursuant to restricted stock
purchase agreements and 1,881,607 shares of common stock were issuable upon
exercise of outstanding options.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In addition, the issuances described in Item 7 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution and
appropriate legends were affixed to the share certificates and warrants issued
in the transactions. All recipients had adequate access, through their
relationships with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement (subject to negotiation).
3.1+ Amended and Restated Articles of Incorporation.
3.2+ Certificate of Incorporation for reincorporation in Delaware.
3.3+ Amended and Restated Certificate of Incorporation for reverse
stock split.
3.4+ Amended and Restated Certificate of Incorporation, post-IPO.
3.5+ Bylaws, as amended.
3.6+ Bylaws for reincorporation in Delaware.
3.7++ Amended and Restated Bylaws, post-IPO.
4.1* Specimen Stock Certificate.
5.1* Opinion of Venture Law Group regarding the legality of the common
stock being registered.
10.1+ Amended and Restated Investors' Rights Agreement dated December 7,
1998 among ORATEC and certain investors.
10.2+ Employment Letter Agreement dated October 29, 1997 between ORATEC
and Nancy V. Westcott.
10.3+ Employment Agreement dated July 14, 1997 between ORATEC and
Kenneth W. Anstey.
10.4+ Employment Agreement dated August 21, 1996 and First Amendment to
Employment Agreement dated July 14, 1997 between ORATEC and Hugh
Sharkey.
10.5+ Change of Control Letter Agreement dated 1996 between ORATEC and
Roger Lipton.
10.6++ 1995 Stock Plan, as amended, and form of option agreement.
10.7++ 1999 Directors' Stock Option Plan and form of option agreement.
10.8++ 1999 Employee Stock Purchase Plan and form of subscription
agreement.
10.9+ Lease dated May 7, 1998 between ORATEC and White Properties Joint
Venture (as amended).
10.10+ Lease dated August 2, 1996 between ORATEC and Huettig &
Schromm/Heaton & Keyser.
10.11+ Form of Indemnification Agreement between ORATEC and officers and
directors.
10.12** International Distribution Agreement dated March 30, 1999 between
ORATEC and DePuy Acromed, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Venture Law Group, A Professional Corporation (See
Exhibit 5.1).
23.3+ Consent of Wilson Sonsini Goodrich & Rosati, a Professional
Corporation.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
23.4+ Power of Attorney (See page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
++ Supersedes previously filed exhibit.
* To be filed by amendment.
** Confidential treatment has been requested with respect to portions of this
exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in the
denominations and registered in the names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to its registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Menlo
Park, State of California, on August 16, 1999.
ORATEC INTERVENTIONS, INC.
/s/ Nancy V. Westcott
By: _________________________________
Nancy V. Westcott
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment to
its Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* President, Chief Executive August 16, 1999
______________________________________ Officer and Director
Kenneth W. Anstey (Principal Executive
Officer)
/s/ Nancy V. Westcott Chief Financial Officer August 16, 1999
______________________________________ (Principal Financial and
Nancy V. Westcott Accounting Officer)
* Director August 16, 1999
______________________________________
Stephen Brackett
* Director August 16, 1999
______________________________________
Gary S. Fanton, M.D.
* Director August 16, 1999
______________________________________
Richard M. Ferrari
* Director August 16, 1999
______________________________________
Patrick F. Latterell
* Director August 16, 1999
______________________________________
Jeffrey A. Saal, M.D.
* Director August 16, 1999
______________________________________
Hugh R. Sharkey
*By: /s/ Nancy V. Westcott
__________________________________
(Attorney-in-fact)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement (subject to negotiation).
3.1+ Amended and Restated Articles of Incorporation.
3.2+ Certificate of Incorporation for reincorporation in Delaware.
3.3+ Amended and Restated Certificate of Incorporation for reverse stock
split.
3.4+ Amended and Restated Certificate of Incorporation, post-IPO.
3.5+ Bylaws, as amended.
3.6+ Bylaws for reincorporation in Delaware.
3.7++ Amended and Restated Bylaws, post-IPO.
4.1* Specimen Stock Certificate.
5.1* Opinion of Venture Law Group regarding the legality of the common
stock being registered.
10.1+ Amended and Restated Investors' Rights Agreement dated December 7,
1998 among ORATEC and certain investors.
10.2+ Employment Letter Agreement dated October 29, 1997 between ORATEC and
Nancy V. Westcott.
10.3+ Employment Agreement dated July 14, 1997 between ORATEC and Kenneth W.
Anstey.
10.4+ Employment Agreement dated August 21, 1996 and First Amendment to
Employment Agreement dated July 14, 1997 between ORATEC and Hugh
Sharkey.
10.5+ Change of Control Letter Agreement dated 1996 between ORATEC and Roger
Lipton.
10.6++ 1995 Stock Plan, as amended, and form of option agreement.
10.7++ 1999 Directors' Stock Option Plan and form of option agreement.
10.8++ 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.9+ Lease dated May 7, 1998 between ORATEC and White Properties Joint
Venture (as amended).
10.10+ Lease dated August 2, 1996 between ORATEC and Huettig & Schromm/Heaton
& Keyser.
10.11+ Form of Indemnification Agreement between ORATEC and officers and
directors.
10.12** International Distribution Agreement dated March 30, 1999 between
ORATEC and DePuy Acromed, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Venture Law Group, A Professional Corporation (See Exhibit
5.1).
23.3+ Consent of Wilson Sonsini Goodrich & Rosati, a Professional
Corporation.
23.4+ Power of Attorney (See page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
++ Supersedes previously filed exhibit.
* To be filed by amendment.
** Confidential treatment has been requested with respect to portions of this
exhibit.
<PAGE>
EXHIBIT 1.1
Draft of August 10, 1999
ORATEC INTERVENTIONS, INC.,
a Delaware corporation
__________ Shares of Common Stock/1/
(Par Value $0.001 Per Share)
PURCHASE AGREEMENT
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
U.S. Bancorp Piper Jaffray, Inc.
as Representative of the several Underwriters
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
ORATEC Interventions, Inc., a Delaware corporation (the "Company"),
addresses you as Representatives of each of the persons, firms and corporations
listed on Schedule A hereto (herein collectively called the "Underwriters") and
confirms its agreement with the several Underwriters with respect to the issue
and sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of shares of Common Stock, par value
$0.001 per share, of the Company ("Common Stock") set forth in said Schedule A,
and with respect to the grant by the Company to the Underwriters, acting
severally and not jointly, of the option described in Section 2(b) hereof to
purchase all or any part of ______ additional shares of Common Stock to cover
over-allotments, if any. The aforesaid ______ shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part of
the ______ shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities."
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to ___ shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association
- ------------------
/1/ Plus an option to purchase up to ___________ additional shares from the
Company to cover over-allotments.
<PAGE>
of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public
as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-82511) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b).
The information included in such prospectus or in such Term Sheet, as the case
may be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (x) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (y) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated _____, 1999 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each
Underwriter, as follows:
2
<PAGE>
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and the Prospectus, any preliminary prospectus and any
supplement thereto or prospectus wrapper prepared in connection therewith,
at their respective times of issuance and at the Closing Time, complied and
will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus and such
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Securities.
Neither the Prospectus nor any amendments or supplements thereto, at the
time the Prospectus or any such amendment or supplement was issued and at
the Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), included or will include an untrue statement of a material
fact or omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading. If Rule 434 is used, the Company will
comply with the requirements of Rule 434 and the Prospectus shall not be
"materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
-----------------------
the financial statements and supporting schedules included in the
Registration Statement are
3
<PAGE>
independent public accountants as required by the 1933 Act and the 1933
Act Regulations.
(iii) Financial Statements. The financial statements included
--------------------
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of the
Company and its consolidated subsidiaries at the dates indicated and the
statement of operations, stockholders' equity and cash flows of the
Company and its consolidated subsidiaries for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data
and the summary financial information included in the Prospectus present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business (a "Material Adverse Effect"), (B) there
have been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered
as one enterprise, and (C) there has been no dividend or distribution of
any kind declared, paid or made by the Company on any class of its
capital stock.
(v) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. The Company has no subsidiaries.
-----------------------------
(vii) Capitalization. The authorized, issued and outstanding
--------------
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to
4
<PAGE>
in the Prospectus). The shares of issued and outstanding capital stock of
the Company have been duly authorized and validly issued and are fully
paid and non-assessable; none of the outstanding shares of capital stock
of the Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
-------------------------------------------
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth
herein, will be validly issued and fully paid and non-assessable; the
Common Stock conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. The Company is not
---------------------------------
in violation of its charter or by-laws or in default in the performance
or observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or other agreement or instrument to which
the Company is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute
a breach of, or default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, the Agreements
and Instruments (except for such conflicts, breaches or defaults or
liens, charges or encumbrances that would not result in a Material
Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any applicable
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of their assets, properties
or operations. As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other evidence
of indebtedness (or any person acting on such holder's behalf) the right
to require the repurchase, redemption or repayment of all or a portion of
such indebtedness by the Company.
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(xi) Absence of Labor Dispute. No labor dispute with the
------------------------
employees of the Company exists or, to the knowledge of the Company, is
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers, customers or contractors, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
----------------------
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company,
which is required to be disclosed in the Registration Statement (other
than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets
thereof or the consummation of the transactions contemplated in this
Agreement or the performance by the Company of its obligations hereunder;
the aggregate of all pending legal or governmental proceedings to which
the Company is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or other
--------------------
material documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which have
not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company owns or
-----------------------------------
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks, trade names or other intellectual property (collectively,
"Intellectual Property") necessary to carry on the business now operated
by them, and the Company has not received any notice and is not otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws and (ii) such as have been obtained
under the laws and regulations of jurisdictions outside the United States
in which the Reserved Securities are offered.
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(xvi) Possession of Licenses and Permits. The Company possesses
----------------------------------
such permits, licenses, approvals, consents and other authorizations
including, but not limited to, any and all 510(k) clearances relating to
the Company's products, (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by it and to sell
the products described in the Prospectus; the Company is in compliance
with the terms and conditions of all such Governmental Licenses, except
where the failure so to comply would not, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect would not have a Material Adverse Effect; and
the Company has not received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses.
(xvii) Title to Property. The Company has good and marketable
-----------------
title to all real property owned by it and good title to all other
properties owned by them, in each case, free and clear of all mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances
of any kind except such as (a) are described in the Prospectus or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company; and all of the leases and subleases
material to the business of the Company, and under which the Company
holds properties described in the Prospectus, are in full force and
effect, and the Company has no notice of any material claim of any sort
that has been asserted by anyone adverse to the rights of the Company
under any of the leases or subleases mentioned above, or affecting or
questioning the rights of the Company to the continued possession of the
leased or subleased premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied
------------------------
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xix) Investment Company Act. The Company is not, and upon
----------------------
the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the
------------------
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) the Company is not in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution
or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land
7
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surface or subsurface strata) or wildlife, including, without limitation,
laws and regulations relating to the release or threatened release of
chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company has all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices
of noncompliance or violation, investigation or proceedings relating to
any Environmental Law against the Company and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by
any private party or governmental body or agency, against or affecting
the Company relating to Hazardous Materials or any Environmental Laws.
(xxi) Registration Rights. There are no persons with
-------------------
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act other than as contained in the Amended
and Restated Investors Rights Agreement, dated as of December 7, 1998.
(xxii) The Company has reviewed its operations and that of any
third parties with which the Company has a material relationship as
described in the Prospectus to evaluate the extent to which the business
or operations of the Company will be affected by the Year 2000 Problem.
As a result of such review, the Company has no reason to believe, and
does not believe, that the Year 2000 Problem will have a material adverse
effect on the Company taken as a whole. The "Year 2000 Problem" as used
herein means any significant risk that computer hardware or software used
in the receipt, transmission, processing, manipulation, storage,
retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000.
(b) Officer's Certificates. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representative or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number
of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any
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additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional _______ shares of Common
Stock at the price per share set forth in Schedule B, less an amount per share
equal to any dividends or distributions declared by the Company and payable on
the Initial Securities but not payable on the Option Securities. The option
hereby granted will expire 30 days after the date hereof and may be exercised
in whole or in part from time to time only for the purpose of covering over-
allotments which may be made in connection with the offering and distribution
of the Initial Securities upon notice by the Representatives to the Company
setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment
and delivery for such Option Securities. Any such time and date of delivery (a
"Date of Delivery") shall be determined by the Representatives, but shall not
be later than seven full business days after the exercise of said option, nor
in any event prior to the Closing Time, as hereinafter defined. If the option
is exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, will purchase that proportion
of the total number of Option Securities then being purchased which the number
of Initial Securities set forth in Schedule A opposite the name of such
Underwriter bears to the total number of Initial Securities, subject in each
case to such adjustments as the Representatives in their discretion shall make
to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Latham & Watkins, 75 Willow Road, Menlo Park, California 94025-3656 or at such
other place as shall be agreed upon by the Representatives and the Company, at
7:00 A.M. (California time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be agreed
upon by the Representatives and the Company (such time and date of payment and
delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually
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<PAGE>
and not as Representative of the Underwriters, may (but shall not be obligated
to) make payment of the purchase price for the Initial Securities or the
Option Securities, if any, to be purchased by any Underwriter whose funds have
not been received by the Closing Time or the relevant Date of Delivery, as the
case may be, but such payment shall not relieve such Underwriter from its
obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at
least one full business day before the Closing Time or the relevant Date of
Delivery, as the case may be. The certificates for the Initial Securities and
the Option Securities, if any, will be made available for examination and
packaging by the Representatives in The City of New York not later than 10:00
A.M. (Eastern time) on the business day prior to the Closing Time or the
relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments from the Commission, (iii) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or
of the initiation or threatening of any proceedings for any of such purposes.
The Company will promptly effect the filings necessary pursuant to Rule 424(b)
and will take such steps as it deems necessary to ascertain promptly whether
the form of prospectus transmitted for filing under Rule 424(b) was received
for filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable effort
to prevent the issuance of any stop order and, if any stop order is issued, to
obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus
will furnish the Representative with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representative or counsel
for the Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the
10
<PAGE>
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also
deliver to the Representatives, without charge, a conformed copy of the
Registration Statement as originally filed and of each amendment thereto
(without exhibits) for each of the Underwriters. The copies of the
Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion
of the distribution of the Securities as contemplated in this Agreement and in
the Prospectus. If at any time when a prospectus is required by the 1933 Act
to be delivered in connection with sales of the Securities, any event shall
occur or condition shall exist as a result of which it is necessary, in the
opinion of counsel for the Underwriters or for the Company, to amend the
Registration Statement or amend or supplement the Prospectus in order that the
Prospectus will not include any untrue statements of a material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file
with the Commission, subject to Section 3(b), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements, and
the Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Representatives may designate and
to maintain such qualifications in effect for a period of not less than one
year from the later of the effective date of the Registration Statement and
any Rule 462(b) Registration Statement; provided, however, that the Company
shall not be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in
11
<PAGE>
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which
it is not otherwise so subject. In each jurisdiction in which the Securities
have been so qualified, the Company will file such statements and reports as
may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b) Registration
Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect and maintain
the quotation of the Securities on the Nasdaq National Market and will file
with the Nasdaq National Market all documents and notices required by the
Nasdaq National Market of companies that have securities that are traded in
the over-the-counter market and quotations for which are reported by the
Nasdaq National Market.
(j) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to the Securities to be sold hereunder.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act within the time periods required by the 1934 Act and the rules
and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of this Agreement. The Underwriters will
notify the Company as to which persons will need to be so restricted. At the
request of the Underwriters, the Company will direct the transfer agent to
place a stop transfer restriction upon such securities for such period of
time. Should the Company release, or seek to release, from such restrictions
any of the Reserved Securities, the Company agrees to reimburse
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<PAGE>
the Underwriters for any reasonable expenses (including, without limitation,
legal expenses) they incur in connection with such release.
(m) Compliance with Rule 463. The Company will file with the Commission
such reports on Form SR as may be required pursuant to Rule 463 of the 1933
Act Regulations.
SECTION 4. Payment of Expenses.
-------------------
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of
this Agreement, any Agreement among Underwriters and such other documents as
may be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and delivery of
the certificates for the Securities to the Underwriters, including any stock
or other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with
the provisions of Section 3(f) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectus and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities and (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the
Securities, (x) the fees and expenses incurred in connection with the
inclusion of the Securities in the Nasdaq National Market and (xi) all costs
and expenses of the Underwriters, including the fees and disbursements of
counsel for the Underwriters, in connection with matters related to the
Reserved Securities which are designated by the Company for sale to employees
and others having a business relationship with the Company.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
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SECTION 5. Conditions of Underwriters' Obligations. The obligations of
---------------------------------------
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company delivered pursuant to the
provisions hereof, to the performance by the Company of its covenants and
other obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with
the requirements of Rule 430A) or, if the Company has elected to rely upon
Rule 434, a Term Sheet shall have been filed with the Commission in accordance
with Rule 424(b).
(b) Opinion of Securities Counsel for Company. At Closing Time, the
Representatives shall have received the following opinion, dated as of Closing
Time, from Venture Law Group, counsel for the Company:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if
any, pursuant to the Purchase Agreement or pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectus or
pursuant to the exercise of convertible securities or options referred to
in the Prospectus); the shares of issued and outstanding capital stock of
the Company have been duly authorized and validly issued and are fully paid
and non-assessable; and none of the outstanding shares of capital stock of
the Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
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(v) The Securities have been duly authorized for issuance and sale
to the Underwriters pursuant to the Purchase Agreement and, when issued
and delivered by the Company pursuant to the Purchase Agreement against
payment of the consideration set forth in the Purchase Agreement, will be
validly issued and fully paid and non-assessable and no holder of the
Securities is or will be subject to personal liability by reason of being
such a holder.
(vi) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company.
(vii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(viii) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to the
best of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectus and each amendment or supplement
to the Registration Statement and Prospectus as of their respective
effective or issue dates (other than the financial statements and
supporting schedules included therein or omitted therefrom, as to which we
need express no opinion) complied as to form in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations.
(x) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective.
(xi) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and by-laws
of the Company and the requirements of the Nasdaq National Market.
(xii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which
the Company is a party, or to which the property of the Company is subject,
before or brought by any court or governmental agency or body, domestic or
foreign, which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance by
the Company of its obligations thereunder.
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(xiii) The information in the Prospectus under "Description of
Capital Stock--Common Stock," "Description of Capital Stock--Preferred
Stock," and in the Registration Statement under Item 14, to the extent that
it constitutes matters of law, summaries of legal matters, the Company's
charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects.
(xiv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are
not described as required.
(xv) All descriptions in the Registration Statement of contracts
and other documents to which the Company is a party are accurate in all
material respects; to the best of our knowledge, there are no franchises,
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described
or referred to therein or filed or incorporated by reference as exhibits
thereto, and the descriptions thereof or references thereto are correct
in all material respects.
(xvi) To the best of our knowledge, the Company is not in violation
of its charter or by-laws and no default by the Company exists in the due
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectus or filed or
incorporated by reference as an exhibit to the Registration Statement.
(xvii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the various states, as to which we
need express no opinion) is necessary or required in connection with the
due authorization, execution and delivery of the Purchase Agreement or for
the offering, issuance or sale of the Securities.
(xviii) The execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated in the
Purchase Agreement and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectus under the caption
"Use Of Proceeds") and compliance by the Company with its obligations under
the Purchase Agreement do not and will not, whether with or without the
giving of notice or lapse of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined in Section 1(a)(x) of
the Purchase Agreement) under or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company
pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known
to us, to which the Company is a party or by which it may be bound, or to
which any of the property or assets of the Company is subject (except for
such conflicts, breaches or defaults or liens,
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charges or encumbrances that would not have a Material Adverse Effect),
nor will such action result in any violation of the provisions of the
charter or by-laws of the Company or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of its respective properties,
assets or operations.
(xix) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
(xx) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule
430A Information and Rule 434 Information (if applicable), (except for
financial statements and schedules and other financial data included
therein or omitted therefrom, as to which we need make no statement), at
the time such Registration Statement or any such amendment became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included therein or omitted therefrom,
as to which we need make no statement), at the time the Prospectus was
issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(c) Opinion of Patent Counsel. At Closing Time, the Representatives shall
have received, dated as of Closing Time, the following opinion from Wilson,
Sonsini, Goodrich & Rosati, patent and trademark counsel for the Company
("Patent Counsel"):
(i) The Company is listed in the records of the Patent and Trademark
Office as the sole holder of record of each of the patents listed under the
heading "U.S. Patents Held by the Company" on Schedule C hereof (the "U.S.
Patents") and each of the patent applications listed under the heading
"U.S. Patent Applications Submitted by the Company" on Schedule C hereof
(the U.S. Applications"). The Company owns 5 issued U.S. Patents and 21
pending U.S. Applications. Such counsel knows of no claims of third
parties to any ownership interest or lien with respect to any of the U.S.
Patents or U.S. Applications. To such counsel's knowledge, none of the
U.S. Applications has been rejected.
(ii) The Company is listed in the records of the appropriate foreign
office as the sole holder of record of each of the foreign patents listed
under the heading "Non-U.S. Patents Held by the Company" on Schedule D
hereof (the "Non-U.S. Patents") (collectively, the U.S. Patents and Non-
U.S. Patents are referred to herein as the
17
<PAGE>
"Patents") and each of the foreign patent applications listed under the
heading "Non-U.S. Patent Applications Submitted by the Company" on
Schedule D hereof (the "Non-U.S. Applications") (collectively, the U.S.
Applications and the Non-U.S. Applications are referred to herein as the
"Applications"). Such counsel knows of no claims of third parties to any
of such Non-U.S. Patents or Non-U.S. Applications. To such counsel's
knowledge, none of the Non-U.S. Applications has been rejected.
(iii) The statements under the Prospectus captions "Risk Factors--If
we do not protect our intellectual property rights, our competitive
position may be impaired," "Risk Factors--We may be sued for violating the
intellectual property rights of others," "Business--Technology" and
"Business--Patents and Proprietary Technology" (collectively, the
"Intellectual Property Portion") in the Registration Statement and the
Prospectus and any amendment or supplement thereto, insofar as such
statements constitute a summary of the Company's Patents and Applications,
are in all material respects accurate summaries and fairly summarize in all
material respects the legal matters, documents and proceedings relating to
such Patents and Applications described therein.
(iv) Such counsel is not aware of any facts that would lead such
counsel to conclude that any of the Patents are invalid or that any patent
issued in respect of an Application would be invalid.
(v) Except as disclosed in the Intellectual Property Portion of the
Registration Statement and the Prospectus, such counsel is not aware that
any valid patent is infringed by the activities of the Company described in
the Prospectus or by the manufacture, use or sale of any product, device,
instrument, drug or other material made and used according to the
Applications or the Patents.
(vi) Such counsel is not aware of any material defects of form in
the preparation or filing of the Applications on behalf of the Company.
The Applications are being diligently pursued by the Company.
(vii) Such counsel knows of no pending or threatened action, suit,
proceeding or claim by others that the Company is infringing or otherwise
violating any patents or trade secrets.
(viii) Such counsel is not aware of any pending or threatened
actions, suits, proceedings or claim by others challenging the validity or
scope of the Applications or the Patents.
(ix) Such counsel is not aware of any infringement on the part of
any third party of the Patents, Applications, trade secrets, know-how or
other proprietary rights of the Company.
(x) Nothing has come to the attention of such counsel which causes
such counsel to believe that the information contained in the Intellectual
Property Portion of
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<PAGE>
(a) the Registration Statement, or any amendments thereof contained or
contains an untrue statement of a material fact or omitted or omits to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or of (b) the Prospectus, or any
amendments thereof, contained or contains an untrue statement of a
material fact or omitted or omits to state any material fact required to
be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(xi) Such counsel is not aware of any contracts or other documents
relating to the Patents and Applications that should be filed as an exhibit
to the Prospectus that are not already filed or described as required.
(d) Additional Patent Information. At Closing Time, the Representatives
shall have received from the Patent Counsel, dated as of the Closing Time, an
opinion addressed to the Representatives as to the invalidity of the Sluijter
patent, or such other documentation as is acceptable to Underwriters' counsel,
entitling the Representatives to rely on the Patent Counsel opinion delivered
to the Company as to the invalidity of the Sluijter patent.
(e) Opinion of Regulatory Counsel. At Closing Time, the Representatives
shall have received, dated as of Closing Time, the following opinion from
Covington & Burling, regulatory counsel for the Company:
(i) The statements under the captions "Risk Factors--Complying with
FDA and other regulations is an expensive and time-consuming process, and
any failure to comply could result in substantial penalties," "Risk
Factors--Product introductions or modifications may be delayed or cancelled
as a result of the FDA regulatory process, which could cause our sales to
decline," "Business--Manufacturing" and "Business--Government Regulation"
(collectively, the "Regulatory Portion") in the Registration Statement and
the Prospectus and any amendment or supplement thereto, to the extent that
they reflect matters of law, summaries of law or regulations, or regulatory
status, are correct in all material respects;
(ii) To such counsel's knowledge, there are no FDA enforcement
actions pending against the Company and no such actions are threatened;
and
(iii) Nothing has come to the attention of such counsel that would
lead such counsel to believe that the information contained in the
Regulatory Portion of (a) the Registration Statement, or any amendments
thereof contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or of (b) the
Prospectus or any amendments thereof, contained or contains any untrue
statement of a material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
19
<PAGE>
(f) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Latham & Watkins, counsel for the Underwriters, together with signed
or reproduced copies of such letter for each of the other Underwriters with
respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to
preemptive or other similar rights arising by operation of law or under the
charter or by-laws of the Company), (viii) through (x), inclusive, (xii),
(xiv) (solely as to the information in the Prospectus under "Description of
Capital Stock--Common Stock") and the last paragraph of Section 5(b) hereto.
In giving such opinion such counsel may rely, as to all matters governed by
the laws of jurisdictions other than the law of the State of New York and the
federal law of the United States and the General Corporation Law of the State
of Delaware, upon the opinions of counsel satisfactory to the Representatives.
Such counsel may also state that, insofar as such opinion involves factual
matters, they have relied, to the extent they deem proper, upon certificates
of officers of the Company and its subsidiaries and certificates of public
officials.
(g) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the President of the
Company and of the chief financial or chief accounting officer of the Company,
dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) the representations and warranties in Section
1(a) hereof are true and correct with the same force and effect as though
expressly made at and as of Closing Time, (iii) the Company has complied with
all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or are contemplated by
the Commission.
(h) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Ernst & Young a letter
dated such date, in form and substance satisfactory to the Representative,
together with signed or reproduced copies of such letter for each of the other
Underwriters containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(i) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from Ernst & Young a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (h) of this Section, except that the specified date referred to
shall be a date not more than three business days prior to Closing Time.
(j) Approval of Listing. At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
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<PAGE>
(k) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(l) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit D hereto signed by all holders of the Company's equity securities or
other instruments convertible into equity securities.
(m) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company
hereunder shall be true and correct as of each Date of Delivery and, at the
relevant Date of Delivery, the Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date
---------------------
of Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company confirming
that the certificate delivered at the Closing Time pursuant to Section
5(g) hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
------------------------------
Venture Law Group, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iii) Opinion of Patent Counsel for Company. The favorable opinion
-------------------------------------
of Covington & Burling in form and substance satisfactory to counsel for
the Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Sections 5(c) and 5(d) hereof.
(iv) Opinion of Regulatory Counsel for Company. The favorable
-----------------------------------------
opinion of Wilson, Sonsini, Goodrich & Rosati, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinion required by
Section 5(e) hereof.
(v) Opinion of Counsel for Underwriters. The favorable
-----------------------------------
opinion of Latham & Watkins, counsel for the Underwriters, dated such
Date of Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(f) hereof.
(vi) Bring-down Comfort Letter. A letter from Ernst & Young,
-------------------------
in form and substance satisfactory to the Representatives and dated such
Date of Delivery, substantially in the same form and substance as the
letter furnished to the Representatives
21
<PAGE>
pursuant to Section 5(g) hereof, except that the "specified date" in the
letter furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the
Securities as herein contemplated shall be satisfactory in form and substance
to the Representatives and counsel for the Underwriters.
(o) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representative by notice to the Company
at any time at or prior to Closing Time or such Date of Delivery, as the case
may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
(p) The statements set forth in the prospectus under the captions "Risk
Factors--We may be sued for violating the intellectual property rights of
others" and "--If we do not protect our intellectual property rights, our
competitive position may be impaired" and "Business--Patents and Proprietary
Technology" shall have been reviewed and approved by Wilson Sonsini Goodrich &
Rosati, a Professional Corporation, patent counsel to the Company, as experts in
such matters, and included therein in reliance upon its review and approval.
(q) The Company shall have been reincorporated in the State of Delaware
and shall have filed such Certificate of Incorporation and have adopted such
Bylaws as are consistent with the description set forth in the preliminary
prospectus and the Financial Statements included therein and otherwise
reasonably satisfactory to the Representatives and their counsel.
(r) The Company shall have affected the stock split described in Note 14
to the Financial Statements included in the preliminary prospectus.
(s) All of the Company's outstanding preferred stock shall have converted
into common stock as described in the prospectus.
SECTION 6. Indemnification.
---------------
(a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
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(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any applicable
laws or regulations of foreign jurisdictions where Reserved Securities have
been offered and (B) any untrue statement or alleged untrue statement of a
material fact included in the supplement or prospectus wrapper material
distributed in connection with the reservation and sale of the Reserved
Securities to the directors, officers, employees, business associates and
related persons of the Company or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein, when
considered in conjunction with the Prospectus or preliminary prospectus,
not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i), (ii) or (iii)
above;
provided, however, that this indemnity agreement shall not apply
-------- -------
to any loss, liability, claim, damage or expense to the extent arising out
of any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through Merrill Lynch which is
accompanied by a written confirmation that it is expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
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<PAGE>
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors,
each of its officers who signed the Registration Statement, and each person,
if any, who controls the Company within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act against any and all loss, liability, claim,
damage and expense described in the indemnity contained in subsection (a) of
this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Merrill Lynch which is accompanied by written confirmation
that it is expressly for use in the Registration Statement (or any amendment
thereto) or such preliminary prospectus or the Prospectus (or any amendment or
supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party
of any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve
such indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section
6(a) above, counsel to the indemnified parties shall be selected by Merrill
Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above,
counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any
such action; provided, however, that counsel to the indemnifying party shall
not (except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
in respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from
all liability arising out of such litigation, investigation, proceeding or
claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated
by Section 6(a)(ii) effected without its written consent if (i) such
settlement is entered into more than 45 days after receipt by such
indemnifying party of the
24
<PAGE>
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a
request in writing, to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of the eligible persons to pay for and
accept delivery of Reserved Securities which, by the end of the first business
day following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for
------------
in Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and of the Underwriters on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
25
<PAGE>
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or
in certificates of officers of the Company submitted pursuant hereto, shall
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of any Underwriter or controlling person, or by or on
behalf of the Company, and shall survive delivery of the Securities to the
Underwriters.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, whether or
not arising in the ordinary course of business, or (ii) if there has occurred
any material adverse change in the financial markets in the United States, any
outbreak of hostilities or escalation thereof or other calamity or crisis or
any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Representatives,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, or (iii) if trading in any securities of the Company has been
suspended or materially limited by the Commission or the Nasdaq National
Market, or
26
<PAGE>
if trading generally on the American Stock Exchange or the New York Stock
Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such
system or by order of the Commission, the National Association of Securities
Dealers, Inc. or any other governmental authority, or (iv) if a banking
moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the Underwriters. If one or
------------------------------------------
more of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but
not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-
defaulting Underwriters shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to
any Date of Delivery which occurs after the Closing Time, the obligation of
the Underwriters to purchase and of the Company to sell the Option
Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
27
<PAGE>
SECTION 11. Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriters shall be directed to the Representatives at World Financial
Center--North Tower, 250 Vesey Street, New York, New York 10281, attention of
Mark Robinson; with a copy to Latham & Watkins, 650 Town Center Drive, Suite
2000, Costa Mesa, California 92626-1925, attention of Charles Ruck, and
notices to the Company shall be directed to it at 3700 Haven Court, Menlo
Park, California 94025, attention of Kenneth Anstey.
SECTION 12. Parties. This Agreement shall inure to the benefit
-------
of and be binding upon each of the Underwriters and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Underwriters and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Underwriters and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any Underwriter shall be deemed to be a successor by reason merely of
such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
----------------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT
AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
SECTION 14. Effect of Headings. The Article and Section headings
------------------
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
28
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and the Company in accordance with its terms.
Very truly yours,
ORATEC INTERVENTIONS, INC.
By _____________________________________
Kenneth Anstey
Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
J.P. MORGAN SECURITIES INC.
U.S. BANCORP PIPER JAFFRAY, INC.
By
________________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
29
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Name of Underwriter Initial Securities
------------------- ------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated........................
J.P. Morgan Securities Inc................................................
U.S. Bancorp Piper Jeffray, Inc...........................................
---------------------
Total.....................................................................
=====================
</TABLE>
Schedule A - 1
<PAGE>
SCHEDULE B
ORATEC INTERVENTIONS, INC.
______ Shares of Common Stock
(Par Value $0.001 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $_________.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $________, being an amount equal to the
initial public offering price set forth above less $______ per share;
provided that the purchase price per share for any Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities.
Schedule B - 1
<PAGE>
SCHEDULE C
List of U.S. Patents Held by Company and
List of U.S. Patent Applications
Submitted by the Company
Schedule C - 1
<PAGE>
SCHEDULE D
List of Non-U.S. Patents Held by Company and
List of Non-U.S. Patent Applications
Submitted by the Company
Schedule D - 1
<PAGE>
Exhibit 3.7
AMENDED AND RESTATED
BYLAWS
OF
ORATEC INTERVENTIONS, INC.
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES..................................................... 3
1.1 Registered Office........................................................ 3
1.2 Other Offices............................................................ 3
ARTICLE II - MEETINGS OF STOCKHOLDERS............................................. 3
2.1 Place Of Meetings........................................................ 3
2.2 Annual Meeting........................................................... 1
2.3 Special Meeting.......................................................... 3
2.4 Notice of Shareholder's Meeting; Affidavit Of Notice..................... 3
2.5 Advance Notice of Stockholder Nominees................................... 3
2.6 Quorum................................................................... 4
2.7 Adjourned Meeting; Notice................................................ 4
2.8 Conduct Of Business...................................................... 4
2.9 Voting................................................................... 5
2.10 Waiver Of Notice........................................................ 5
2.11 Record Date For Stockholder Notice; Voting.............................. 5
2.12 Proxies................................................................. 6
ARTICLE III - DIRECTOR............................................................ 6
3.1 Powers................................................................... 6
3.2 Number Of Directors...................................................... 6
3.3 Election, Qualification And Term Of Office Of Directors.................. 6
3.4 Resignation And Vacancies................................................ 6
3.5 Place Of Meetings; Meetings By Telephone................................. 7
3.6 Regular Meetings......................................................... 8
3.7 Special Meetings; Notice................................................. 8
3.8 Quorum................................................................... 8
3.9 Waiver Of Notice......................................................... 8
3.10 Board Action By Written Consent Without A Meeting....................... 9
3.11 Fees And Compensation Of Directors...................................... 9
3.12 Approval Of Loans To Officers........................................... 9
3.13 Removal Of Directors.................................................... 9
3.14 Chairman Of The Board Of Directors...................................... 10
ARTICLE IV - COMMITTEES........................................................... 10
4.1 Committees Of Directors.................................................. 10
4.2 Committee Minutes........................................................ 10
4.3 Meetings And Action Of Committees........................................ 11
ARTICLE V - OFFICERS.............................................................. 13
5.1 Officers................................................................. 13
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
5.2 Appointment Of Officers.................................................. 13
5.3 Subordinate Officers..................................................... 13
5.4 Removal And Resignation Of Officers...................................... 14
5.5 Vacancies In Offices..................................................... 12
5.6 Chief Executive Officer.................................................. 14
5.7 President................................................................ 14
5.8 Vice Presidents.......................................................... 13
5.9 Secretary................................................................ 13
5.10 Chief Financial Officer................................................. 15
5.11 Representation Of Shares Of Other Corporations.......................... 15
5.12 Authority And Duties Of Officers........................................ 16
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.. 16
6.1 Indemnification Of Directors And Officers................................ 16
6.2 Indemnification Of Others................................................ 16
6.3 Payment Of Expenses In Advance........................................... 17
6.4 Indemnity Not Exclusive.................................................. 17
6.5 Insurance................................................................ 17
6.6 Conflicts................................................................ 17
ARTICLE VII - RECORDS AND REPORTS................................................. 18
7.1 Maintenance And Inspection Of Records.................................... 18
7.2 Inspection By Directors.................................................. 18
7.3 Annual Statement To Stockholders......................................... 18
ARTICLE VIII - GENERAL MATTERS.................................................... 18
8.1 Checks................................................................... 18
8.2 Execution Of Corporate Contracts And Instruments......................... 19
8.3 Stock Certificates; Partly Paid Shares................................... 19
8.4 Special Designation On Certificates...................................... 19
8.5 Lost Certificates........................................................ 20
8.6 Construction; Definitions................................................ 20
8.7 Dividends................................................................ 20
8.8 Fiscal Year.............................................................. 20
8.9 Seal..................................................................... 21
8.10 Transfer Of Stock....................................................... 21
8.11 Stock Transfer Agreements............................................... 21
8.12 Registered Stockholders................................................. 21
ARTICLE IX - AMENDMENTS........................................................... 21
</TABLE>
-ii-
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
ORATEC INTERVENTIONS, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware, County of New Castle,
19801. The name of its registered agent at such address is The Corporation
Trust Company.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place Of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 Annual Meeting.
--------------
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by the Board of Directors. At the meeting,
directors shall be elected and any other proper business may be transacted.
(b) Nominations of persons for election to the Board of Directors of
the corporation and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the corporation's notice with respect to such meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
corporation who was a stockholder of record at the time of giving of the notice
provided for in this Section 2.2, who is entitled to vote at the meeting and who
has complied with the notice procedures set forth in this Section 2.2.
<PAGE>
(c) In addition to the requirements of Section 2.5, for nominations or
other business to be properly brought before an annual meeting by a stockholder
pursuant to clause (iii) of paragraph (b) of this Section 2.2, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation and such business must be a proper matter for stockholder action
under the General Corporation Law of Delaware. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the corporation not less than twenty (20) days nor more than ninety (90) days
prior to the first anniversary of the preceding year's annual meeting of
stockholders; provided, however, that in the event that the date of the annual
meeting is more than thirty (30) days prior to or more than sixty (60) days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the ninetieth (90th) day prior to such annual meeting
and not later than the close of business on the later of the twentieth (20th)
day prior to such annual meeting or the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the stockholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (A) the name
and address of such stockholder, as they appear on the corporation's books, and
of such beneficial owner and (B) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.2. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service.
(f) Nothing in this Section 2.2 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
-2-
<PAGE>
2.3 Special Meeting.
---------------
(a) A special meeting of the stockholders may be called at any time by
the Board of Directors, or by the chairman of the board, or by the president or
the holders of the shares entitled to cast not less than 10% of the votes at a
meeting until such time as the Company has outstanding securities designated as
qualified for trading on the Nasdaq National Market and the Company has at least
800 shareholders of record.
(b) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
selected pursuant to such notice of meeting (i) by or at the direction of the
Board of Directors or (ii) by any stockholder of the corporation who is a
stockholder of record at the time of giving of notice provided for in Section
2.5, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.5.
2.4 Notice of Stockholder's Meetings; Affidavit Of Notice.
-----------------------------------------------------
All notices of meetings of stockholders shall be in writing and shall
be sent or otherwise given in accordance with this Section 2.4 of these Bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting (or such longer or
shorter time as is required by Section 2.5 of these Bylaws, if applicable). The
notice shall specify the place, date, and hour of the meeting, and, in the case
of a special meeting, the purpose or purposes for which the meeting is called.
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.5 Advance Notice of Stockholder Nominees.
--------------------------------------
Only persons who are nominated in accordance with the procedures set
forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the board of directors of the corporation
may be made at a meeting of stockholders by or at the direction of the board of
directors or by any stockholder of the corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 2.5. Such nominations, other than those made by or at the
direction of the board of directors, shall be made pursuant to timely notice in
writing to the secretary of the corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the corporation not less than sixty (60) days nor more than ninety
(90) days prior to the meeting; provided, however, that in the event that less
than sixty (60) days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or re-
election as a Director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the corporation which are
-3-
<PAGE>
beneficially owned by such person and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving the notice (i) the name and address, as they appear on
the corporation's books, of such stockholder and (ii) the class and number of
shares of the corporation which are beneficially owned by such stockholder. At
the request of the Board of Directors any person nominated by the Board of
Directors for election as a director shall furnish to the secretary of the
corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. No person shall be eligible for
election as a director of the corporation unless nominated in accordance with
the procedures set forth in this Section 2.5. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the
Bylaws, and if he or she should so determine, he or she shall so declare to the
meeting and the defective nomination shall be disregarded.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (a) the chairman of the meeting or (b) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 Conduct Of Business.
-------------------
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
-4-
<PAGE>
2.9 Voting.
------
(a) The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
(b) Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 Record Date For Stockholder Notice; Voting.
------------------------------------------
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. If the Board
of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(b) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
-5-
<PAGE>
2.12 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number Of Directors.
-------------------
The number of directors constituting the entire Board of Directors
shall be seven (7).
3.3 Election, Qualification And Term Of Office Of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation And Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold
-6-
<PAGE>
office as provided in this section in the filling of other vacancies. A vacancy
created by the removal of a director by the vote of the stockholders or by court
order may be filled only by the affirmative vote of a majority of the shares
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute a majority of the quorum.
Each director so elected shall hold office until the next annual meeting of the
stockholders and until a successor has been elected and qualified.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place Of Meetings; Meetings By Telephone.
----------------------------------------
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in
-7-
<PAGE>
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.7 Special Meetings; Notice.
------------------------
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall
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constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these Bylaws.
3.10 Board Action By Written Consent Without A Meeting.
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the
board or committee may be executed by telex, telecopy or other facsimile
transmission, and such facsimile shall be valid and binding to the same extent
as if it were an original.
3.11 Fees And Compensation Of Directors.
----------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval Of Loans To Officers.
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 Removal Of Directors.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
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No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Chairman Of The Board Of Directors.
----------------------------------
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
ARTICLE IV
COMMITTEES
----------
4.1 Committees Of Directors.
-----------------------
The Board of Directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors or in the Bylaws of the corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (a) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (b) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (c) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (d) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (e) amend the Bylaws of the corporation; and, unless the board
resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 Committee Minutes.
-----------------
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Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings And Action Of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment Of Officers.
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
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5.4 Removal And Resignation Of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
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president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the Bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
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The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do
so by proxy or power of attorney duly executed by the person having such
authority.
5.12 Authority And Duties Of Officers.
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
-------------------------------------------------------------------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (a) who is or was
a director or officer of the corporation, (b) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (a) who is or was an employee or
agent of the corporation, (b) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (c) who was an
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employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any Bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 Insurance.
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the certificate
of incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
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ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money,
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notes or other evidences of indebtedness that are issued in the name of or
payable to the corporation, and only the persons so authorized shall sign or
endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full
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or summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
---------
The directors of the corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
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8.9 Seal.
----
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer Of Stock.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 Stock Transfer Agreements.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The Bylaws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the corporation may,
in its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
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Exhibit 10.6
ORATEC INTERVENTIONS, INC.
1995 STOCK PLAN
(As amended through July 1999)
1. Purposes of the Plan. The purposes of this 1995 Stock Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary in which the
---------
Company owns an equity interest or which, together with the Company, is under
common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option, restricted stock purchase and stock bonus plans
under applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any stock exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Oratec Interventions, Inc., a California
-------
corporation.
(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent, Subsidiary or Affiliate to render services
and is compensated for such services, and any director of the Company whether
compensated for such services or not.
<PAGE>
(j) "Continuous Status as an Employee or Consultant" means the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
purposes of this Plan, a change in status from an Employee to a Consultant or
from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
(k) "Director" means a member of the Board.
--------
(l) "Employee" means any person (including if appropriate, any Named
--------
Executive, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company, with the status of employment determined
based upon such minimum number of hours or periods worked as shall be determined
by the Administrator in its discretion, subject to any requirements of the Code.
The payment by the Company of a director's fee to a Director shall not be
sufficient to constitute "employment" of such Director by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock on the date of grant of the Option (or in the event the
Common Stock is not traded on such date, on the immediately preceding trading
date), as reported in The Wall Street Journal or such other source as the
-----------------------
Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the bid and asked prices for the Common Stock on the date of grant
of the Option, as reported in The Wall Street Journal or such other source as
-----------------------
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
-2-
<PAGE>
(p) "Listed Security" means any security of the Company that is
---------------
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(q) "Named Executive" means any individual who, on the last day of
---------------
the Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(r) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(v) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(w) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(x) "Plan" means this 1995 Stock Plan.
----
(y) "Reporting Person" means an Officer, Director, or greater than
----------------
ten percent shareholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(z) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(aa) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
(bb) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(cc) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
-3-
<PAGE>
(dd) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(ee) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(ff) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 3,000,000 shares of Common Stock (on a post-split basis) plus
an automatic annual increase on the first day of each of the Company's fiscal
years beginning in 2000 and ending in 2002 equal to the lesser of: (i) 750,000
Shares; (ii) four percent (4%) of the Shares outstanding on the last day of the
immediately preceding fiscal year; or (iii) such lesser number of shares as is
determined by the Board of Directors. The Shares may be authorized, but
unissued, or reacquired Common Stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares that were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan. In addition,
any Shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan.
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Optionees and, if permitted by the Applicable Laws, the Board may
authorize one or more officers (who may (but need not) be Officers) to grant
Options or Stock Purchase Rights to Employees and Consultants.
(b) Administration With Respect to Reporting Persons. With respect
------------------------------------------------
to Options and Stock Purchase Rights granted to Reporting Persons and Named
Executives, the Plan may (but need not) be administered so as to permit such
Options and Stock Purchase Rights to qualify for the exemption set forth in Rule
16b-3 and to qualify as performance-based compensation under Section 162(m) of
the Code.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
-4-
<PAGE>
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(c) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees, provided however that Employees of
Affiliates shall not be eligible to receive Incentive Stock Options. An
Employee or Consultant who has been granted an Option or Stock Purchase Right
may, if he or she is otherwise eligible, be granted additional Options or Stock
Purchase Rights.
-5-
<PAGE>
(b) Type of Option. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 20 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 16 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Option granted to an Optionee who, at the time the Option is granted, is a Ten
Percent Holder, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the written option
agreement. After the date, if any, on which the Common Stock becomes a Listed
Security, the five (5) year limitation on option grants to Ten Percent Holders
described above shall only apply to the grant of Incentive Stock Options.
8. Limitation on Grants to Employees. Subject to adjustment as provided
---------------------------------
in Section 13 below, the maximum number of Shares which may be subject to
Options and Stock Purchase Rights granted to any one Employee under this Plan
for any fiscal year of the Company shall be 1,000,000Shares.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the applicable agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of grant.
-6-
<PAGE>
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted, prior to the date, if any, on which the Common
Stock becomes a Listed Security, to a person who, at the time of the grant of
such Option, is a Ten Percent Holder, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of the grant.
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive, the per share Exercise Price shall be no less
than 100% of the Fair Market Value on the date of grant if such Option is
intended to qualify as performance-based compensation under Section 162(m) of
the Code;
(C) granted, prior to the date, if any, on which the Common
Stock becomes a Listed Security, to a person other than a Named Executive or a
Ten Percent Holder, the per Share exercise price shall be no less than 85% of
the Fair Market Value per Share on the date of grant if required by the
Applicable Laws and, if not so required, shall be such price as is determined by
the Administrator.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (7) any combination of the foregoing methods of
payment, or (8) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
-7-
<PAGE>
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, and reflected in the written option
agreement, which may include vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided that if required by
the Applicable Laws, any option granted prior to the date, if any, upon which
the Common Stock becomes a Listed Security, shall become exercisable at the rate
of at least twenty percent (20%) per year over five (5) years from the date the
Option is granted. In the event that any of the Shares issued upon exercise of
an Option (which exercise occurs prior to the date, if any, upon which the
Common Stock becomes a Listed Security) should be subject to a right of
repurchase in the Company's favor, such repurchase right shall, if required by
the Applicable Laws, lapse at the rate of at least twenty percent (20%) per year
over five (5) years from the date the Option is granted. Notwithstanding the
above, in the case of an Option granted to an officer, Director or Consultant of
the Company or any Parent, Subsidiary or Affiliate of the Company, the Option
may become fully exercisable, or a repurchase right, if any, in favor of the
Company shall lapse, at any time or during any period established by the
Administrator. The Administrator shall have the discretion to determine whether
and to what extent the vesting of Options shall be tolled during any unpaid
leave of absence; provided however that in the absence of such determination,
vesting of Options shall be tolled during any such leave.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Sections 10(c) and 10(d), in the event of termination of an Optionee's
Continuous Status as an Employee or Consultant with the Company, such Optionee
may, but only within three (3) months (or such other period of time not less
than thirty (30) days as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at
-8-
<PAGE>
the time of grant of the Option and not exceeding three (3) months) after the
date of such termination (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise his or her
Option to the extent that the Optionee was entitled to exercise it at the date
of such termination. To the extent that Optionee was not entitled to exercise
the Option at the date of such termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate. No termination shall be deemed to occur and this Section
10(b) shall not apply if (i) the Optionee is a Consultant who becomes an
Employee; or (ii) the Optionee is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 10(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from
the date of such termination (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
422 of the Code) within three (3) months of the date of such termination, the
Option will not qualify for ISO treatment under the Code. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within six
months (6) from the date of termination, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following the
termination of Optionee's Continuous Status as an Employee or Consultant, the
Option may be exercised, at any time within six (6) months following the date of
death (but in no event later than the expiration date of the term of such Option
as set forth in the Option Agreement), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the date of
death, or, if earlier, the date of termination of Optionee's Continuous Status
as an Employee or Consultant. To the extent that Optionee is not
-9-
<PAGE>
entitled to exercise the Option as set forth above, or if the Option is not
exercised to the extent it is exercisable within the time specified herein, the
Option shall terminate.
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Status as
an Employee or Consultant from the periods set forth in Sections 10(b), 10(c)
and 10(d) above or in the Option Agreement to such greater time as the Board
shall deem appropriate, provided that in no event shall such Option be
exercisable later than the date of expiration of the term of such Option as set
forth in the Option Agreement.
(f) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(g) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid and the time within which such person must accept
such offer, which shall in no event exceed thirty (30) days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. In the case of a Stock Purchase Right granted prior to the date, if any,
on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws at such time, the purchase price of Shares subject to such Stock
Purchase Rights shall not be less than 85% of the Fair Market Value of the
Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer. If the Applicable Laws do not impose the requirements
set forth in the preceding sentence and with respect to any Stock Purchase
Rights granted after the date, if any, on which the Common Stock becomes a
Listed Security, the purchase price of Shares subject to Stock Purchase Rights
shall be as determined by the Administrator. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased
-10-
<PAGE>
pursuant to the Restricted Stock purchase agreement shall be the original
purchase price paid by the purchaser and may be paid by cancellation of any
indebtedness of the Purchaser to the Company. The repurchase option shall lapse
at such rate as the Administrator may determine, provided, however, that with
respect to a Stock Purchase Right granted prior to the date, if any, on which
the Common Stock becomes a Listed Security to a purchaser who is not an officer
(including an Officer), Director or Consultant of the Company or any Parent,
Subsidiary or Affiliate of the Company, it shall lapse at a minimum rate of 20%
per year.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Taxes.
-----
(a) As a condition of the exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising or receiving the Option or Stock
Purchase Right) shall make such arrangements as the Administrator may require
for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the exercise of
Option or Stock Purchase Right and the issuance of Shares. The Company shall
not be required to issue any Shares under the Plan until such obligations are
satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option or Stock Purchase Right.
(c) This Section 12(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option or Stock Purchase Right that number of Shares having a
Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the amount required to be withheld. For purposes of this Section 12,
the Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined under the
Applicable Laws (the "Tax Date").
--------
-11-
<PAGE>
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Participant for more than six (6) months on the date of surrender, and (ii)
have a Fair Market Value determined as of the applicable Tax Date equal to the
amount required to be withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 12(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 12(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Participant shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the applicable Tax
Date.
13. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, the number of Shares described in Section 3(a)(i) and 8 above,
as well as the price per share of Common Stock covered by each such outstanding
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to
-12-
<PAGE>
such proposed action. To the extent it has not been previously exercised, the
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale of all
------------------------
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's shareholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right or to accept
assignment of the conditions and restrictions with respect to Restricted Stock,
in which case such Option or Stock Purchase Right shall terminate upon the
consummation of the merger or sale of assets and all conditions and restrictions
with respect to Restricted Stock shall lapse upon the consummation of the merger
or sale of assets.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
14. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution, provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an Optionee will not constitute a
transfer. An Option or Stock Purchase Right may be exercised, during the
lifetime of the holder of Option or Stock Purchase Right, only by such holder or
a transferee permitted by this Section 14.
15. Time of Granting Options and Stock Purchase Rights. The date of
--------------------------------------------------
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to
-13-
<PAGE>
comply with the Applicable Laws, the Company shall obtain shareholder approval
of any Plan amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange. As a condition to the exercise of an Option
or Stock Purchase Right, the Company may require the person exercising such
Option or Stock Purchase Right to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Administrator shall approve from time to
time.
20. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under the Applicable Laws. All Options and
Stock Purchase Rights issued under the Plan shall become void in the event such
approval is not obtained.
21. Information to Optionees and Purchasers. Prior to the date, if any,
---------------------------------------
upon which the Common Stock becomes a Listed Security and if required by the
Applicable Laws, the Company shall provide financial statements at least
annually to each Optionee and to each individual who acquired Shares Pursuant to
the Plan, during the period such Optionee or purchaser has one or more Options
or Stock Purchase Rights outstanding, and in the case of an individual who
acquired Shares pursuant to the Plan, during the period such individual owns
such Shares. The Company shall not be required to provide such information if
the issuance of Options or Stock Purchase Rights under the Plan is limited to
key employees whose duties in connection with the Company assure their access to
equivalent information.
-14-
<PAGE>
EXHIBIT 10.7
ORATEC INTERVENTIONS, INC.
1999 DIRECTORS' STOCK OPTION PLAN
---------------------------------
1. Purposes of the Plan. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available individuals for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Change of Control" means a sale of all or substantially all of
-----------------
the Company's assets, or any merger or consolidation of the Company with or into
another corporation other than a merger or consolidation in which the holders of
more than 50% of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by their being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Common Stock" means the Common Stock of the Company.
------------
(e) "Company" means Oratec Interventions, Inc., a California
-------
corporation.
(f) "Continuous Status as a Director" means the absence of any
-------------------------------
interruption or termination of service as a Director.
(g) "Corporate Transaction" means a dissolution or liquidation of the
---------------------
Company, a sale of all or substantially all of the Company's assets, or a
merger, consolidation or other capital reorganization of the Company with or
into another corporation.
(h) "Director" means a member of the Board.
--------
(i) "Employee" means any person, including any officer or Director,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
<PAGE>
(k) "Option" means a stock option granted pursuant to the Plan. All
------
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).
(l) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(m) "Optionee" means an Outside Director who receives an Option.
--------
(n) "Outside Director" means a Director who is not an Employee.
----------------
(o) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(p) "Plan" means this 1999 Directors' Stock Option Plan.
----
(q) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 200,000 Shares of Common Stock (on a post-split basis) (the
"Pool"). The Shares may be authorized, but unissued, or reacquired Common
----
Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by
the Company upon exercise of an Option in order to satisfy the exercise price
for such Option, or any withholding taxes due with respect to such exercise,
shall be treated as not issued and shall continue to be available under the
Plan. If Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
------------------------------------------------------
(a) Administrator. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
-2-
<PAGE>
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 20,000 Shares (on a post-split basis) (the "First Option") on
the date on which such person first becomes an Outside Director after the
effective date of this Plan, whether through election by the shareholders of the
Company or appointment by the Board of Directors to fill a vacancy.
(iii) Each Outside Director, including an Outside Director who
did not receive a First Option grant, shall be automatically granted an Option
to purchase 5,000 Shares (on a post-split basis) (the "Subsequent Option") on
the date of each Annual Meeting of the Company's stockholders immediately
following which such Outside Director is serving on the Board, provided that, on
such date, he or she shall have served on the Board for at least six (6) months
prior to the date of such Annual Meeting.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares subject
to outstanding Options plus the number of Shares previously purchased upon
exercise of Options to exceed the Pool, then each such automatic grant shall be
for that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Outside Directors receiving an
Option on the automatic grant date. Any further grants shall then be deferred
until such time, if any, as additional Shares become available for grant under
the Plan through action of the stockholders to increase the number of Shares
which may be issued under the Plan or through cancellation or expiration of
Options previously granted hereunder.
(v) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 17 hereof.
(vii) The terms of each Option granted hereunder shall be as
follows:
(1) each Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of each Option, determined in
accordance with Section 8 hereof;
(3) each Option shall be fully vested and exercisable as
of the date of grant.
(c) Powers of the Board. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of
-3-
<PAGE>
relevant information and in accordance with Section 8(b) of the Plan, the fair
market value of the Common Stock; (ii) to determine the exercise price per Share
of Options to be granted, which exercise price shall be determined in accordance
with Section 8 of the Plan; (iii) to interpret the Plan; (iv) to prescribe,
amend and rescind rules and regulations relating to the Plan; (v) to authorize
any person to execute on behalf of the Company any instrument required to
effectuate the grant of an Option previously granted hereunder; and (vi) to make
all other determinations deemed necessary or advisable for the administration of
the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
-----------------------------------
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right to
exercise any option pending a determination by the Board (excluding the Outside
Director accused of such misconduct). If the Board (excluding the Outside
Director accused of such misconduct) determines an Optionee has committed an act
of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the
Company, breach of fiduciary duty or deliberate disregard of the Company rules
resulting in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential information,
engages in any conduct constituting unfair competition, induces any Company
customer to breach a contract with the Company or induces any principal for whom
the Company acts as agent to terminate such agency relationship, neither the
Optionee nor his or her estate shall be entitled to exercise any Option
whatsoever. In making such determination, the Board of Directors (excluding the
Outside Director accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's behalf at a
hearing before the Board or a committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) above. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. Term of Options. The term of each Option shall be ten (10) years from
---------------
the date of grant thereof unless an Option terminates sooner pursuant to Section
9 below.
-4-
<PAGE>
8. Exercise Price and Consideration.
--------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
-----------------
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National Market or listed on a stock exchange, the fair market value per
Share shall be the closing sales price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
--------
Street Journal, or if there is a public market for the Common Stock but the
- --------------
Common Stock is not traded on the Nasdaq National Market or listed on a stock
exchange, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
-----------------------
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System).
(c) Form of Consideration. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) above; provided however that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 below has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise
-5-
<PAGE>
of the Option. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock certificate is issued,
except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. If an Outside
----------------------------------------------
Director ceases to serve as a Director, he or she may, but only within sixty
(60) days after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination. Notwithstanding the foregoing, in no event
may the Option be exercised after its term set forth in Section 7 has expired.
To the extent that such Outside Director was not entitled to exercise an Option
at the date of such termination, or does not exercise such Option (to the extent
he or she was entitled to exercise) within the time specified above, the Option
shall terminate and the Shares underlying the unexercised portion of the Option
shall revert to the Plan.
(c) Disability of Optionee. Notwithstanding Section 9(b) above, in
----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within twelve (12)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (to the extent he or she was entitled to exercise)
within the time specified above, the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee: (A)
-----------------
during the term of the Option who is, at the time of his or her death, a
Director of the Company and who shall have been in Continuous Status as a
Director since the date of grant of the Option, or (B) within three (3) months
after the termination of Continuous Status as a Director, the Option may be
exercised, at any time within twelve (12) months following the date of death, by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of death or the date of termination, as
applicable. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
an Optionee was not entitled to exercise the Option at the date of death or
termination or if he or she does not exercise such Option (to the extent he or
she was entitled to exercise) within the time specified above, the Option shall
terminate and the Shares underlying the unexercised portion of the Option shall
revert to the Plan.
10. Nontransferability of Options. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code
-6-
<PAGE>
or the rules thereunder). The designation of a beneficiary by an Optionee does
not constitute a transfer. An Option may be exercised during the lifetime of an
Optionee only by the Optionee or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the shareholders of
----------
the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii) and
(iii) above, and the number of Shares of Common Stock which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock (including any such change in the number of Shares of Common
Stock effected in connection with a change in domicile of the Company) or any
other increase or decrease in the number of issued Shares of Common Stock
effected without receipt of consideration by the Company; provided however that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.
(b) Corporate Transactions; Change of Control. In the event of a
-----------------------------------------
Corporate Transaction, including a Change of Control, and except as otherwise
provided in a Stock Option Agreement issued under the Plan, each outstanding
Option shall be assumed or an equivalent option shall be substituted by the
successor corporation or a Parent or Subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the outstanding
Options or to substitute equivalent options, in which case the Options shall
terminate upon the consummation of the transaction.
For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon such Corporate Transaction or Change of Control, each
Optionee would be entitled to receive upon exercise of an Option the same number
and kind of shares of stock or the same amount of property, cash or securities
as the Optionee would have been entitled to receive upon the occurrence of such
transaction if the Optionee had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the Option at such
time (after giving effect to any adjustments in the number of Shares covered by
the Option as provided for in this Section 11); provided however that if such
consideration received in the transaction was not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent of
the successor corporation, provide for the consideration to be received upon
exercise of the Option to be solely common stock of the successor corporation or
its Parent equal
-7-
<PAGE>
to the Fair Market Value of the per Share consideration received by holders of
Common Stock in the transaction.
(c) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the legal requirements relating to the administration
of stock option plans under applicable U.S. state corporate laws, U.S. federal
and applicable state securities laws, the Code, any stock exchange or Nasdaq
rules or regulations to which the Company may be subject and the applicable laws
of any other country or jurisdiction where Options are granted under the Plan,
as such laws, rules, regulations and requirements shall be in place from time to
time (the "Applicable Laws"). Such compliance shall be determined by the
---------------
Company in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
-8-
<PAGE>
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company.
Such stockholder approval shall be obtained in the manner and to the degree
required under the Applicable Laws.
-9-
<PAGE>
ORATEC INTERVENTIONS, INC.
1999 DIRECTORS' STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
((Optionee))
((OptioneeAddress1))
((OptioneeAddress2))
You have been granted an option to purchase Common Stock of Oratec
Interventions, Inc. (the "Company") as follows:
-------
Date of Grant ((GrantDate))
Vesting Commencement Date ((VestingStartDate))
Exercise Price per Share ((ExercisePrice))
Total Number of Shares Granted ((SharesGranted))
Total Exercise Price ((TotalExercisePrice))
Expiration Date ((ExpirDate))
Vesting Schedule: This Option may be exercised, in
----------------
whole or in part, in accordance
with the following schedule: 100%
of the Option Shares shall be
vested and exercisable in full as
of the Date of Grant.
Termination Period: This Option may be exercised for
------------------
60 days after termination of
Optionee's Continuous Status as a
Director, or such longer period as
may be applicable upon death or
Disability of Optionee as provided
in the Plan, but in no event later
than the Expiration Date as
provided above.
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 1999 Directors' Stock Option Plan and the
Nonstatutory Stock Option Agreement, all of which are attached and made a part
of this document.
OPTIONEE: ORATEC INTERVENTIONS, INC.
_____________________________ By: ____________________________________
Signature
_____________________________ Title: _________________________________
Print Name
-11-
<PAGE>
ORATEC INTERVENTIONS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
-----------------------------------
1. Grant of Option. The Board of Directors of the Company hereby grants
---------------
to the Optionee named in the Notice of Stock Option Grant attached as Part I of
this Agreement (the "Optionee"), an option (the "Option") to purchase a number
-------- ------
of Shares, as set forth in the Notice of Stock Option Grant, at the exercise
price per share set forth in the Notice of Stock Option Grant (the "Exercise
--------
Price"'), subject to the terms and conditions of the 1999 Directors' Stock
- -----
Option Plan (the "Plan"), which is incorporated herein by reference.
----
(Capitalized terms not defined herein shall have the meanings ascribed to such
terms in the Plan.) In the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Nonstatutory Stock Option
Agreement, the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Stock Option Grant
and the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement. In the event of Optionee's death, disability or other termination of
Optionee's employment or consulting relationship, the exercisability of the
Option is governed by the applicable provisions of the Plan and this
Nonstatutory Stock Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
--------- ---------------
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
----------------
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment
of the aggregate Exercise Price as to all Exercised Shares. This Option shall
be deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
<PAGE>
(b) check;
(c) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a domestic relations order (as defined by the Code or the rules
thereunder) and may be exercised during the lifetime of Optionee only by the
Optionee or a transferee permitted by Section 10 of the Plan. The terms of the
Plan and this Nonstatutory Stock Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Nonstatutory Stock Option
Agreement.
6. Tax Consequences. Set forth below is a brief summary of certain
----------------
federal tax consequences relating to this Option under the law in effect as of
the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. Since this Option does not qualify as an
---------------------
incentive stock option under Section 422 of the Code, the Optionee may incur
regular federal income tax liability upon exercise. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price.
(b) Disposition of Shares. If the Optionee holds the Option Shares
---------------------
for more than one year, gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. The long-
term capital gain will be taxed for federal income tax purposes at a maximum
rate of 20 percent.
-13-
<PAGE>
By your signature and the signature of the Company's representative below, you
and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Nonstatutory Stock Option Agreement.
Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Nonstatutory Stock Option Agreement and fully understands all
provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions relating to the Plan and
Nonstatutory Stock Option Agreement.
ORATEC INTERVENTIONS, INC.
____________________________ By: __________________________________
(Optionee)
Title: _______________________________
-14-
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
To: Oratec Interventions, Inc.
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase __________ shares of Oratec
Interventions, Inc. Common Stock, under and pursuant to the Company's 1999
Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement dated
_______________, as follows:
Grant Number: ____________________________
Date of Purchase: ____________________________
Number of Shares: ____________________________
Purchase Price: ____________________________
Method of Payment of ____________________________
Purchase Price: ____________________________
Social Security No.: ____________________________
The shares should be issued as follows:
Name: ____________________________
Address: ____________________________
____________________________
____________________________
Signed: ____________________________
Date: ____________________________
-15-
<PAGE>
EXHIBIT 10.8
ORATEC INTERVENTIONS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of Oratec Interventions, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means Oratec Interventions, Inc., a California
-------
corporation.
(e) "Compensation" means total cash compensation received by an
------------
Employee from the Company or a Designated Subsidiary. By way of illustration,
but not limitation, Compensation includes regular compensation such as salary,
wages, overtime, shift differentials, bonuses (other than bonuses offered in
connection with, and as an inducement for, the commencement of employment),
commissions and incentive compensation, but excludes relocation, expense
reimbursements, tuition or other reimbursements, cash payments in lieu of sick
or vacation time benefits and income realized as a result of participation in
any stock option, stock purchase, or similar plan of the Company or any
Designated Subsidiary.
(f) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Company,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
-------------
participant pursuant to the Plan.
<PAGE>
(h) "Corporate Transaction" means a sale of all or substantially all
---------------------
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(i) "Designated Subsidiaries" means the Subsidiaries which have been
-----------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if the issuance of options to such
Subsidiary's Employees pursuant to the Plan would not cause the Company to incur
adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Offering Date" means the first business day of each Offering
-------------
Period of the Plan, except that in the case of an individual who becomes an
eligible Employee after the first business day of an Offering Period but prior
to the first business day of the fourth month of such Offering Period, the term
"Offering Date" shall mean the first business day of the fourth month coinciding
with or next succeeding the day on which that individual becomes an eligible
Employee.
Options granted after the first business day of an Offering Period
will be subject to the same terms as the options granted on the first business
day of such Offering Period except that they will have a different grant date
(thus, potentially, a different exercise price) and, because they expire at the
same time as the options granted on the first business day of such Offering
Period, a shorter term.
(m) "Offering Period" means a period of six (6) months commencing on
---------------
May 1 and November 1 of each year, except for the first Offering Period as set
forth in Section 4(a).
(n) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this Employee Stock Purchase Plan.
----
(p) "Purchase Date" means the last day of each Offering Period of the
-------------
Plan.
(q) "Purchase Price" means with respect to an Offering Period an
--------------
amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below)
of a Share of Common Stock on the Offering Date or on the Purchase Date,
whichever is lower; provided, however, that in the event (i) of any increase in
the number of Shares available for issuance under the Plan as a result of a
shareholder-approved amendment to the Plan, and (ii) all or a portion of such
2
<PAGE>
additional Shares are to be issued with respect to an Offering Period that is
underway at the time of such increase ("Additional Shares"), and (iii) the Fair
-----------------
Market Value of a Share of Common Stock on the date of such increase (the
"Approval Date Fair Market Value") is higher than the Fair Market Value on the
-------------------------------
Offering Date for any such Offering Period, then in such instance the Purchase
Price with respect to Additional Shares shall be 85% of the Approval Date Fair
Market Value or the Fair Market Value of a Share of Common Stock on the Purchase
Date, whichever is lower.
(r) "Share" means a share of Common Stock, as adjusted in accordance
-----
with Section 18 of the Plan.
(s) "Subsidiary" means a corporation, domestic or foreign, of which
----------
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by a series of
----------------
Offering Periods of six (6) months' duration, with new Offering Periods
commencing on or about May 1 and November 1 of each year (or at such other time
or times as may be determined by the Board of Directors). The first Offering
Period shall commence on the effective date of the Registration Statement on
Form S-1 for the initial public offering of the Company's Common Stock (the "IPO
---
Date") and continue until April 30, 2000. The Plan shall continue until
- ----
terminated in accordance with Section 19 hereof. The Board of Directors of the
Company shall have the power to change the duration and/or the frequency of
Offering Periods with respect to future offerings without shareholder approval
if such change is announced at least five (5) days prior to the scheduled
beginning of the first Offering Period to be affected.
3
<PAGE>
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's Human Resources Department prior to the applicable
Offering Date, unless a later time for filing the subscription agreement is set
by the Board for all eligible Employees with respect to a given Offering Period.
The subscription agreement shall set forth the percentage of the participant's
Compensation (subject to Section 6(a) below) to be paid as Contributions
pursuant to the Plan.
(b) Payroll deductions shall commence on the first full payroll paid
following the Offering Date and shall end on the last payroll paid on or prior
to the Purchase Date of the Offering Period to which the subscription agreement
is applicable, unless sooner terminated by the participant as provided in
Section 10.
6. Method of Payment of Contributions.
----------------------------------
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than fifteen percent (15%) of such participant's Compensation on
each payday during the Offering Period. All payroll deductions made by a
participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan
as provided in Section 10, or, on one occasion only during an Offering Period
may decrease and on one occasion only during an Offering Period may increase the
rate of his or her Contributions with respect to the Offering Period by
completing and filing with the Company a new subscription agreement authorizing
a change in the payroll deduction rate. The change in rate shall be effective as
of the beginning of the next calendar month following the date of filing of the
new subscription agreement, if the agreement is filed at least ten (10) business
days prior to such date and, if not, as of the beginning of the next succeeding
calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased during any Offering Period scheduled to end
during the current calendar year to 0%. Payroll deductions shall re-commence at
the rate provided in such participant's subscription agreement at the beginning
of the first Offering Period which is scheduled to end in the following calendar
year, unless terminated by the participant as provided in Section 10.
7. Grant of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided however that the maximum number of
Shares an Employee may purchase during each Offering Period
4
<PAGE>
shall be 2,000 shares (on a post-split basis) (subject to any adjustment
pursuant to section 19 below,) and provided further that such purchase shall be
subject to the limitations set forth in Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined based on the closing sales
-----------------
price of the Common Stock for such date (or, in the event that the Common Stock
is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(Nasdaq) National Market or, if such price is not reported, the mean of the bid
and asked prices per share of the Common Stock as reported by Nasdaq on such
date or, in the event the Common Stock is listed on a stock exchange, the Fair
Market Value per share shall be the closing sales price on such exchange on such
date (or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported in The Wall Street Journal.
-----------------------
For purposes of the Offering Date under the first Offering Period under the
Plan, the Fair Market Value of a share of the Common Stock of the Company shall
be the Price to Public as set forth in the final prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424 under the Securities Act
of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on the Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after the Purchase Date of each
--------
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, of the Shares purchased upon exercise of his or her option. No
fractional Shares shall be issued; any payroll deductions accumulated in a
participant's account which are not sufficient to purchase a full Share shall be
retained in the participant's account for the subsequent Offering Period,
subject to earlier withdrawal by the participant as provided in Section 10
below. Any other amounts left over in a participant's account after a Purchase
Date shall be returned to the participant.
10. Withdrawal; Termination of Employment.
-------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
the Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of Shares will be made during the Offering
Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death,
5
<PAGE>
the Contributions credited to his or her account will be returned to him or her
or, in the case of his or her death, to the person or persons entitled thereto
under Section 14, and his or her option will be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
12. Stock.
-----
(a) Subject to adjustment as provided in Section 18, the maximum
number of Shares which shall be made available for sale under the Plan shall be
250,000 Shares (on a post-split basis), plus an annual increase of the first day
of each of the Company's fiscal years in 2001, 2002 and 2003 equal to the lesser
of (i) 250,000 Shares (on a post-split basis), (ii) two percent (2.00%) of the
Shares outstanding on the last day of the immediately preceding fiscal year, or
(iii) such lesser number of Shares as is determined by the Board. The Shares may
be authorized, but unissued, or reacquired Common Stock. If the Board determines
that, on a given Purchase Date, the number of shares with respect to which
options are to be exercised may exceed (i) the number of shares of Common Stock
that were available for sale under the Plan on the Offering Date of the
applicable Offering Period, or (ii) the number of shares available for sale
under the Plan on such Purchase Date, the Board may in its sole discretion
provide (x) that the Company shall make a pro rata allocation of the Shares of
Common Stock available for purchase on such Offering Date or Purchase Date, as
applicable, in as uniform a manner as shall be practicable and as it shall
determine in its sole discretion to be equitable among all participants
exercising options to purchase Common Stock on such Purchase Date, and continue
all Offering Periods then in effect, or (y) that the Company shall make a pro
rata allocation of the shares available for purchase on such Offering Date or
Purchase Date, as applicable, in as uniform a manner as shall be practicable and
as it shall determine in its sole discretion to be equitable among all
participants exercising options to purchase Common Stock on such Purchase Date,
and terminate any or all Offering Periods then in effect pursuant to Section 19
below. The Company may make pro rata allocation of the Shares available on the
Offering Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional Shares for issuance
under the Plan by the Company's shareholders subsequent to such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
6
<PAGE>
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
14. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and/or cash, if any, from the participant's account
under the Plan in the event of such participant's death prior to or subsequent
to the end of an Offering Period but prior to delivery to him or her of such
Shares and/or cash. If a participant is married and the designated beneficiary
is not the spouse, spousal consent shall be required for such designation to be
effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such Shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such Shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
15. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 14) by the participant. Any such attempt
at assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 10.
16. Use of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
17. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
7
<PAGE>
18. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the shareholders of
----------
the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised and the number of Shares which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), the maximum number of shares of Common Stock
--------
which may be purchased by a participant in an Offering Period, the number of
shares of Common Stock set forth in Section 12(a) above, and the price per Share
of Common Stock covered by each option under the Plan which has not yet been
exercised, shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock (including any
such change in the number of Shares of Common Stock effected in connection with
a change in domicile of the Company), or any other increase or decrease in the
number of Shares effected without receipt of consideration by the Company;
provided however that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of Shares subject to
an option.
(b) Corporate Transactions. In the event of a dissolution or
----------------------
liquidation of the Company, the Offering Period then in progress will terminate
immediately prior to the consummation of such action, unless otherwise provided
by the Board. In the event of a Corporate Transaction, each option outstanding
under the Plan shall be assumed or an equivalent option shall be substituted by
the successor corporation or a parent or Subsidiary of such successor
corporation. In the event that the successor corporation refuses to assume or
substitute for outstanding options, the Offering Period then in progress shall
be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as
-----------------
of which date any Offering Period then in progress will terminate. The New
Purchase Date shall be on or before the date of consummation of the transaction
and the Board shall notify each participant in writing, at least ten (10) days
prior to the New Purchase Date, that the Purchase Date for his or her option has
been changed to the New Purchase Date and that his or her option will be
exercised automatically on the New Purchase Date, unless prior to such date he
or she has withdrawn from the Offering Period as provided in Section 10. For
purposes of this Section 18, an option granted under the Plan shall be deemed to
be assumed, without limitation, if, at the time of issuance of the stock or
other consideration upon a Corporate Transaction, each holder of an option under
the Plan would be entitled to receive upon exercise of the option the same
number and kind of shares of stock or the same amount of property, cash or
securities as such holder would have been entitled to receive upon the
occurrence of the transaction if the holder had been, immediately prior to the
transaction, the holder of the number of Shares of Common Stock covered by the
option at such time (after giving effect to any adjustments in the number of
Shares covered by the option as provided for in this Section 18); provided
however that if the consideration received in the transaction is not solely
common stock of the successor corporation or its parent (as defined in Section
424(e) of the Code), the Board may, with the consent of the successor
8
<PAGE>
corporation, provide for the consideration to be received upon exercise of the
option to be solely common stock of the successor corporation or its parent
equal in Fair Market Value to the per Share consideration received by holders of
Common Stock in the transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
19. Amendment or Termination.
------------------------
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 18, no such termination of the Plan may
affect options previously granted, nor may an amendment to the Plan make any
change in any option previously granted which adversely affects the rights of
any participant, provided that the Plan or an Offering Period may be terminated
or amended by the Board by the Board's setting a new Purchase Date with respect
to an Offering Period then in progress if the Board determines that termination
or amendment of the Plan and/or the Offering Period is in the best interests of
the Company and the shareholders or if continuation of the Plan and/or the
Offering Period would cause the Company to incur adverse accounting charges as a
result of a change after the effective date of the Plan in the generally
accepted accounting rules applicable to the Plan. In addition, to the extent
necessary to comply with Rule 16b-3 under the Exchange Act, or under Section 423
of the Code (or any successor rule or provision or any applicable law or
regulation), the Company shall obtain shareholder approval in such a manner and
to such a degree as so required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods, limit the
frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
9
<PAGE>
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
22. Term of Plan; Effective Date. The Plan shall become effective upon
----------------------------
the IPO Date. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 19.
23. Additional Restrictions of Rule 16b-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
10
<PAGE>
ORATEC INTERVENTIONS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
----------------------
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the Oratec
Interventions, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the
----
Offering Period ______________, ____ to _______________, ____, and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my Compensation
on each payday following a full payroll period, as those terms are defined in
the Plan, applied to this purchase. I understand that this amount must not be
less than 1% and not more than 15% of my Compensation during the Offering
Period. (Please note that no fractional percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can decrease or increase the rate of my Contributions on one
occasion only with respect to each rate change during an Offering Period by
completing and filing a new Subscription Agreement with such decrease or
increase taking effect as of the first payroll date following the date of filing
of the new Subscription Agreement, if filed at least five (5) business days
prior to such payroll date. Further, I may change the rate of deductions for
future Offering Periods by filing a new Subscription Agreement, and any such
change will be effective as of the beginning of the next Offering Period. In
addition, I acknowledge that, unless I discontinue my participation in the Plan
as provided in Section 10 of the Plan, my election will continue to be effective
for each successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "Oratec Interventions, Inc. 1999 Employee Stock
Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
____________________________________
____________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) _____________________________________
(First) (Middle) (Last)
________________________ _____________________________________
(Relationship) (Address)
_____________________________________
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Offering Date (the first day of the Offering
Period during which I purchased such shares) or within 1 year after the Purchase
Date, I will be treated for federal income tax purposes as having received
ordinary compensation income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares on the Purchase Date over
the price which I paid for the shares, regardless of whether I disposed of the
shares at a price less than their fair market value at the Purchase Date. The
remainder of the gain or loss, if any, recognized on such disposition will be
treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
------------------------------------------------------------------------
date of any such disposition, and I will make adequate provision for federal,
- -----------------------------------------------------------------------------
state or other tax withholding obligations, if any, which arise upon the
- ------------------------------------------------------------------------
disposition of the Common Stock. The Company may, but will not be obligated to,
- -------------------------------
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the
<PAGE>
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE: ___________________________
SOCIAL SECURITY #: ___________________
DATE: ________________________________
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
______________________________________
(Signature)
______________________________________
(Print name)
<PAGE>
ORATEC INTERVENTIONS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the Oratec Interventions, Inc. 1999 Employee Stock Purchase Plan (the "Plan")
----
for the Offering Period that began on _________ ___, _____. This withdrawal
covers all Contributions credited to my account and is effective on the date
designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:___________________ ________________________________
Signature of Employee
________________________________
Social Security Number
<PAGE>
Exhibit 10.12
DISTRIBUTION AGREEMENT
THIS AGREEMENT is between Oratec Interventions, Inc., a California corporation,
with its principal place of business at 3700 Haven Court, Menlo Park, California
94025, hereinafter referred to a "Oratec" and DePuy AcroMed, Inc., an Ohio
corportion with offices at 3303 Carnegie Ave., Cleveland, Ohio 44115 hereinafter
referred to as "DePuy," effective as of the 30 day of March, 1999 (the
"Effective Date").
WHEREAS, Oratec has developed, prototyped, and/or manufactured and verified
clinically products used to apply heat to the spine to denervate and shrink
spinal disc tissue, as further described herein; and
WHEREAS, DePuy has developed an extensive worldwide distribution capability and
desires to distribute the Products to surgeons worldwide, with the exception of
the united States; and
WHEREAS, Oratec desires to contract with DePuy to assist Oratec in conducting
selected clinical evaluations with surgeons outside the United States and in
obtaining regulatory approval for the Products outside the United States, and to
exclusively market, distribute and sell the Products, as further described
herein; and
WHEREAS, DePuy is willing to contract with Oratec to assist Oratec in conducting
such selected clinical evaluations, obtaining regulatory approval outside the
Untied States and to exclusively market, distribute and sell the Products;
NOW, THEREFORE, in consideration of the mutual covenants set forth below, the
parties agree as follows:
1. DEFINITIONS
1.1 "Products" shall mean all Oratec products developed, designed,
intended or sold for the spine or neurosurgery markets for use by any
medical practitioner, including any improvements or variations
thereto. The SpineCATH Intradiscal Catheter Product including any
modification thereto, may not be sold into any other medical or
surgical specialty without the prior written consent of DePuy. All
such Products currently in existence are listed on Appendix A.
Appendix A shall be modified in writing as additional Products,
including improvements and variations thereto, become available.
1.2 "New Products" means those Oratec products developed, designed,
intended or sold for the spine or neurosurgery markets for use by any
medical practitioner which perform a significantly different function
or perform in a significantly different manner from Products.
- ----------------------------------
*** Certain information in this document has been omitted and filed separately
with the Securities Exchange Commission. Confidential Treatment has been
requested with respect to the omitted portions.
<PAGE>
1.3 "Specifications" shall mean the detailed written specifications for a
Product in such form as Oratec shall provide and DePuy shall accept.
1.4 "Territory" shall mean the entire world, excluding the United States.
2. APPOINTMENT OF DEPUY AS EXCLUSIVE DISTRIBUTOR
2.1 Oratec hereby grants DePuy the exclusive right to market, sell and
distribute the Products in the Territory.
2.2 Provided Oratec has first offered the New Products to DePuy and DePuy
has declined the opportunity to market the New Products, Oratec may
freely negotiate with other parties to market the New Products. DePuy
shall have ninety (90) days within which to accept or reject any such
opportunity to market New Products. In the case in which Oratec had
first offered the New Products to DePuy and the parties were unable to
negotiate mutually acceptable terms, Oratec is free to contact with
other parties provided Oratec does not accept terms inferior to
DePuy's last offer. In the case in which the third party's offered
terms are equal to or inferior to DePuy's last offer, Oratec will
contract with DePuy under the terms of DePuy's last offer.
2.3 If a third party appointed by Oratec to sell Oratec products for non-
spine applications sells such products for spine applications within
the Territory, Oratec shall take all reasonable steps to prevent such
occurrences by said third party. Sales by third parties resulting
form such occurrences shall be applied toward DePuy's minimum purchase
requirements. DePuy shall not sell the Products for non-spine
applications. If a Distributor appointed by DePuy to sell the
Products sells such Products for non-spine applications within the
Territory, DePuy shall take all reasonable steps to prevent such
occurrences by said Distributor.
3. MUTUAL COOPERATION
3.1 It is the parties intention to cooperate and communicate regarding the
development and marketing of the Products. The parties agree to make
reasonable efforts to share general information received by either
party on the Products and competitive activities.
4. INTELLECTUAL PROPERTY
4.1 Any and all technology and intellectual property developed by Oratec
used in development or manufacture of a Product shall be the property
of Oratec. Oratec shall have sole responsibility for filing and
maintaining any and all patents and patent applications which address
or cover its Products.
-2-
<PAGE>
5. ORATEC'S COVENANTS
5.1 Oratec hereby agrees to supply the Products to DePuy in accordance
with the terms set forth in this Agreement.
5.2 Oratec will work actively to make available in sufficient quantities
Products that meet mutually agreed upon specifications to meet DePuy's
requirements; provided that, shipment of all orders by Oratec shall be
on a "first in, first out" inventory basis, and may be subject to
delays due to transportation difficulties, government regulations,
inability to obtain new materials, and other circumstances beyond
Oratec's control.
5.3 Oratec will extend technical assistance to DePuy as DePuy may
reasonably request to assist in the marketing and sale of the Products
at periodic intervals to be agreed upon by Oratec and DePuy. The
parties will agree upon a mutually acceptable technical training
program.
5.4 Oratec will provide training to the DePuy sales force on the proper
use of the Products at times and places mutually agreed upon by the
parties throughout the duration of this Agreement.
5.5 Oratec will use commercially reasonable efforts to obtain FDA
approval, including 510(k) approval, ISO 9000 Certification and obtain
CE marking(s) for each Product prior to the sale to DePuy of such
Product.
5.6 Oratec agrees to cooperate with DePuy and supply DePuy with any
information required by DePuy to allow DePuy to respond to or comply
with any inquiry or regulation from any foreign government agency
regarding the use, marketing, sales or distribution of Products.
5.7 Oratec will as soon as possible after receipt of notice advise DePuy
of any claim, complaint, suit or action involving any Product sold by
DePuy or involving DePuy's marketing, sale or distribution of the
Products if such claim, complaint, suit or action relates to a Product
performance issue or could have a potential adverse impact on DePuy.
5.8 Oratec shall sell DePuy a reasonable number of demonstration samples
of Products at the cost specified in Appendix B, for use by the DePuy
sales force for customer presentations, for presentations at seminars,
meetings, conventions and the like. The samples will be marked "For
demonstration only, not for human use."
6. ORATEC'S REPRESENTATIONS AND WARRANTIES
6.1 Oratec shall have full title and full right to manufacture all
Products sold to DePuy hereunder.
-3-
<PAGE>
6.2 Oratec represents and warrants that to the best of Oratec's knowledge,
as of the date of this Agreement, the distribution, marketing,
promotion and sale of Products by DePuy will not infringe any patents
held by persons who are not parties to this Agreement.
6.3 To Oratec's knowledge, there are no licenses or other agreements
relating to the Products that would affect Oratec's ability to
manufacture and deliver the Products or substantially equivalent
products and none are contemplated or anticipated by Oratec, except
for an agreement now in place with Oratec's vendor for generators.
6.4 All necessary governmental approvals required by the federal, state
and/or local governments of the United States for the Products will
have been obtained by Oratec prior to the sale of the Products to or
by DePuy, and will be obtained by Oratec should the need arise in the
future.
6.5 To Oratec's knowledge, all Products comprising each shipment or other
delivery made to DePuy are and, at all times, will be as of the date
of such shipment or delivery, in compliance with all applicable United
States laws, as well as all regulations, rules, declarations,
interpretations and orders issued thereunder.
6.6 To Oratec's knowledge, no Product is in violation of any United States
law, statute, executive order or regulation regarding packaging,
labeling, manufacturing, distribution, or sale. Oratec shall use
commercially reasonable efforts to comply with any applicable foreign
law, statute, executive order or regulation regarding, packaging,
labeling, manufacturing, distribution, or sale made known to Oratec.
6.7 Oratec has no pre-existing distribution or other arrangements
concerning the Products in any country located within the Territory
that would affect DePuy's ability to sell the Products in the
Territory or DePuy's right to select and appoint Distributors or
affiliates to sell the Products in the Territory.
7. PACKAGING AND LABELING
7.1 DePuy will use the Oratec trademark in marketing the Products unless
prohibited by law or regulation. DePuy will acknowledge Oratec and
its patent pending or patented technology in Product promotional
materials. DePuy shall not modify any Oratec trademark in any way
without Oratec's prior written approval or use any Oratec trademark
with any goods or services other than the Products.
7.2 During the term of this Agreement, the parties may, at their option,
indicate on signs, advertising, publicity, or other sales, marketing,
or promotional media or materials that DePuy is the authorized dealer
or distributor of the Products for spine applications. Neither party
shall otherwise use the other party's name,
-4-
<PAGE>
trademarks, service marks, trade names, commercial symbols or logos
without having received the other party's prior written approval.
7.3 Upon termination of this Agreement, each party's license in or right
to use the other party's name, trademarks, services marks, trade
names, commercial symbols or logos shall terminate, except that DePuy
shall have the right to continue such use with respect to any
inventory of Products not purchased by Oratec as provided by Section
20.1.
7.4 Oratec will provide the Products to DePuy sterile and in standard
packaging. In the event that Oratec's sterilization processes or
standard product packaging is unacceptable to any regulatory or
government agency, Oratec shall modify its sterilization processes
and/or standard product packaging to comply with the requirements of
such regulatory or government agency. The parties shall evaluate the
costs associated with any such required modifications by country,
comparing the country sales forecast with extraordinary costs that
Oratec would have to incur.
8. DEPUY'S COVENANTS
8.1 DePuy hereby agrees to sell the Products through its marketing and
sales distribution network comprised of independent sales
representatives (the "Distributors"), through employees who specialize
in geographical regions or in designated professional fields, or
through affiliated companies, provided that any such affiliated
company is not a competitor of Oratec. DePuy shall have the right to
select and appoint all Distributors and affiliates to market and sell
the Products in the Territory. While DePuy has exclusive distribution
rights in the Territory under this Agreement, DePuy will obtain the
Products for sale in the Territory only from Oratec.
8.2 Depuy will actively promote the Products and will provide its
Distributors and employees with the following:
1. Product samples
2. Appropriate training related to Products
3. Exposure of Products at appropriate training courses and
conventions
8.3 Provided the Products are available in adequate quantities, DePuy will
work to market the Products by including them as important promotional
Products for its Distributors in 1999 and 2000. For purposes of this
Section 8.3, adequate quantities shall mean Product quantities
necessary to support DePuy's sales forecasts for the Products. DePuy
will provide to Oratec an initial forecast of sales for a one year
period for such Products. When the parties agree to develop and
market a Product not included in the original list of Products in
Appendix A, DePuy will provide Oratec with a sales forecast for that
Product within 30 days of the date a Product is available for sale and
marketing. All such forecasts will be
-5-
<PAGE>
updated on a quarterly basis. Thereafter, DePuy will provide Oratec
on the last day of October of each year during the duration of this
Agreement, with a forecast for each forthcoming contract year for
all Products sold by DePuy at that time in order to properly provide
for all accounts, insure prompt service to customers and avoid out-
of-stock conditions. Forecasts shall be provided on a country basis
when it may be necessary to reduce minimums due to late regulatory
approvals and/or mutual decisions not to market in a particular
country.
8.4 DePuy will show the Products at major meetings in 1999 and 2000 and
will be responsible for all costs of exhibiting at such major meetings
as well as local conventions and trade shows unless otherwise agreed
by Oratec prior to such meeting, convention or trade show.
8.5 DePuy will take reasonable and necessary steps to provide that DePuy's
marketing, sale and distribution of the Products complies with
applicable government regulations throughout the Territory and will
provide reasonable assistance to Oratec as Oratec may reasonably
request to allow Oratec to comply with regulatory requirements of
government agencies throughout the Territory regarding the use, sale
and distribution of the Products.
8.6 DePuy shall, as soon as possible after receipt of notice, advise
Oratec of any claim, suit, or other action regarding any of the
Products sold by DePuy.
8.7 DePuy will prepare and submit import licenses, registrations or other
listings and regulatory approvals for the sale and import of the
Products in countries within the Territory. DePuy may use its system
of independent companies and Distributors throughout the Territory to
assist in obtaining import licenses and/or approvals. DePuy will
obtain necessary certifications for the Products where required. Upon
any termination of this Agreement other than for a material breach by
Oratec which remains uncured by Oratec for more than forty-five (45)
days after receipt of written notice from DePuy, DePuy shall transfer
all import licenses, registrations, listings and regulatory approvals
for the sale and import of the Products to Oratec, provided that
Oratec reimburses DePuy at the time of transfer for the cost to DePuy
to obtain and maintain all such import licenses, registrations,
listings and regulatory approvals. Any such transfer shall take place
immediately upon receipt of the foregoing payment and Oratec's
contractual commitment to buy back all inventory of Products
maintained by DePuy, its affiliates or its Distributors. DePuy makes
no representation or warranty regarding the transferability of any of
the foregoing licenses, registrations, listings, and approvals.
8.8 DePuy will provide proposed Product literature to Oratec for approval
of the content of Product marketing claims. Oratec will respond to
DePuy's request for Product literature approval within ten (10)
working days.
-6-
<PAGE>
8.9 DePuy will provide required multilingual labeling to Oratec for
placement on the Product packaging during manufacture.
-7-
<PAGE>
9. PRICES
9.1 Initial Prices for the Products shall be as set forth on Appendix B.
Prices for all Products will be based on a transfer price (as
hereinafter defined) that allows DePuy, for the duration of this
Agreement and any extension thereof, to receive a gross margin of at
least ***, as exemplified in Appendix B. Transfer price
shall mean the price charged to DePuy by Oratec for the Products.
Oratec shall give DePuy at least six (6) months prior written notice
of any price increase. During the first nine (9) months that this
Agreement is in effect, Oratec shall provide probes to DePuy at ***
for each probe and catheters to DePuy at *** for each catheter. The
transfer price will then be revised to reflect a *** gross margin if
the average end user selling price equals or exceeds *** per probe
and *** per spine catheter. The limit on the probe and spine
catheter transfer prices will be set at *** and ***, respectively.
9.2 DePuy retains the right to select its customers and to sell the
Products at such prices and on such terms and conditions as it may
elect. DePuy intends to market the Products at competitive pricing
that produces maximum revenues, but DePuy shall retain the right to
sell the Products at a discount where DePuy, in its sole discretion,
deems it necessary.
10. CLINICAL TRIALS
10.1 In the event that a limited clinical trial or similar testing of any
Product is required to obtain governmental approval outside the Untied
States before sale and use of the Product, the parties will conduct
such trial(s) jointly. DePuy will coordinate the trials through
surgeons and other medical personnel and health care providers.
Oratec will provide reusable and disposable products for such trials
at no costs to DePuy. However, any reuseable and disposable products
such as generators, needle benders, cables, etc. will remain the
property of Oratec and will be returned to Oratec when the need for
the products has ended. Should extensive clinical trials be required
for a Product outside the United States, the parties will determine a
mutually acceptable plan which will include financial incentives to
DePuy regarding such extensive clinical trials.
11. ORDERING
11.1 All forecasts shall be non-binding. Notwithstanding any forecast
made by DePuy, DePuy shall place firm written purchase orders
identifying the Products ordered and requested delivery date(s) with
Oratec on DePuy purchase order forms with at least 90 days lead time
to allow Oratec to optimize inventory and production patterns. Oratec
will ship Product pursuant to such purchase orders within ninety (90)
days of the receipt by Oratec of such purchase order.
*** CONFIDENTIAL TREATMENT REQUESTED
-8-
<PAGE>
11.2 DePuy will have *** purchase requirements in 1999 ***. Oratec and
DePuy will agree upon minimum purchase requirements for the year 2000
by October 31, 1999. If annual minimum purchase requirements for the
year 2000 are not agreed to by October 31, 1999, the parties shall
engage a mutually acceptable third party to consult with them to
develop an acceptable compromise. Should the parties be unable to
select a mutually acceptable third party to develop an acceptable
compromise, the parties shall engage in arbitration as provided in
Section 11.4. Minimum purchase requirements for subsequent years that
the Agreement is in effect will be established in the same manner.
DePuy shall have no obligation to purchase the minimum purchase
requirements, provided that failure to do so shall trigger the rights
provided to Oratec in Section 11.3. DePuy will generate a purchase
order for samples and demo equipment within 30 days of the effective
date of this Agreement. In the event that regulatory approvals
required to market and sell the Products in any country located within
the Territory are not secured or are delayed, minimum purchase
requirements for the Products shall be appropriately reduced.
11.3 Beginning with the year 2000 and for any subsequent year this
Agreement is in effect, provided that Oratec has supplied adequate
quantities of Products that meet Specifications, if less than
*** of the mutually agreed upon annual minimum purchase
requirement for all Products is not achieved by DePuy by the end of
any applicable year, DePuy's exclusive distribution rights under
this Agreement may become non-exclusive at Oratec's option, written
notice of which must be received by DePuy prior to November 1st of
such year. Upon receipt of such written notice, DePuy may make up
any shortfall in the minimum purchase requirement through a purchase
of Products (the "Shortfall Purchase") by issuing a purchase order
by December 1st of such year, specifying delivery by December 31st
or as soon as possible thereafter. If DePuy makes this Shortfall
Purchase, DePuy shall retain its exclusive distribution rights. If
DePuy does not make the Shortfall Purchase, DePuy's exclusive
distribution rights, may, at Oratec's option, become non-exclusive. If
the Shortfall Purchase is not made, and if at least *** of the
mutually agreed upon annual minimum purchase requirement for all
Products is not achieved by DePuy in the next consecutive year this
Agreement is in effect, and DePuy does not make a Shortfall Purchase
in that next consecutive year, Oratec may, upon written notice to
DePuy received within sixty (60) days after the end of such year,
terminate this Agreement. In any event, the mutually agreed upon
annual minimum purchase requirement for any year this Agreement is in
effect will be considered to be met if at least *** of such minimum
purchase requirement has been met by DePuy.
11.4 All disputes, controversies, or differences arising between the
parties hereto, out
*** CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE>
of, or in relation to, or in connection with, minimum purchase
requirements which cannot be settled amicably by the parties shall be
resolved by arbitration under the Rules of Procedure of the American
Arbitration Association (the "Rules") then prevailing arbitration
shall be by a single arbitrator chosen by the parties, provided that
if the parties fail to agree and to appoint such single arbitrator
within thirty (30) days after demand for arbitration, the arbitrator
shall be chosen in accordance with the Rules. The decision of the
arbitrator shall be final and binding on the parties with respect to
minimum purchase requirements.
12. PAYMENT
12.1 Depuy shall be responsible for the collection of all amounts due from
customers for the Products. DePuy shall pay for its purchases of
Products (except for those Products returned pursuant to Section 15)
within *** days of its receipt of the specific Products. A
late penalty of *** or the maximum rate permitted by law shall be
levied on outstanding balances for every month extending beyond the
*** day payment period beginning with the *** day. DePuy shall be
responsible for the payment of all taxes arising from the purchase and
sale of the Products by DePuy except for taxes on the income of
Oratec. These taxes include import duties, forwarding taxes, value
added taxes and any similar taxes imposed by the jurisdictions in
which the Products are sold.
13. SHIPPING
13.1 Oratec shall deliver Products directly to DePuy via common or
contract carrier. All costs of transportation and shipping to DePuy's
facilities in Cleveland, Ohio, Warsaw, Indiana, Raynham,
Massachusetts, or Leeds, England will be paid by DePuy. Title to
shall transfer and risk of loss of the Products shall pass to DePuy
upon DePuy's receipt of the Products. Notwithstanding the foregoing,
any fees to expedite shipments to DePuy at DePuy's request will be
borne by DePuy, unless the need for expedited shipment was due to
Oratec's failure to deliver promised quantities on time.
14. WARRANTY
14.1 Oratec represents and warrants to DePuy that all Products supplied in
connection with this Agreement shall be of merchantable quality, free
from defects in material and workmanship and shall be manufactured and
provided in accordance and conformity with the Specifications and in
compliance with this Agreement.
14.2 DePuy may return non-conforming and/or defective Products, including
Products which malfunction or fail to operate, or bear a sterilization
date at the time of receipt by DePuy that is more than sixty (60) days
old, to Oratec. Oratec shall
*** CONFIDENTIAL TREATMENT REQUESTED
-10-
<PAGE>
replace or repair such nonconforming and/or defective Products at no
cost to DePuy or the customer. Replacement of such non-conforming
and/or defective Products includes payment of DePuy's reasonable
shipping costs, both from and to Oratec. Oratec shall replace or
repair such non-conforming and/or defective Products promptly provided
that the non-conformance or defect was caused by Oratec. Oratec shall
have no obligation to replace or repair Product adulterated, misused
or repackaged by another party without the previous written approval
of Oratec.
14.3 NEITHER PARTY SHALL HAVE ANY LIABILITY TO EACH OTHER OR TO ANY THIRD
PARTY FOR ANY PUNITIVE, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, OR THE
MANUFACTURE, SALE SUPPLY, DISTRIBUTION, MARKETING, ORDERING OR
DELIVERY OF THE PRODUCTS, INCLUDING BY WAY OF EXAMPLE AND NOT BY WAY
OF LIMITATION, ANY DAMAGES, EXPENSES OR LOSSES INCURRED BY REASON OF
LOST REVENUES, LOST PROFITS, COSTS OF SUBSTITUTE PRODUCTS, AND ANY
SIMILAR AND DISSIMILAR DAMAGES, EXPENSES OR LOSSES EVEN IF THAT PARTY
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, EXPENSES OR
LOSSES. NOTWITHSTANDING THE ABOVE, NOTHING IN THIS AGREEMENT SHALL BE
CONSTRUED TO LIMIT EITHER OF THE PARTIES' LIABILITY FOR DAMAGES OR
PERSONAL INJURIES, INCLUDING PROPERTY DAMAGE AND DEATH, SUFFERED BY
ANY THIRD PARTY AS A RESULT OF ACTIONS OR OMISSIONS OF SUCH PARTY.
LEGAL RELATIONSHIP AND INDEMNIFICATION
15.1 DePuy is an independent contractor and the relationship between
Oratec and DePuy is that of Vendor and Vendee. Nothing herein is
intended or shall be construed, either express or implied, to
authorize either party to create or assume any liability or obligation
of any kind for or on behalf of the other party. Neither party will
be considered or will represent itself as the agent or legal
representative of the other party for any purpose whatsoever.
15.2 The parties hereto are each responsible for their own acts, alleged
acts or omissions and respectively agree to protect, indemnify, defend
and hold harmless each other and any affiliate from and against any
and all claims, losses, demands and liabilities, including attorneys'
fees and court costs, which may arise therefrom.
15.3 Notwithstanding anything in this Agreement to the contrary, Oratec
agrees to indemnify and hold harmless DePuy from any loss, claim or
judgment, including reasonable costs and expenses of defending same,
arising out of bodily injury, property damage or any other damage or
injury which is caused by any defect in
-11-
<PAGE>
the design, material, or manufacture of a Product, but excluding any
oral or written statements or representations by DePuy or its
distributors or employees concerning the Products inconsistent with
Oratec's training or literature. Oratec shall have control of the
defense of any litigation arising out of alleged defect in the
design, material or manufacture of a Product and DePuy agrees to
cooperate with Oratec in such defense.
15.4 DePuy agrees to indemnify and hold harmless Oratec from any loss,
claim or judgment, including reasonable costs and expenses of
defending same, arising out of any bodily injury caused by any
negligent or intentional misrepresentation concerning the Products by
DePuy or its sales employees inconsistent with Oratec's training or
literature, to the extent that Oratec is damaged due to such negligent
or intentional misrepresentation.
15.5 Should any person assert a claim against DePuy based on the alleged
infringement of a patent or other protected intellectual property
right related to a Product, Oratec agrees to indemnify and hold
harmless DePuy from and against any and all losses, claims, or
judgments, including reasonable costs and expenses of defending same,
arising directly or indirectly from any such claims of infringement of
patents or other protected intellectual property rights.
15.6 Oratec has or will have prior to the sale of the Products by DePuy
and will maintain at all times while this Agreement is in effect, a
product liability insurance policy providing at least *** dollars
(***) coverage per occurrence and *** dollars (***) aggregate coverage
per policy year, which policy shall either name DePuy as insured or
shall, by endorsement or otherwise, provide such coverage to DePuy for
any claim arising out of the sale of any Product by DePuy. Oratec
shall furnish DePuy with acceptable certificates evidencing such
insurance coverage prior to the release of any Products for clinical
studies or evaluation. Such insurance certificates shall contain a
provision that a thirty (30) day advance written notice will be given
to DePuy prior to any material change or cancellation of such
insurance.
16. ASSIGNMENT AND ***
16.1 Neither party shall have the right to assign this Agreement without
the other's prior written consent, except that either party may assign
its obligations hereunder to an entity under common control with,
controlled by or which controls the assigning party. Notwithstanding
the foregoing, DePuy agrees that it will not assign its obligations
hereunder to any such entity that competes with Oratec.
16.2 In the event that Oratec should desire to ***, Oratec shall notify
DePuy in writing of such desire. DePuy will have *** days after
receipt of such written notice to ***
*** CONFIDENTIAL TREATMENT REQUESTED
-12-
<PAGE>
During such *** day period, *** will not ***. This *** day period does
not constitute ***. The foregoing provision shall not apply if, at the
time of such ***, Oratec's securities are publicly traded.
16.3 If the sale of Oratec's interests in any Products and/or a majority
of it stock and/or assets would result in this Agreement being
assigned to a competitor of DePuy, DePuy may, at its sole option,
continue under the terms of this Agreement for a period of *** after
such assignment or sale. If the sale of Oratec's interests in any
Products and/or a majority of its stock and/or assets would result in
this Agreement being assigned to a third party other than a competitor
of DePuy, DePuy may, at its sole option, continue under the terms of
this Agreement for a period of *** after such assignment or sale.
Following the expiration of such *** or *** month period, the
Agreement shall terminate.
17. CONFIDENTIALITY
17.1 Each party will keep confidential and not disclose to any third
party, without the prior written consent of the disclosing party, any
information received from the other party, including, without
limitation, the technology, capabilities, business plans, operations,
and personnel of the other party (the "Confidential Information").
Confidential Information shall not include: (a) information which is
or later becomes generally available to the public by use, publication
or the like, by a party other than the party receiving the
Confidential Information pursuant to the Agreement; (b) is obtained by
a party on a non-confidential basis from a third party; (c) is in the
possession of the receiving party prior to its disclosure, as is
evidenced by written record; or (d) is required by law to be
disclosed. The obligation of this Section 17 shall continue for a
period of three (3) years from the date of termination of this
Agreement.
18. APPLICABLE LAW
18.1 Any controversy or claim relating to this Agreement, or its breach,
or to the relationship created by this Agreement, shall be resolved
through legal proceedings initiated in the United States District
Court for the Northern District of California. The laws of the State
of California shall control as to all such matters. The parties waive
the right to trial by jury, the right to seek or collect punitive or
exemplary damages, and any claim of consequential damages. If any
portion of this Agreement itself is contrary to law, or declared
invalid or unenforceable by a court of competent jurisdiction, the
remaining provisions shall remain valid and enforceable. The parties
shall consult and use reasonable efforts to agree upon a valid and
enforceable provision as a reasonable substitute for such provision in
the light of the intent of this Agreement.
*** CONFIDENTIAL TREATMENT REQUESTED
-13-
<PAGE>
19. TERMINATION OF AGREEMENT
19.1 The initial term of this Agreement shall be [five] years from the
date first written above. Thereafter, this Agreement will renew for
successive periods of one (1) year each. This Agreement may be
terminated during either the initial term or the renewal term in
accord with the provisions of Sections 19.2, 19.3, 19.4 or 19.5.
19.2 This Agreement will be automatically terminated if a party files a
voluntary petition for bankruptcy or reorganization, is the subject of
an involuntary petition for bankruptcy, has its affairs placed in the
hands of a receiver, enters into a composition for the benefit of
creditors, or is deemed insolvent by a court of competent
jurisdiction.
19.3 This Agreement may also be terminated if a party is in material
breach of this Agreement provided the non-breaching party has provided
at least forty-five (45) days prior written notice and such breach has
not been cured within said forty-five (45) days.
19.4 This Agreement may be terminated by DePuy upon 180 days' prior
written notice to Oratec. Should DePuy provide such written notice of
termination to Oratec, DePuy's distribution rights hereunder shall
become non-exclusive during such 180 day period.
19.5 This Agreement may also be terminated in accordance with the
provisions of Article 11.3.
19.6 This Agreement may be terminated by Oratec at the end of the initial
term upon 180 days' prior written notice to DePuy, which termination
shall take effect at the end of such 180 day period.
20 OBLIGATIONS UPON TERMINATION
20.1 Upon termination or non-renewal of this Agreement by Oratec, DePuy
will return all unsold saleable Products in its possession and will
use commercially reasonable efforts to retrieve unsold saleable
Products from its distributors. DePuy agrees not to market Oratec
Products beyond *** days following termination of this Agreement.
Oratec will reimburse DePuy for such inventory in the following
manner:
Sealed, sterile disposable Product: DePuy cost
Unused generators and equipment: DePuy cost
Demo generators and equipment: Not reimbursable
Oratec will pay inventory-shipping costs unless DePuy initiates
Agreement termination.
20.2 In the event of termination, DePuy may, at its sole option, decide to
make its customer listing available to Oratec.
21. COMPLETE AGREEMENT
21.1 This Agreement constitutes the entire agreement between DePuy and
Oratec. No modifications of this Agreement shall be binding on either
party unless made in writing and signed by both parties, and this
Agreement supersedes and cancels any and all previous contracts,
arrangements or understandings that may have existed or may exist
between the parties, whether written or verbal. There are no
understandings, representations or warranties of any such kind,
expressed or implied, that are not expressly set forth herein. The
language of this Agreement shall for all purposes be construed as a
whole, according to its fair meaning, not strictly for or against
either party, and without regard to identity or status of any person
who drafted all or any part of it.
22. NOTICES
22.1 All notices required under this Agreement shall be sent registered
mail, return receipt requested, or by other means of verified
delivery, or by personal delivery, as follows:
If to Oratec: Oratec Interventions, Inc.
3700 Haven Court
Menlo Park, CA 94025
Attn: President
If to DePuy: DePuy AcroMed, Inc.
3303 Carnegie Ave.
Cleveland, OH 44115
Attn: President
With a copy to: DePuy AcroMed, Inc.
325 Paramount Drive
Raynham, MA 02767
Attn: President
Either party may change its address for notice purposes by notifying
the other party of such change of address, such notice to be as
required herein. Notice is effective when actually received by the
addressee or when the addressee refuses delivery, or is sent by
Registered Mail, Return Receipt Requested, on the fifteen (15th) day
following deposit. If sent by facsimile, notice shall be deemed
effective when sender receives confirmation of receipt.
*** CONFIDENTIAL TREATMENT REQUESTED
-14-
<PAGE>
23. MISCELLANEOUS
23.1 Notwithstanding any other provision in this Agreement, the parties
agree that Sections 4.1, 5.6, 5.7, 7.3, 8.6, 12, 14, 15, 16, 17, 18,
19, and 20 shall survive the termination of this Agreement.
23.2 DePuy may not customize, modify or have customized or modified any
Product. In the event that DePuy should receive a request from a
customer or other party for a customized or modified Product, such
request shall be forwarded to Oratec who will solely be responsible
for response and/or customization or modification of the Product.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date and year first written.
Oratec Interventions, Inc. DePuy AcroMed, Inc.
Date: March 30, 1999 Date: April 1, 1999
-15-
<PAGE>
Appendix A.
Item Number Name / Description
- ----------- ------------------
902002 SpineCATH Intradiscal Catheter
Flexible Intradiscal Catheter specifically designed to provide
precise hearing over a broad intradiscal surface. (IDET
Procedure)
902003 ORAflex ElectroThermal Probe
Unique RF probe featuring a deflectable rip for improved
posterior access in thermal endoscopic herniated disk
treatment.
805017 ORA 50 S ElectroThermal Spine System Generator
Designed specifically for spinal procedures, the ORA 50 S
provides the needed RF output for the SpineCATH and ORAflex
products. Includes foot pedal and power cord.
902004 Needle Introducer (Box of 5)
For use with the SpineCATH Intradiscal Catheter, the 17 gauge
needle provides minimally invasive access to the internal
disc.
802004 Needle Bender
Instrument designed for contouring of the Introducer Needle.
805016 ElectroThermal System Extension Cable
Featuring a universal 4 pin connector, the Extension cable
links either the ORAflex probe or the Intradiscal Catheter to
the generator.
805012/19 Indifferent Electrode Pad
Grounding pad for monopolar applications (ORAflex).
805011/13 Indifferent Electrode Adapter
Plug adapter to facilitate attachment of various indifferent
electrodes.
<PAGE>
DePuy Transfer Spine Products Pricing Schedule
<TABLE>
<CAPTION>
Initial Pricing Transfer Price Demo Price
- --------------- -------------- ----------
<S> <C> <C>
SpineCATH(TM) *** ***
ORAflex(TM) *** ***
SpineCATH Needles *** ***
(box of 5)
Electro Thermal Spine *** ***
Generator
Probe Cable *** ***
</TABLE>
*** CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 25, 1999, in the Registration Statement
(Form S-1 No. 333-82511) and related Prospectus of ORATEC Interventions, Inc.
for the registration of 2,875,000 shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
August 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,157
<SECURITIES> 3,022
<RECEIVABLES> 5,248
<ALLOWANCES> (287)
<INVENTORY> 2,340
<CURRENT-ASSETS> 21,747
<PP&E> 7,840
<DEPRECIATION> (4,567)
<TOTAL-ASSETS> 25,020
<CURRENT-LIABILITIES> 8,895
<BONDS> 0
0
35,816
<COMMON> 2
<OTHER-SE> 656
<TOTAL-LIABILITY-AND-EQUITY> 25,020
<SALES> 12,899
<TOTAL-REVENUES> 12,899
<CGS> 6,261
<TOTAL-COSTS> 11,583
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 339
<INCOME-PRETAX> (5,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,284)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,284)
<EPS-BASIC> (2.16)
<EPS-DILUTED> (2.16)
</TABLE>
