<PAGE>
As filed with the Securities and Exchange Commission on January 31, 2000
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 Classification Identification Number)
Incorporation or Code Number)
Organization)
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)
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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)
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Copies to:
Mark B. Weeks Patrick T. Seaver
Laurel Finch Charles K. 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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be To be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................. 4,600,000 $13.00 $59,800,000 $15,787.20(2)
</TABLE>
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(1) Includes 600,000 shares of Common Stock issuable upon 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.
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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 , 2000
PROSPECTUS
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4,000,000 Shares
[ORATEC LOGO APPEARS HERE]
Common Stock
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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 $11.00 and $13.00.
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.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.................................. $ $
Underwriting discount.................................. $ $
Proceeds, before expenses, to ORATEC................... $ $
</TABLE>
The underwriters may also purchase up to an additional 600,000 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 , 2000.
------------
Merrill Lynch & Co.
J.P. Morgan & Co.
U.S. Bancorp Piper Jaffray
------------
The date of this prospectus is , 2000.
<PAGE>
INSIDE FRONT COVER:
Text at top of page: Electrothermal Technologies from Oratec Interventions.
Text is followed by logo.
Middle of page: picture of man showing musculature.
Text under picture: 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. Our
ElectroThermal Arthroscopy System treats joint disorders by modifying, cutting
and removing soft tissue through the arthroscopic application of controlled
heat.
Bottom of page: Three pictures showing fluoroscopic images of catheter in use
in various procedures. Captions describe images.
First caption: A SpineCATH IDET catheter is navigated inside the spinal disc to
heat and shrink damaged tissue.
Second caption: SpineCATH IDET catheters are positioned inside spinal discs
using real time X-rays.
Third caption: A Temperature Control TAC probe modifies tissue during
arthroscopic joint repair.
INSIDE BACK COVER:
Text at top of page: Electrothermal Technologies from Oratec Interventions.
Text is followed by logo.
Left justified heading near top of page: SPINE
Below this heading, there are two pictures next to each other:
First picture is of the IDET catheter, with the following text underneath:
Physicians navigate the self-guiding SpineCATH IDET catheter to the location of
damaged tissue along a spinal disc wall and apply controlled heat t o shrink the
disc tissue.
Second picture is of the ORA-50S generator, with the following text underneath:
The ORA-50S ElectroThermal Generator, one of a line of temperature control
energy sources, delivers the appropriate power level and maintains the
physician's desired temperature settings in spine procedures.
Left justified heading in middle of page: ARTHROSCOPY
Subheading: TEMPERATURE CONTROL PROBES
Shows profile view of various probes in a line, with names listed underneath:
(TAC-S, TAC-S Angled, TAC-C, MiniTAC, MicroTAC-S and MicroTAC-S Angled).
Text underneath graphic: Temperature Control TAC probes provide a minimally
invasive treatment alternative for patients suffering from joint disorders. The
probes apply controlled heat to modify damaged soft tissue utilizing a
proprietary temperature control system to maintain optimal tissue temperature.
Subheading: LIGAMENT CHISEL CUTTING PROBES
Shows profile view of various cutting probes, with names listed underneath
(Straight, Angled, Curved, Hooked, Micro-Angled, 90 degree Ablator, 30 degree
Ablator).
<PAGE>
Text underneath graphic: Ligament Chisels, cutting and ablation probes have a
variety of tip designs that allow precise energy delivery to specific joints,
providing physicians control during cutting, coagulation and ablation of soft
tissue.
-2-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary of the Prospectus................................................ 3
Risk Factors............................................................. 5
Special Note Regarding Forward-Looking Statements........................ 11
Use of Proceeds.......................................................... 12
Our Policy Regarding Dividends........................................... 12
Capitalization........................................................... 13
Dilution................................................................. 14
Selected Financial Data.................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 22
Management............................................................... 38
Transactions with Directors, Executive Officers and 5% Stockholders...... 47
Principal Stockholders................................................... 49
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 56
Legal Matters............................................................ 58
Experts.................................................................. 58
Where You Can Find More Information...................................... 59
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 , 2000 (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, ElectroThermal and Vulcan 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 develops and markets innovative 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 modify, cut or remove damaged or stretched soft
tissue. We market our products to orthopedic surgeons, neurosurgeons and pain
management specialists.
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 over time results in a stiffening of the disc wall. Following
the IDET procedure, many patients have experienced significant pain reduction
and improved overall quality of life, and have reduced or eliminated pain
medication. 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 December 31, 1999, over
640 physicians had performed the IDET procedure on approximately 11,000
patients.
Back pain costs the U.S. economy over $50 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, we estimate that there are approximately
1.4 million people who have failed to improve with non-operative therapies. We
believe spine surgery is not recommended for these individuals because the
level of disc degeneration does not yet warrant a spinal fusion. We believe
these 1.4 million 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 modifying, cutting or removing soft tissue. The system
provides a minimally invasive outpatient treatment option for patients who
suffer from joint disorders 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 through tissue modification in
combination with tissue anchoring, cutting and removal, or ablation. The
ElectroThermal Arthroscopy System was launched in March 1997. In November 1999,
we introduced the new Vulcan ElectroThermal Arthroscopy System (EAS) which
combines the benefits of rapid tissue cutting and ablation capabilities with
the ability to modify tissue using our temperature control technology. We
estimate that, as of December 31, 1999, over 1,500 physicians had used our
arthroscopy products in approximately 100,000 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 separate sales and marketing team for each of the spine and
arthroscopy markets in order to address the different physician groups in these
growing areas. Our sales organizations include direct sales employees
complemented by select sales agencies. We have 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 physician training programs. The products we currently
market have either received the necessary 510(k) pre-market clearance from the
FDA or are exempt from this requirement. As of December 31, 1999 we had 12
issued patents, four notices of allowance and 45 U.S. and foreign patent
applications pending.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by ORATEC....... 4,000,000 shares
Common stock to be outstanding after
the offering........................ 20,491,149 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>
The share data in the table above is based on shares outstanding as of
December 31, 1999 and excludes: (a) 3,369,037 shares that were subject to
outstanding options at a weighted average exercise price of $3.27 as of
December 31, 1999; (b) 212,908 shares that were issuable upon exercise of
outstanding warrants at a weighted average exercise price of $3.29 per share as
of December 31, 1999; and (c) an aggregate of 1,618,700 shares that were
available for future issuance under our 1999 stock plan, our 1999 directors'
plan and our 1999 employee stock purchase plan as of December 31, 1999.
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December
31,
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1997 1998 1999
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<S> <C> <C> <C>
Statement of Operations Data:
Sales.............................................. $2,600 $11,129 $31,365
Gross profit....................................... 859 4,563 18,335
Total operating expenses........................... 7,857 15,748 27,293
Net loss........................................... (6,832) (11,342) (9,669)
Net loss per common share, basic and diluted....... $(1.75) $ (2.83) $ (2.30)
Shares used in computing net loss per common share,
basic and diluted................................. 3,912 4,006 4,201
Pro forma net loss per share, basic and diluted
(unaudited)....................................... $ (0.59)
Shares used in computing pro forma net loss per
share, basic and diluted (unaudited).............. 16,276
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short term investments....... $ 8,874 $52,714
Total assets............................................ 23,841 67,681
Long term obligations, net of current portion........... 4,348 4,348
Redeemable convertible preferred stock.................. 35,816 --
Common stock, additional paid-in capital, deferred stock
compensation, receivable from stockholder and
accumulated deficit.................................... (29,385) 50,271
</TABLE>
The as adjusted numbers in the table above reflect receipt of the net
proceeds from the sale of shares of common stock offered by us at an assumed
offering price of $12.00 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 conversion of each outstanding share of
redeemable preferred stock into one share of common stock upon the completion
of this offering, (b) no exercise of the underwriters' overallotment option and
(c) the filing of our amended and restated certificate of incorporation
immediately following 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 material risks
that are specific to us, to our industry or to companies going public. There
may be other risks which we do not currently believe are material which may
impair our business.
If physicians 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. Other physicians may not
purchase our products until there is long term clinical evidence to convince
them to alter their existing treatment methods and recommendations from
prominent physicians that our products are effective in treating spine and
joint 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 products and the uncertainty of third party reimbursement. If we
fail to gain further physician support for our products, we may not achieve
expected revenues and may never become profitable.
If health care providers cannot get reimbursed for the procedures which use 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 payors for the
cost of the procedures using our products. There are payors, including several
large insurance companies, that 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, payors
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."
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, we could discover that our current clinical results cannot be
supported. If longer term patient studies or clinical experience indicate that
treatments with our products do not provide patients with sustained benefits,
our sales could decline. If longer term patient studies or clinical experience
indicate that our procedures cause tissue damage, motor impairment or other
negative effects, we could be subject to significant liability. Further,
because some of 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 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
$9.7 million in 1999. As of December 31, 1999, we had an accumulated deficit of
approximately $30.7 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>
Because we are introducing new products and technology into the spine and
arthroscopy markets, 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 we are
introducing novel technology into these markets, we face the challenge of
gaining widespread acceptance of our products. If we fail at this task, we may
not achieve expected revenues and may never become profitable.
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 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.
At any time, other companies may develop additional directly competitive
products. See "Business--Competition."
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. 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 patents 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 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. Whether a product
infringes a patent involves complex legal and factual issues, the determination
of which is often uncertain. While we attempt to ensure that our products do
not infringe other parties' patents and proprietary rights, our
6
<PAGE>
competitors may assert that our products and the methods they employ may be
covered by U.S. patents held by them. In consultation with our experts, we have
made a careful analysis of patents covering related technology, and, based on
this analysis, we believe that either those patents or claims are invalid or,
if valid, that we do not infringe. 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. 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.
If the holder of patents brought an infringement action against us, and 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
products, our business could suffer.
If we are sued in a product liability action, we could be forced to pay
substantial damages.
We manufacture medical devices that are used on patients in surgical
procedures, and we may be subject to product liability lawsuits. In particular,
the market for spine products has a history of product liability litigation. We
have reported to the FDA instances in which burns were related to grounding pad
placement and one instance of nerve inflammation caused by an arthroscopic
procedure performed on the shoulder. We have also reported instances in which
the tip of the SpineCATH catheter broke off in the patient's body as the
catheter was being removed after the procedure and instances in which the
SpineCATH catheter experienced an electrical short during the procedure,
resulting in a small burn at the entry point on the skin. We believe that both
the catheter breakage and electrical shorts were related to overmanipulation of
the catheter which caused the catheter to kink. In addition, we have reported
instances in which the SpineCATH catheter has passed outside the disc wall
causing mild motor impairment. We do not believe that any of these instances
were the result of design flaws. During 1999, we sent a letter to our physician
customers informing them of the close association between catheter kinking and
breakage and a safety alert emphasizing the importance of following the correct
protocol during the IDET procedure.
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. A lawsuit has been
filed in state court in New Jersey by a patient who claims that he was injured
during treatment with the SpineCATH catheter. We are currently investigating
the claims set forth in the complaint. 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 both the spine and arthroscopy sales teams over the next 12 months to
achieve our market share
7
<PAGE>
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.
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.
If we fail to meet the demand for generators as we fully transition their
manufacture to internal operations, we may experience a decrease in sales.
We transitioned the manufacture of our generators, including the Vulcan
generator, to internal operations in October 1999. We have limited experience
manufacturing generators and our internal production may have difficulty
meeting customer demand. In addition, we may be unable to obtain a sufficient
number of generators from a third party supplier to satisfy customer needs.
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 the 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 foreign countries, including Australia, Belgium, Canada, Italy, the
Netherlands, Spain, Taiwan and the United Kingdom.
Because we compete with Mitek, an Ethicon division of Johnson & Johnson, in
the arthroscopy market, a conflict with them could negatively affect our
international spine sales efforts which are conducted exclusively by DePuy
AcroMed, another division of Johnson & Johnson.
Because our exclusive international spine product distributor is affiliated
with 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 AcroMed fails to devote adequate resources to
our products,
8
<PAGE>
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 testing, manufacture, distribution, marketing,
promotion, record keeping and reporting 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.
Product sales, 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
clearance, which can be a lengthy and time-consuming process. The products we
market have obtained the necessary clearances from the FDA through premarket
notification under Section 510(k) of the Federal Food, Drug, and Cosmetic Act
or were 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) notifications. However, if the FDA disagrees with us and requires us to
submit a new 510(k) notification for modifications to our existing products, we
may be required to stop marketing the products while the FDA reviews the 510(k)
notification, 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 promote our products for the uses
indicated on the labels cleared by the FDA. We may request additional label
indications for our current products, and the FDA may 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. If the FDA determines that we have marketed our
products for off label use, we could be subject to fines, injunctions or other
penalties.
Our disposable probes have been cleared 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
9
<PAGE>
additional funds are raised through the issuance of debt securities, these
securities could have 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.
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 27.2% 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."
10
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
There are statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus which are forward-
looking, 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 or to conform
such statements to actual results.
11
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 4,000,000 shares of common stock we are
offering are estimated to be $43,840,000 ($50,536,000 if the underwriters'
over-allotment option is exercised in full), assuming an offering price of
$12.00 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, marketing and reimbursement activities, future development of our
product lines and approximately $9.0 million to repay debt with interest rates
ranging from 7% to 13% and maturities ranging from month to month to August
2002. We currently intend to use the remaining proceeds for 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 have not yet determined our expected use of the remaining
proceeds, but we currently estimate that we will incur at least $18 million in
sales, marketing, reimbursement and product development expenses and $5 million
in capital expenditures over the next 18 months. 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 redeemable 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.
12
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. the actual capitalization of ORATEC as of December 31, 1999;
. the pro forma capitalization of ORATEC, after giving effect to the
automatic conversion of all outstanding shares of preferred stock into
12,079,948 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 $12.00 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>
December 31, 1999
-------------------------------------------
Actual Pro Forma As Adjusted
------------ ------------ --------------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C>
Current portion of long term
obligations...................... $ 3,130 $ 3,130 $ 3,130
============ ============ ============
Long term obligations............. $ 4,348 $ 4,348 $ 4,348
Redeemable convertible preferred
stock, par value $0.001 per
share; 12,400,000 shares
authorized, actual; 12,079,948
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, 19,900,000 shares
authorized, actual; 4,411,201
shares issued and outstanding,
actual; 75,000,000 shares
authorized, pro forma; 16,491,149
issued and outstanding, pro
forma; 75,000,000 shares
authorized, as adjusted;
20,491,149 shares issued and
outstanding, as adjusted......... 4 16 20
Additional paid-in capital........ 1,625 37,429 81,265
Deferred stock compensation....... (320) (320) (320)
Receivable from stockholder....... (9) (9) (9)
Accumulated deficit............... (30,685) (30,685) (30,685)
------------ ------------ ------------
Total capitalization.............. $ 10,779 $ 10,779 $ 54,619
============ ============ ============
</TABLE>
- --------
This table excludes the following shares (in thousands, except per share data):
. 3,369,037 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $3.27 per share as of December 31,
1999;
. 212,908 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.29 per share as of December 31,
1999; and
. an aggregate of 1,618,700 shares available for future issuance under our
1999 stock plan, our 1999 directors' plan and our 1999 employee stock
purchase plan as of December 31, 1999. See "Management--Stock Plans" and
Note 11 of Notes to Financial Statements.
13
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock on December 31,
1999 was $6,431,000 or $0.39 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 December 31,
1999 would have been $50,271,000 or $2.45 per share of common stock. This
represents an immediate increase in net tangible book value of $2.06 per share
to existing stockholders and an immediate dilution of $9.55 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share as of December 31,
1999........................................................... $0.39
Increase per share attributable to new investors................ 2.06
-----
Pro forma net tangible book value per share after the offering.. 2.45
------
Dilution per share to new investors............................. $ 9.55
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
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...... 16,491,149 80.5% $36,883,000 43.5% $ 2.24
New investors.............. 4,000,000 19.5 48,000,000 56.5 12.00
---------- ----- ----------- -----
Total.................... 20,491,149 100.0% $84,883,000 100.0%
========== ===== =========== =====
</TABLE>
This table excludes the following shares:
. 3,369,037 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $3.27 per share as of December 31,
1999;
. 212,908 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.29 per share as of December 31,
1999; and
. an aggregate of 1,618,700 shares available for future issuance under
our 1999 stock plan, our 1999 directors' plan and our 1999 employee
stock purchase plan as of December 31, 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 percentage of shares of common stock held by existing
stockholders will decrease to approximately 78.2% 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
4,600,000 or approximately 21.8% of the total number of shares of our
common stock outstanding after this offering.
14
<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, 1997, 1998 and 1999, and the balance sheet data at December 31,
1998 and 1999, are derived from audited financial statements included elsewhere
in this prospectus. The statement of operations data for the years ended
December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995,
1996 and 1997, are derived from audited financial statements not included in
this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales............................. $ -- $ -- $ 2,600 $ 11,129 $31,365
Cost of sales..................... -- -- 1,741 6,566 13,030
------ ------- ------- -------- -------
Gross profit...................... -- -- 859 4,563 18,335
Operating expenses:
Research and development........ 156 878 2,147 4,056 4,709
Sales and marketing............. -- 561 2,622 8,318 17,541
General and administrative...... 187 945 3,088 3,374 5,043
------ ------- ------- -------- -------
Total operating expenses...... 343 2,384 7,857 15,748 27,293
------ ------- ------- -------- -------
Loss from operations.............. (343) (2,384) (6,998) (11,185) (8,958)
Interest income (expense), net.... 3 82 166 (157) (711)
------ ------- ------- -------- -------
Net loss.......................... $ (340) $(2,302) $(6,832) $(11,342) $(9,669)
====== ======= ======= ======== =======
Net loss per common share, basic
and diluted...................... $(0.10) $ (0.60) $ (1.75) $ (2.83) $ (2.30)
====== ======= ======= ======== =======
Shares used in computing net loss
per common share, basic and
diluted.......................... 3,246 3,841 3,912 4,006 4,201
Pro forma net loss per share,
basic and diluted (unaudited).... $ (0.59)
=======
Shares used in computing pro forma
net loss per share, basic and
diluted (unaudited).............. 16,276
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1996 1997 1998 1999
----- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short
term investments.................. $ 64 $ 1,778 $ 9,185 $ 15,581 $ 8,874
Working capital.................... (97) 1,545 8,717 13,997 6,370
Total assets....................... 97 2,593 13,418 24,195 23,841
Long term obligations, net of
current portion................... 35 221 404 2,702 4,348
Redeemable convertible preferred
stock............................. 474 4,792 20,324 35,816 35,816
Common stock, additional paid-in
capital, deferred stock
compensation, receivable from
stockholder and accumulated
deficit........................... (582) (2,838) (9,771) (20,746) (29,385)
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
ORATEC Interventions develops and markets innovative 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 510(k)
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 510(k) 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. In November 1999,
we introduced the new Vulcan ElectroThermal Arthroscopy System (EAS).
All of our revenues are generated from the sales of our spine and arthroscopy
products. For the year ended December 31, 1999, 90% of our total sales was
derived from our disposable spine catheters and arthroscopy probes and 10% was
derived from sales of generators and accessories. We incurred net losses of
approximately $11.3 million in 1998 and $9.7 million in 1999. As of December
31, 1999, we had an accumulated deficit of $30.7 million.
For the year ended December 31, 1999, approximately 67% of our U.S. sales was
generated by our direct sales employees and the remainder of our sales 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 year ended December 31, 1999, only 2% of our sales was derived from
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. We have limited or no control over the
sales efforts of these third-party distributors.
We recognize revenue upon shipment of products to customers or, in some
instances, when inventory provided to customers by our employees and sales
agencies 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 convert these placements to 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, greater
reimbursement acceptance by payors, and further training, in order to convince
physicians who currently favor open surgery or other treatment alternatives to
switch to our minimally invasive procedures.
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. An adverse outcome in a
patent lawsuit could require us to cease sales of affected products or to pay
royalties, which could harm our results of operations.
16
<PAGE>
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
sales could be lower than expected.
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
Sales
Sales increased 182% to $31.4 million in 1999 from $11.1 million in 1998, and
increased 328% in 1998 from sales of $2.6 million in 1997. We began selling our
arthroscopy products early in 1997, and those products comprised all of our
sales for that year. During 1998, we experienced growth in the unit sales of
our arthroscopy products. In the fourth quarter of 1998, we formally launched
our spine products, sales of which comprised 11% of our revenues for that year.
During 1999, revenue growth was led by sales of our spine products, which
increased from $1.2 million in 1998 to $16.2 million in 1999. Sales of
arthroscopy products increased by 54% to $15.2 million in 1999 from sales of
$9.9 million in 1998. This increase in overall sales was due to higher unit
shipments. These higher unit shipments resulted from an increased number of
physicians trained in the use of our products, the expansion of our spine sales
force, the increasing effectiveness of the arthroscopy direct sales force
during 1998 and 1999 and 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 98% to $13.0 million in 1999 from $6.6 million in
1998, and increased 277% in 1998 from cost of sales of $1.7 million in 1997.
The growth in cost of sales was attributable primarily to the significant
expansion of our manufacturing operations, higher material, labor and overhead
costs associated with increased unit shipments and higher depreciation costs on
the increased number of generators placed with customers. 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 products.
Gross profit
Gross profit increased to $18.3 million, or 58% of sales, in 1999 from $4.6
million, or 41% of sales, in 1998, and increased in 1998 from $900,000, or 33%
of sales, in 1997. The increase in gross profit as a percentage of sales was
due to sales growing at a faster pace than manufacturing and depreciation
costs.
Research and development expenses
Research and development expenses increased 16% to $4.7 million in 1999 from
$4.1 million in 1998, and increased 89% in 1998 from research and development
expenses of $2.1 million in 1997. Each of these expense increases was
attributable primarily to additional personnel and increased numbers of
clinical studies. During 1999, expenses related to the development of the
Vulcan arthroscopy system represented the largest component of research and
development spending. During 1998, expense increases were driven by spine
product and generator development. Research and development expenses in 1997
were largely focused on the enhancement of probes for the arthroscopy system.
Research and development expenses consist of costs related to our research and
development, regulatory and clinical affairs 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 and development expenses will continue to increase in the future.
Sales and marketing expenses
Sales and marketing expenses increased 111% to $17.5 million in 1999 from
$8.3 million in 1998, and increased 217% in 1998 from sales and marketing
expenses of $2.6 million in 1997. Each of these expense
17
<PAGE>
increases reflected increased personnel expense as we developed a field sales
force for each of the spine and arthroscopy markets, added personnel in our
reimbursement group, increased spending on physician training and medical
conference participation and paid higher commissions on an increased volume of
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 as we continue to develop our sales and
reimbursement support staffs and expand our physician training programs.
General and administrative expenses
General and administrative expenses increased 49% to $5.0 million in 1999
from $3.4 million in 1998, primarily due to the write-off of $1.0 million in
expenses related to our initial public offering, which was postponed in
September 1999. General and administrative expenses increased 9% in 1998 from
general and administrative expenses of $3.1 million in 1997. Increases in
general and administrative expenses resulted from increased personnel expenses
related to our growth in operations. In 1998, this increase in general and
administrative expenses was partially offset by the relatively high expense of
hiring and relocating executive officers in 1997. General and administrative
expenses consist primarily of personnel costs, professional service fees,
expenses related to intellectual property rights and general corporate
expenses. We expect general and administrative expenses to increase in the
future as we add personnel, continue to expand our patent portfolio and incur
reporting and investor-related expenses as a public company.
Interest and other income (expense), net
Net interest and other expense increased 353% to $(711,000) in 1999 from
$(157,000) in 1998. Net interest and other income was $166,000 in 1997. The
higher interest expense in 1999 was related to debt funding obtained to support
our growth in working capital and equipment purchases. Other year-to-year
changes resulted from changes in earnings on short term investment balances,
which varied as a result of the timing of our private placement financings, and
increasing interest expense resulting from our drawdown of debt. 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.
Income Taxes
As of December 31, 1999, we had net operating loss carryforwards of
approximately $24.1 million for federal and $4.5 million for California and
Delaware income tax purposes. We also had research and development credit
carryforwards of $400,000 for federal income tax purposes. The net operating
loss carryforwards will expire at various dates beginning in 2009 through 2019,
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 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.
18
<PAGE>
Quarterly Results of Operations
The following table sets forth our operating results for each of the eight
quarters in the period ended December 31, 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, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $ 1,572 $ 2,535 $ 2,782 $ 4,240 $ 5,196 $ 7,703 $ 8,839 $ 9,627
Cost of sales........... 987 1,368 1,867 2,344 2,828 3,433 3,328 3,441
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 585 1,167 915 1,896 2,368 4,270 5,511 6,186
Gross margin percent-
age.................... 37% 46% 33% 45% 46% 55% 62% 64%
Operating expenses:
Research and develop-
ment.................. 800 947 1,053 1,255 1,044 1,225 1,337 1,103
Sales and marketing.... 1,512 1,879 2,284 2,643 3,254 4,240 4,675 5,372
General and administra-
tive.................. 678 860 1,006 831 997 823 2,241 982
------- ------- ------- ------- ------- ------- ------- -------
Total operating ex-
penses.............. 2,990 3,686 4,343 4,729 5,295 6,288 8,253 7,457
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (2,405) (2,519) (3,428) (2,833) (2,927) (2,018) (2,742) (1,271)
Interest and other in-
come (expense), net.... 56 68 (43) (238) (106) (233) (118) (254)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(2,349) $(2,451) $(3,471) $(3,071) $(3,033) $(2,251) $(2,860) $(1,525)
======= ======= ======= ======= ======= ======= ======= =======
</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 because people often defer elective surgeries
until the fall. In addition, sales of arthroscopy products have tended 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 a quarter-to-quarter 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.
Quarter-to-quarter sales increased by 15% during the quarter ended September
30, 1999 and 9% during the quarter ended December 31, 1999. During the quarter
ended December 31, 1999, sales growth slowed due to deferred purchases of
arthroscopy products by new customers as a result of the pending introduction
of our Vulcan arthroscopy system and our failure to obtain pre-authorization
for insurance reimbursement for our spine products from some payors. Overall,
spine sales as a percentage of total sales grew from 33% in the first quarter
of 1999 to 55% in the fourth quarter of 1999.
Gross margin percentage tended to increase over the eight quarter period
ending December 31, 1999 as a result of the formal launch of new 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 213 at
December 31, 1999. As a result of the growth in the number of employees
throughout the organization, all of the 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 agencies to increase. We have also increased
spending on clinical studies, physician training, medical conferences and
outside development costs during this eight quarter period.
19
<PAGE>
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-authorization 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; and
. timing of regulatory approvals or other FDA action.
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.
Liquidity and Capital Resources
From inception through December 31, 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 $10.9
million in principal outstanding at December 31, 1999. As of December 31, 1999,
we had $5.9 million of cash and cash equivalents, $2.9 million of short term
investments and $6.4 million of working capital.
Net cash used for operating activities was $9.3 million in 1999, $9.2 million
in 1998 and $6.2 million in 1997. Cash used for operating activities was
attributable primarily to net losses after adjustment for non-cash depreciation
and amortization charges on generators and equipment and increases in accounts
receivable and inventories, resulting from higher revenues on increasing unit
shipments in all periods. These increases in use of cash for operating
activities were 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 $2.7 million in 1999, compared to
$4.0 million in 1998 and $5.3 million in 1997. For each of these periods, cash
used in investing activities reflected purchases of property, generators and
equipment and net purchases or sales of short term investments.
Net cash provided by financing activities was $6.4 million in 1999,
$19.3 million in 1998 and $15.8 million in 1997. Cash provided during these
periods was attributable to proceeds from the issuance of stock and debt
obligations.
20
<PAGE>
As of December 31, 1999, our principal debt and other commitments consisted
of $3.5 million outstanding under our equipment loans, $3.4 million under our
accounts receivable credit line, $4.0 million under our subordinated debt
facility and amounts payable under various operating leases. 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 December 31, 1999, we had available debt facilities totaling
approximately $600,000 under our asset-based line of credit. Our loan
agreements with Transamerica Business Credit Corporation and one loan agreement
with Silicon Valley Bank 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 3:1.
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 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.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk at December 31, 1999 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 1999 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, 1999, we had bank borrowings of
$3.4 million outstanding, which bear interest at 1% above the prime rate, and
notes payable of $4 million outstanding,which bear interest at 13.1% per annum.
We have determined that there is no material exposure to interest rate risk
arising from these borrowings.
21
<PAGE>
BUSINESS
Overview
ORATEC Interventions develops and markets innovative 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 modify, cut or remove 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, over time, 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 modifying, cutting or removing
tissue. We believe that this minimally invasive treatment not only complements
existing arthroscopic procedures, but is a viable alternative to many open
surgical procedures.
As of December 31, 1999 we had 12 issued patents, four notices of allowance
and 45 U.S. and foreign patent applications.
In 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 growing segments of the medical device industry.
Spine Market Opportunity
Back pain costs the U.S. economy over $50 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, we estimate
that there are approximately 1.4 million people in the U.S. who have failed to
improve with non-operative therapies. We believe spine surgery is not
recommended for these individuals because the level of disc degeneration does
not yet warrant a spinal fusion. We believe these 1.4 million 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
22
<PAGE>
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.
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 Procedures
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
23
<PAGE>
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 disc tissue.
IDET is performed in an outpatient setting using local anesthesia. ORATEC's
protocol calls for the patient to be 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. While there are a few patients who have reported increased pain in
their backs and numbness in their legs following the IDET procedure, most
patients report significant relief from their back pain and few post-procedure
complications. 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 we believe 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 of
tissue or the permanent alteration of spinal anatomy associated with
conventional surgical treatments. We believe 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, and over time stiffens and repairs 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. In many cases, 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.
Spinal fusions are inpatient procedures performed under general
anesthesia, are costly and require a prolonged hospital stay.
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 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.
24
<PAGE>
While we believe that shoulder arthroscopy is the fastest-growing portion of
the market, with 450,000 procedures performed in 1998, knee arthroscopy
continues to represent the greatest number of arthroscopic procedures,
accounting for approximately 1.5 million of arthroscopic procedures performed.
In addition, there were approximately 250,000 elbow, ankle, wrist and hip joint
arthroscopic procedures performed in 1998.
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, are 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 conditions that involve stretched or loose
tissue, the ability to modify tissue by using heat to shrink the collagen
within the tissue could produce better patient outcomes. Existing
electrosurgical tools are capable of cutting and removing, or ablating, soft
tissue because feedback on tissue temperature is not required for these
procedures. We believe that for tissue modification, 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 modify 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 modification, cutting and
ablation offers a minimally invasive solution to patients whose alternatives
are open surgery or a less effective arthroscopic procedure.
The Procedures
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.
In November 1999, we introduced the new Vulcan ElectroThermal Arthroscopy
System, or EAS. This system is designed to allow physicians to set the
generator at higher temperature levels to rapidly cut and ablate soft tissue
and to utilize our proprietary temperature control technology to effectively
modify damaged tissue.
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.
25
<PAGE>
Benefits of the ElectroThermal Arthroscopy System
Clinical and scientific experience to date has indicated that our
ElectroThermal Arthroscopy System has the following benefits:
. Single comprehensive system: Existing arthroscopic systems do not allow
physicians to effectively monitor the temperature of the treated tissue
during modification procedures and to cut and ablate tissue using the
same system. Our Vulcan EAS provides physicians a single system for all
three treatment approaches, and includes our proprietary temperature
control capability, which is designed to keep the temperature of treated
tissue within 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. Clinical data indicates that
patients treated with our products typically require significantly less
post-operative pain medication, experience a decreased risk of post-
operative recovery complications and require less extensive
rehabilitation compared to patients who undergo open procedures. 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
temperature control technology with other arthroscopic tools, physicians
can more completely treat joint disorders. For example, in connection
with the arthroscopic repair of a torn ligament, the application of our
temperature control technology can be useful to tighten 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 typically 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 growing segments of the medical device industry. It is estimated
that 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.
26
<PAGE>
Technology
Our proprietary SpineCATH IDET system and ElectroThermal Arthroscopy System
apply temperature-controlled thermal energy to achieve controlled modification
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 treated collagen allows new collagen to grow 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 allowing
physicians to effectively modify, or shrink, the collagen in the disc. Our
ElectroThermal Arthroscopy System includes the only products in the market that
monitor tissue temperature to facilitate effective modification while also
permitting a physician to cut and ablate damaged tissue. We believe our systems
result in 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 an incremental increase in the temperature of the
treated tissue to a therapeutic temperature range. The temperature is then
maintained within that optimal range for the remainder of the prescribed
treatment period. Our temperature feedback mechanism enables the generator to
continually adjust heat to achieve catheter temperatures consistent with these
predetermined heating protocols.
Technology--ElectroThermal Arthroscopy System
Physicians use our patented electrothermal arthroscopy products to perform a
number of electrosurgical functions, including cutting, ablation, coagulation
and electrothermal modification of 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
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, permitting modification as well as effective cutting and
ablation of soft tissue. The tip of our temperature control probe contains a
thermocouple which records tissue temperature and relays it back to the
generator, enabling the generator to adjust energy output up to 50 times per
second to maintain optimal tissue temperatures in modification procedures.
27
<PAGE>
Products
We currently manufacture and sell the SpineCATH IntraDiscal ElectroThermal
Therapy system for the treatment of spinal disc 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.
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
received 510(k) premarket clearance from the FDA in March 1998 and was formally
launched in October 1998.
<TABLE>
<CAPTION>
SpineCATH IDET System Description Features
- -------------------------------------------------------------------------------
<C> <C> <S>
. SpineCATH IntraDiscal . Disposable 1.0 mm . Enters the disc through a
Catheter flexible, self-guiding 17 gauge introducer
catheter designed to needle
deliver resistive . Catheter temperature
thermal energy sensing and control
system
. Pre-curved navigation
tip, designed to
automatically follow the
curvature of the human
disc
. Radiopaque indicators,
which enable physicians
to verify optimal
catheter placement
through the use of real
time X-rays
. List price: $795
(Approximately 1.5
catheters used per
procedure)
- -------------------------------------------------------------------------------
. ORA-50 S . The source of the . Software that causes the
Electrothermal energy used to heat catheter temperature to
Generator the SpineCATH catheter automatically increase
according to the pre-
determined heating
protocols
. Proprietary temperature
feedback and control
system, which monitors
temperature in the tip of
the catheter
. Easy-to-read graphic
display, which enables
the physician to monitor
catheter temperatures,
delivered power and total
treatment time
. List price: $12,995
</TABLE>
In addition, we offer the ORAflex electrothermal disposable spine probe for
the treatment of herniated discs. The list price of the ORAflex probe is $595.
28
<PAGE>
ElectroThermal Arthroscopy System
Our ElectroThermal Arthroscopy System provides a minimally invasive
alternative for patients suffering from joint injuries. Our first TAC probe
received 510(k) premarket clearance from the FDA in December 1995, and the
first arthroscopy generator received clearance in December 1996. This system
was 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. In November 1999, following 510(k) premarket clearance in
October 1999, we introduced the Vulcan ElectroThermal Arthroscopy System (EAS)
and a line of ablation probes for the rapid removal of soft tissue.
<TABLE>
<CAPTION>
Electrothermal Arthroscopy System Description Features
- -------------------------------------------------------------------------------------
<C> <C> <S>
. Temperature Control . Disposable temperature . Malleable shaft, for
(TAC) Probes control probes improved access and
maneuverability in
difficult-to-reach
areas
. Designed to treat a . Thermocouple in the
variety of joint probe tip, which
disorders using low measures and monitors
energy for soft tissue tissue temperature
modification . Variety of probe
shapes and sizes for
optimal tissue access
. List price: $295
- -------------------------------------------------------------------------------------
. Ligament Chisel Family . Disposable . Malleable shaft for
of Electrosurgical electrosurgical improved access and
Probes cutting probes maneuverability in
difficult-to-reach
joint areas
. Cuts soft tissue while . Four different tip
simultaneously designs to allow
cauterizing bleeding precise matching of
vessels energy delivery to
specific anatomy and
procedures
. Tip design that
enhances tactile
feedback for optimal
control and access
. List price: $95-$120
- -------------------------------------------------------------------------------------
. Vulcan Family of . Disposable . Low tip profile for
Surgical Ablation electrosurgical improved joint access
Probes ablation probes and mobility within
designed for rapid the joint
tissue removal . Improved visualization
. Ablate tissue using . Monopolar probe tips
higher energy levels which allow direct
while simultaneously contact with tissue to
cauterizing bleeding enhance tactile
vessels feedback to the
physician
. Variety of probe
angles for optimal
tissue access
. List price: $125
- -------------------------------------------------------------------------------------
. Eflex Family of Probes . Specialized versions . Deflectable tips which
of the temperature can move up to
control and cutting 90(degrees) through a
probes mechanism built into
the device handles
. Improved access to
stretched or damaged
joint tissue (for
example, the hip
joint)
. List price: $345-$495
- -------------------------------------------------------------------------------------
. Vulcan EAS Generator . 200 watt generator . Improved temperature
control technology for
faster tissue response
and shorter treatment
times
. Combines our . Auto-Probe recognition
proprietary that automatically
temperature control selects the
technology with appropriate power,
enhanced temperature and mode
settings for each
probe attachment
cutting and ablation . List price: $13,495
capabilities
</TABLE>
In addition, we have historically marketed the ORA-50 ElectroThermal
Generator, a 50 watt dual mode generator. The list price of the ORA-50
Generator is $8,995. We intend to discontinue sales of the ORA-50 Generator
because it was replaced by the Vulcan EAS Generator.
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 and pain management specialists. For
29
<PAGE>
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.
We have a separate sales and marketing team 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. As of December 31,
1999, we have trained over 1,675 physicians in the use of the IDET procedure.
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 2000.
Our spine products are marketed domestically by 19 direct sales employees,
one national director, two regional sales managers, one marketing manager and
10 independent sales agencies. Our arthroscopy products are marketed
domestically by 21 direct sales employees, one national training director, four
regional managers, one national manager, one marketing manager and 28 sales
agencies. We plan to increase both of our sales forces during 2000.
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
unless terminated by ORATEC or DePuy AcroMed. We have the right to terminate
the agreement if DePuy AcroMed fails to meet negotiated minimum purchase
requirements commencing in the year 2001.
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-authorization
of procedures;
. screens each case to determine that the procedure is appropriate for the
patient's condition;
. assists physicians and providers in claim collections; and
. provides payors with outcome data on their insured patients.
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-
authorization for the IDET procedure by contacting payors on behalf of the
physician practice and facility. The service is free to physicians and
facilities. Our reimbursement staff of 13 individuals educates the payor
community, from the local case managers to the national policy makers, on the
IDET procedure. 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.
30
<PAGE>
See "Risk Factors--If health care providers cannot get reimbursed for the
procedures which use our products, our sales may decline."
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 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. We are aware that Radionics offers kits that are designed
to lesion and denervate tissue in the spine. These products are not, however,
designed to shrink collagen in disc tissue. There are also products which are
currently under development, including the prosthetic nucleus, which are not
currently supported by clinical data, are not currently FDA cleared and are not
currently available on the market. At some point, these products may offer
competitive treatments for low back pain caused by degenerative disc disease.
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 physicians may use spinal fusion to treat patients with degenerative
disc disease in an overlapping patient population. The cost of our IDET
procedure is approximately $8,000. The cost of spinal fusion is approximately
$45,000.
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 temperature control
products and, we believe, currently represent a combined 15% of the tissue
modification 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.
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
31
<PAGE>
improvements that we believe are significant to the growth of our business. As
of December 31, 1999, we had 11 issued U.S. patents, one issued foreign patent,
four notices of allowance, 21 pending U.S. patent applications and 24 pending
foreign patent applications. The issued and allowed patents cover, among other
things, method and apparatus claims for directing energy to and sealing
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 advisors
who we expect to work on our products 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. While we attempt to
ensure that our products do not infringe other parties' patents and proprietary
rights, our competitors may assert that our products and the methods they
employ may be covered by U.S. patents held by them. In consultation with our
experts, we have made a careful analysis of patents covering related
technology, and, based on this analysis, we believe that either those patents
or claims are invalid or, if valid, that we do not infringe. In addition, our
competitors may assert that future products we may market infringe their
patents. See "Risk Factors--Because the medical device industry is litigious,
we are 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 December 31, 1999, we employed 24 people in our research
and development organization. Our probe and generator development group
consisted of 18 people. We also had six people responsible for clinical and
regulatory affairs.
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. Some of our planned
product line extensions include:
. the development of a spine catheter for the upper spine;
. the expansion of our ablation probe line;
. enhanced electrosurgical capabilities in our arthroscopy generators;
. product enhancements for the SpineCATH IDET system; and
. advanced devices for knee and small joint arthroscopy procedures.
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. 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.
32
<PAGE>
As of December 31, 1999, there had been 14 published reports in peer reviewed
journals discussing the effects of our arthroscopic technology. An additional
five manuscripts related to our spine technology are pending publication, and
35 abstracts have been presented at medical conferences by both physicians
affiliated with us as clinical and scientific advisors and unaffiliated
physicians.
Manufacturing
Our manufacturing operations are focused on the manufacture of disposable
products and generators. 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.
Our quality assurance systems are required to be 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.
In October 1999, we began to assemble our generators at our facility in Menlo
Park, California. We continue to subcontract the manufacture of a small number
of generators from a third party supplier. We made this transition in order to
reduce the risk of having a single source supplier, to directly control the
quality and availability of the product and to leverage fixed costs. See "Risk
Factors--If we fail to meet the demand for generators as we fully transition
their manufacture to internal operations, we may experience a decrease in
sales."
Most purchased components and services are available from more than one
supplier. For the components and services for which there are relatively few
alternate sources of supply, establishment of additional or replacement
suppliers for such components and services could not be accomplished quickly.
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. 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, reporting of adverse
events and corrective actions, 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.
All of our products have the necessary 510(k) clearances required for
marketing or are exempt from this requirement. It generally takes three to 12
months from the date of the submission to obtain clearance of a
33
<PAGE>
510(k) submission, but may take longer. Recently, the FDA has begun requiring a
more rigorous demonstration of substantial equivalence, including clinical
trials for devices which represent either new technologies, new intended uses
or new materials with no previous history of use in medical applications. While
we have been successful to date in 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 our products which we believe
do not require the submission of new 510(k) notifications. If the FDA disagrees
with us and requires us to submit a new 510(k) notification for any prior
device modification, we may be prohibited from marketing the modified device
until the new 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 subject to periodic inspection 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. As of January 31, 1999, we
had filed 25 Medical Device Reports, or MDRs, with the FDA. In June 1999, we
sent a letter to our physician customers informing them about the close
association between catheter kinking and catheter breakage, but we do not
believe that these instances were the result of a design flaw. In September
1999, we sent a safety alert to our physician customers which emphasizes the
importance of following the correct protocol during the IDET procedure,
including constant monitoring of the patient's condition and the electrical
resistance reading on the ORA 50 S generator. See "Risk Factors--If we are sued
in a product liability action, we could be forced to pay substantial
penalties."
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
voluntary recall, and no further notification was required. In April 1999, we
received a warning letter from the FDA regarding information on our website
which the FDA believed extended beyond our cleared label indications. This
means that the FDA believed that there was information on our website which led
readers to believe that our products could be used for indications that have
not been cleared by the FDA. We removed the information that we agreed was
outside our FDA-cleared label indications and responded that we believed the
remaining information was within our FDA-cleared label indications. In October
1999 we received a response from the FDA supporting our position.
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 Australia, Belgium, Canada, Italy, the Netherlands, Spain,
Taiwan and the United Kingdom. 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.
34
<PAGE>
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 ISO
9001/EN 46001 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 December 31, 1999, we had 213 employees, including 24 in research and
development, 96 in manufacturing, 75 in sales and marketing and 18 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.
Insurance
We have general and product liability insurance coverage which is consistent
with the level of coverage held by other companies in the medical device
industry. We believe our level of liability insurance coverage provides us with
adequate protection against the risks associated with general and product
liability claims.
Facilities
We are headquartered in Menlo Park, California, where we lease three
buildings with approximately 30,000 square feet of office, research and
development and manufacturing space under leases expiring between September
2000 and March 2005. We have entered into one additional agreement to lease
approximately 6,000 square feet of space for manufacturing and distribution. We
will occupy that space during the second quarter of 2000. 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.
35
<PAGE>
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
</TABLE>
Clinical Advisory Board
<TABLE>
<CAPTION>
Name Position and Affiliation
---- ------------------------
<C> <S>
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
Sam Maywood, MD.............. Medical Director, Coast Surgery and Pain
Management Center, San Diego, CA
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
Daniel A. Sapir, MD.......... Medical Director, Indiana Pain Institute,
Lafayette, IN
James Walt Simmons, Jr., MD.. Clinical Professor, Department of Orthopedics
and Rehabilitation, University of Texas Medical
Branch, Galveston, TX
Kerry Thompson, M.D. ........ Neuroradiologist, Anne Arundel General Hospital,
Annapolis, MD
Michael Wall, M.D. .......... Orthopedic Surgeon, S.O.A.R., Menlo Park, CA
F. Todd Wetzel, M.D. ........ Associate Professor of Surgery, Section of
Orthopedic Surgery and Rehabilitation,
University of Chicago, Chicago, IL
Robert E. Wright, MD......... Medical Director, Denver Pain Management,
Denver, CO
</TABLE>
36
<PAGE>
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
Michael Wall, M.D ...... Orthopedic Surgeon, S.O.A.R., Menlo Park, 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 R. Bocell, Jr., Clinical Professor, Dept. of Orthopedics, Baylor College of
M.D. .................. Medicine, Houston, TX
James Bradley, M.D. .... Director, Pittsburgh Center for Sports Medicine, Shadyside
Hospital, Pittsburgh, PA
Christopher D.
Casscells, M.D......... Attending Staff, Christian Care Health Systems
Brian Cole, M.D. ....... Assistant Professor of Orthopedics, Sports Medicine, Rush
Presbyterian St. Luke's Medical Center, Chicago, IL
Stevens D. Coupens, Orthopedic Surgeon, Oklahoma Sports Science & Orthopedics
M.D. ..................
Philip A. Davidson, Tampa Bay Orthopedic Specialists; Assistant Professor, Clinical-
M.D. .................. Orthopedic Surgery, University of South Florida
Michael Dillingham, Partner, Sports Orthopedic and Rehabilitation, of S.O.A.R.,
M.D. ................. Medicine Associates, Menlo Park, CA
Neal S. ElAttrache, Orthopedic Surgeon, Kerlan-Jobe Orthopedic Clinic, Los Angeles, CA
M.D. ..................
Robert Eppley, M.D. .... Orthopedic Consultant, University of California, Berkeley, CA
Gary Fanton, M.D. ...... Assistant Clinical Professor, Stanford University School of
Medicine, Palo Alto, CA
Gary Gartsman, M.D...... Orthopedic Surgeon, Fondren Orthopedic Group, Houston, TX
Jeffrey Halbrecht, Medical Director, Women's Professional Ski Tour; California
M.D. .................. Pacific Medical Center, San Francisco, CA
Richard Hawkins, M.D. .. Orthopedic Surgeon, Steadman Hawkins Clinic, Vail, CO
Robert F. Hines, M.D. .. Orthopedic Surgeon, Oklahoma Sports Science & Orthopedics,
Clinical Instructor, University of Oklahoma, Department of
Orthopedics, Oklahoma City, OK
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
Steven C. Mirabello, Orthopedic Surgeon, Florida Sports & Orthopedic Medicine
M.D. ..................
Dev Mishra, M.D. ....... Orthopedic Consultant, Team Physician, University of California,
Berkeley, CA
Bruce Moseley, M.D. .... Clinical Associate Professor, Baylor College of Medicine, Houston,
TX
Stephen J. Nicholas, Orthopedic Surgeon, Director of the Nicholas Institute of Sports
M.D. .................. Medicine and Athletic Trauma
Lawrence D.P.M. Surgeon, S.O.A.R., Menlo Park, CA
Oloff, D.P.M. .........
Marc J. Philippon, Orthopedic Surgeon, Holy Cross Hospital, Fort Lauderdale, FL
M.D. ..................
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>
37
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth specific information regarding our executive
officers and directors as of December 31, 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, Vice President, Administration and Secretary
Roger H. Lipton......... 42 Vice President, Sales and Marketing
Calvin K. Lee........... 45 Vice President, Operations
Theresa M. Mitchell..... 50 Vice President, Regulatory and Clinical Affairs and Quality Assurance
Richard M. Ferrari
(1)(2)................. 46 Chairman of the Board
Stephen Brackett (1).... 36 Director
Gary S. Fanton, M.D.
(2).................... 48 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 and was elected to the office of
Secretary in August 1999. 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
38
<PAGE>
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.
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 was employed by 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.
Theresa M. Mitchell joined ORATEC in December 1999 as Vice President,
Regulatory and Clinical Affairs and Quality Assurance. From June 1999 to
December 1999, Ms. Mitchell was a regulatory consultant to APX, Inc. and
Circulation, Inc., cardiovascular medical device companies. From December 1997
to June 1999, she served as co-CEO and Senior Vice President, Business
Development and Marketing of Fidus Medical Technology, Inc., a medical
technology company. From October 1995 to October 1997, Ms. Mitchell served as
Vice President, Business Development, Regulatory and Clinical Affairs and
Quality Assurance of Intella Interventional, Inc., a cardiovascular medical
device company. From January 1995 to September 1995, Ms. Mitchell was a
consultant to Sunrise Medical, an opthalmic lasers company. Ms. Mitchell holds
M.A. and B.A. degrees in Experimental Psychology/Biostatistics from the
California State University, San Francisco.
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, which was recently acquired by Guidant
Corporation. 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 and General Manager 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.
39
<PAGE>
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 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 Latterell, 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 our Series
D and Series E Preferred Stock investors, respectively. 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 1999 Stock Plan and will be eligible to participate in our
1999 Employee Stock Purchase Plan. Nonemployee directors are eligible to
participate in our 1999 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;
40
<PAGE>
. 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.
Executive Compensation
Summary Compensation. The following table sets forth the compensation
received for services rendered to us during the fiscal year ended December 31,
1999 by our Chief Executive Officer and our named executive officers, the four
other most highly compensated executive officers who earned more than $100,000
during the fiscal year ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------- ------------
All Other Securities
Compensation Underlying
Name and Principal Position Salary ($) Bonus ($) ($) Options (#)
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Kenneth W. Anstey,............. $219,308 $38,000 $ 55,439(1) 100,000
President and Chief Executive
Officer
Hugh R. Sharkey,............... $171,962 $37,500 $ 6,000(2) --
Executive Vice President and
Chief Technical Officer
Nancy V. Westcott,............. $161,346 $50,000 -- --
Chief Financial Officer, Vice
President, Administration and
Secretary
Roger H. Lipton,............... $164,481 $45,000 $ 50,480(3) --
Vice President, Sales and
Marketing
Calvin K. Lee,................. $154,058 $10,000 -- --
Vice President, Operations
</TABLE>
- --------
(1) Consists of $49,670 in perquisite (including reimbursement of taxes) and
$5,769 car allowance.
(2) Consists of car allowance.
(3) Consists of $46,880 in perquisite (including reimbursement of taxes) and
$3,600 car allowance.
Option Grants. The following table shows information regarding stock options
granted to our named executive officers during the year ended December 31,
1999. 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>
Kenneth W. Anstey....... 100,000 8.6% $4.25 2/25/09 $1,529,674 $2,687,491
</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.
41
<PAGE>
(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 $12.00 was the
fair market value of the common stock on the date of grant. There is no
assurance provided to any executive officer or any other holder of our
securities that the actual stock price appreciation over the 10-year option
term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers.
Aggregate Option Exercises and Holdings. The following table provides summary
information concerning the shares of common stock represented by outstanding
stock options held by each of our named executive officers as of December 31,
1999.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Number of Options at at December 31, 1999
Shares Value December 31, 1999 (#) ($)(2)
Acquired on Realized ------------------------- -------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth W. Anstey....... -- -- 354,584 245,416 $3,968,151 $2,483,849
Hugh R. Sharkey......... 40,000 $166,000 -- -- -- --
Nancy V. Westcott....... 59,375 $163,281 18,750 71,875 $ 196,875 $ 754,688
Roger H. Lipton......... -- -- 114,479 8,021 $1,359,787 $ 91,380
Calvin K. Lee........... -- -- 83,959 26,041 $ 939,747 $ 287,753
</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, 1999, using an assumed
initial public offering price of $12.00 per share as the fair market value,
and the exercise price of the option.
Employment Agreements. We have entered into employment agreements with the
executive officers set forth below, which provide for the payment of severance
or the acceleration of unvested stock, options and warrants in some
circumstances. In addition, effective upon the closing of this offering our
stock plans provide for accelerated vesting of some employee options and shares
if the employee is involuntarily terminated without cause by ORATEC or a
successor company within two years after a change of control transaction. To
the extent that the acceleration provisions in our stock plans provide for a
greater acceleration benefit than an executive officer would otherwise receive
based on that officer's agreement, then the stock plan acceleration provisions
would govern the acceleration of that officer's stock and options.
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, any unvested options
and stock granted under this agreement 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.
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) six
months, or (b) 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.
42
<PAGE>
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, as amended. 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,
November 1998 and July 1999, and our stockholders approved these amendments to
the 1995 plan in May 1996, July 1997, November 1998 and August 1999. A total of
4,990,000 shares were authorized for issuance under this plan. In October 1999,
the board of directors approved an amendment to the 1995 plan effective upon
the closing of this offering which, under the circumstances described in detail
in the 1995 plan, provides for acceleration of vesting if we consummate a
change of control transaction.
In connection with our reincorporation in Delaware in December 1999, the
board of directors determined that no future grants will be made out of the
1995 plan and no annual increases in shares will be made under the existing
provision regarding automatic annual increases in authorized shares.
As of December 31, 1999, options to purchase 3,163,737 shares of common stock
were outstanding under the 1995 plan at a weighted average exercise price of
$2.86 per share, 656,201 shares had been issued upon exercise of outstanding
options or pursuant to restricted stock purchase agreements, 1,170,062 shares
had been retired and no shares remained available for future grant.
The terms of awards issued under our 1995 plan are generally the same as
those that may be issued under our 1999 plan described below.
1999 Stock Plan. Our 1999 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 1999 plan are
to attract and retain the best available personnel, to provide additional
incentives to our employees and consultants and to promote the success of our
business. The 1999 plan was adopted by our board of directors in November 1999
and will be submitted to our stockholders for their approval prior to the date
of this offering. A total of 1,149,000 shares of common stock has been reserved
for issuance under the 1999 plan. The number of shares reserved for issuance
under the 1999 plan will be subject to 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 1,250,000 shares, 4% of our outstanding common stock on the last
day of the immediately preceding fiscal year, or a lesser number of shares as
the board of directors determines. The 1999 plan will terminate in 2009 unless
the board of directors terminates it earlier.
As of December 31, 1999, options to purchase 205,300 shares of common stock
were outstanding under the 1999 plan at a weighted average exercise price of
$9.60 per share, no shares had been issued upon exercise of outstanding options
or pursuant to restricted stock purchase agreements and 943,700 shares remained
available for future grant.
The 1999 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 1999 plan,
including the number of shares subject to the award, the exercise or purchase
price, the vesting and/or exercisability of the award and any other conditions
to which the award is subject. Stock options are generally subject to vesting,
which means the optionee earns the right to exercise an increasing number of
the shares underlying the option over a specific period of time only if he or
she continues to provide services to ORATEC over that period. However, in no
event may an employee receive awards for more than 1,000,000 shares under the
1999 plan in any fiscal year. Incentive stock options granted under the 1999
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
43
<PAGE>
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 1999 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 1999 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
that 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 1999 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 1999 plan as
provided in the 1999 plan. Stock issued pursuant to stock purchase rights
granted under the 1999 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 or purchaser.
However, if the acquiror does not agree to this assumption or substitution, all
outstanding options and stock purchase rights will terminate. Upon the closing
of this offering, the 1999 plan provides, under the circumstances described in
detail in the 1999 plan, for the accelerated vesting of outstanding options and
repurchase rights if an optionee is involuntarily terminated without cause by
ORATEC or a successor corporation within two years after a change of control
transaction. If an acquiror does not agree to assume or substitute outstanding
ORATEC options and repurchase rights with an equivalent award at the time of
the transaction, the acceleration of vesting described above shall be effective
on the date immediately prior to the effective date of the transaction. If a
change of control transaction is consummated, all unvested shares held by
consultants shall automatically become vested immediately prior to the
effective date of the change of control transaction.
Outstanding awards will be adjusted in the event of a stock split, stock
dividend or other similar change in our capital. The board of directors has the
power to amend or terminate the 1999 plan as long as this action does not
adversely affect any outstanding option and we obtain stockholder approval for
any amendment to the extent 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 was approved by our
stockholders in August 1999. A total of 425,000 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 425,000 shares, 2% of our outstanding common
stock on the last day of the immediately preceding fiscal year, or a 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
44
<PAGE>
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 October 31, 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 may not exceed 15% of an employee's
compensation. 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 is not eligible to participate in the 1999 purchase plan if
immediately after the grant of an option to purchase stock under the 1999
purchase plan 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 3,000 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 an employee's 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. Outstanding options will be adjusted if we effect a stock
split, stock dividend or other similar change in our capital. 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 was approved by our
stockholders in August 1999. It will become effective upon the date of this
offering. A total of 250,000 shares of common stock has been reserved for
issuance under the 1999 directors' plan, all of which remains available for
future grants. The directors' plan provides for the grant of nonstatutory stock
options to our nonemployee directors. The directors' 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 10 years after the date of this offering.
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. This initial grant
will vest monthly over three years. 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. Each of these subsequent grants will vest monthly over
one year.
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. If a
45
<PAGE>
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. Outstanding options will be
adjusted if we effect a stock split, stock dividend or other similar change in
our capital. 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 derived 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 Delaware law 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 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
indemnification.
46
<PAGE>
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
From December 31, 1996 through December 31, 1999, we issued shares of
preferred stock in private placement transactions as follows:
. an aggregate of 1,442,542 shares of Series C preferred stock at $3.00 per
share in March 1997 through December 1997;
. an aggregate of 3,228,571 shares of Series D preferred stock at $3.50 per
share in November 1997 and December 1997; and
. an aggregate of 3,757,807 shares of Series E preferred stock at $4.25 per
share in December 1998.
The following table summarizes the shares of preferred stock purchased since
December 31, 1996 and held as of December 31, 1999 by our executive officers,
directors, holders of more than 5% of our outstanding stock and their
affiliates:
<TABLE>
<CAPTION>
Series C Series D Series E
Name Preferred Preferred Preferred
---- --------- --------- ---------
<S> <C> <C> <C>
Entities affiliated with Venrock Associates(1).......... 571,429 176,471
Entities affiliated with Delphi Ventures................ 428,571
Entities affiliated with Pequot Private Equity Fund,
L.P.................................................... 1,142,857 235,300
Gerlach & Co. as nominee for The Manufacturers Life
Insurance Company (U.S.A.)(2).......................... 941,176
Kenneth W. Anstey....................................... 16,666
Gary S. Fanton, M.D..................................... 15,000
Richard M. Ferrari...................................... 25,000 85,000
Calvin K. Lee........................................... 10,000 12,000
Jeffrey A. Saal, M.D.................................... 10,000
Hugh R. Sharkey......................................... 10,000
</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.
Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
On February 26, 1999, Roger H. Lipton, one of our executive officers,
purchased 34,117 shares of Series B preferred stock by exercising a warrant.
See "Management--Executive Compensation" for description of employment
agreements with the named executive officers, which provide for the payment of
severance or the acceleration of unvested stock and options. In addition,
Theresa Mitchell, one of our executive officers, has an agreement, which
provides that if she is terminated other than for cause or constructively
terminated in connection with a change of control of ORATEC, 100% of the shares
underlying her option shall vest on her termination.
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 the liabilities described in the
indemnification agreements 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.
47
<PAGE>
The following table summarizes the options granted to, and the shares of
common stock purchased since December 31, 1996 and held as of December 31, 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.................. 9,412(1) $ 4.25 Aug. 1998
420,000 $ 0.75 July 1997 (2)
100,000 $ 4.25 Feb. 1999 (3)
Gary S. Fanton, M.D................ 10,000 $ 1.75 Feb. 1998 (4)
10,000 $ 4.25 Mar. 1999 (4)
Richard M. Ferrari................. 10,000 $ 4.25 Mar. 1999 (4)
Calvin K. Lee...................... 10,000 $ 1.75 Jan. 1998 (3)
Roger H. Lipton.................... 27,500(5) $0.001 Jan. 1997
10,000 $ 0.75 June 1997 (4)
5,000 $ 1.75 Jan. 1998 (3)
Theresa M. Mitchell................ 120,000 $ 9.60 Nov. 1999 (6)
Jeffrey A. Saal, M.D............... 10,000 $ 1.75 Feb. 1998 (4)
10,000 $ 4.25 Mar. 1999 (4)
Hugh R. Sharkey.................... 34,000(5) $ 0.10 April 1999
Nancy V. Westcott.................. 46,875(5) $ 1.50 Feb. 1999
12,500(5) $ 1.50 June 1999
90,625 $ 1.50 Nov. 1997 (6)
</TABLE>
- --------
(1) Shares were issued as a bonus to Mr. Anstey.
(2) Shares vest at the rate of 6/48ths six months after the vesting
commencement date and 1/48th per month thereafter.
(3) Shares vest at the rate of 1/48th per month after the vesting commencement
date.
(4) Shares vest at the rate of 1/24th per month after the vesting commencement
date.
(5) Shares were purchased with cash pursuant to an option exercise.
(6) 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 of the vesting commencement date
thereafter.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of December 31, 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)......................... 1,678,825 10.2% 8.2%
Entities Associated with Venrock Associates(4).. 1,673,825 10.1% 8.2%
30 Rockefeller Plaza, Suite 5508
New York, NY 10112
Entities Associated with Pequot Private Equity 1,378,157 8.4% 6.7%
Fund, L.P.(5)..................................
500 Nayala Farm Road
Westport, CT 06880
Entities Associated with Delphi Ventures(6)..... 1,354,496 8.2% 6.6%
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Stephen Brackett(7)............................. 941,176 5.7% 4.6%
Gerlach & Co. as nominee for The Manufacturers 941,176 5.7% 4.6%
Life Insurance
Company (U.S.A.)...............................
45 Milk Street, Suite 600
Boston, MA 02109-5105
Hugh R. Sharkey(8).............................. 916,013 5.6% 4.5%
Gary S. Fanton, M.D.(9)......................... 658,749 4.0% 3.2%
Jeffrey A. Saal, M.D.(10)....................... 619,860 3.7% 3.0%
Kenneth W. Anstey(11)........................... 402,328 2.4% 1.9%
Richard M. Ferrari(12).......................... 194,583 1.2% *
Roger H. Lipton(13)............................. 179,637 1.1% *
Calvin K. Lee(14)............................... 110,541 * *
Nancy V. Westcott(15)........................... 84,375 * *
All directors and officers as a group (ten
persons)(16)................................... 5,786,087 33.5% 27.2%
</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 February 29, 2000 are included as shares beneficially
owned. For the purposes of calculating percent ownership, as of December
31, 1999, 16,491,149 shares were issued and outstanding, and, for any
individual who beneficially owns shares represented by options vested as
of February 29, 2000, these shares are treated as if
49
<PAGE>
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 1,673,825 shares held by entities associated with Venrock
Associates, of which Mr. Latterell is a general partner. Mr. Latterell
disclaims beneficial ownership of the shares held by the entities except
to the extent of his pecuniary interest therein.
(4) Consists of 795,296 shares held by Venrock Associates II, L.P. and
878,529 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 1,223,276 shares held by Pequot Private Equity Fund, L.P. and
154,881 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 1,330,542 shares held by Delphi Ventures III, L.P. and 23,954
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. Each of these managing members disclaims
beneficial ownership of the shares held by these funds except to the
extent of each of their pecuniary interests in the partnerships.
(7) Consists of 941,176 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 107,531 shares held in trust for or on behalf of Mr. Sharkey's
children, 616,394 shares held by the Sharkey-Daly Family Trust and 33,000
shares held by Kathleen Daly, Mr. Sharkey's spouse.
(9) Includes 54,583 shares issuable upon exercise of options vested as of
February 29, 2000.
(10) Includes 54,583 shares issuable upon exercise of options vested as of
February 29, 2000 and 116,000 shares held in trust for Dr. Saal's
children.
(11) Includes 376,250 shares issuable upon exercise of options vested as of
February 29, 2000 and 16,666 shares held by Mary Jo Anstey, Mr. Anstey's
spouse.
(12) Consists of 84,583 shares issuable upon exercise of options vested as of
February 29, 2000, 85,000 shares held by Saratoga Ventures, a limited
partnership of which Mr. Ferrari is the general partner, and 25,000
shares held by Ferrari Partners, a limited partnership of which Mr.
Ferrari is a limited partner. Mr. Ferrari disclaims beneficial ownership
of the shares held by Ferrari Partners except to the extent of his
pecuniary interest in the partnership.
(13) Includes 118,020 issuable upon exercise of options vested as of February
29, 2000.
(14) Includes 88,541 shares issuable upon exercise of options vested as of
February 29, 2000.
(15) Includes 25,000 shares issuable upon exercise of options vested as of
February 29, 2000.
(16) Includes 801,560 shares issuable upon exercise of options vested as of
February 29, 2000 held by all directors and officers.
50
<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 December 31, 1999, there were 16,491,149 shares of common stock
outstanding, held of record by approximately 349 stockholders, which reflects
the conversion of all outstanding shares of preferred stock into common stock.
In addition, as of December 31, 1999, there were 3,369,037 shares of common
stock subject to outstanding options and 212,908 shares of common stock subject
to outstanding warrants. Upon completion of this offering, there will be
20,491,149 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 12,079,948 shares of common stock and
will be 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 December 31, 1999 there were the following warrants outstanding:
. a warrant to purchase 55,555 shares of Series B preferred stock with an
exercise price of $1.35, which expires on March 20, 2001;
. warrants to purchase an aggregate of 35,000 shares of Series C preferred
stock with an exercise price of $3.00, which expire five years after the
closing of this initial public offering; and
. a warrant to purchase 122,353 shares of Series E preferred stock with an
exercise price of $4.25 which expires 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 11,805,857 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
51
<PAGE>
holders of 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 212,908 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.
52
<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.
53
<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 51,000
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 20,491,149 outstanding shares
of common stock. Of these shares, the 4,000,000 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 16,491,149 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 4,000,000 shares
sold in the offering and 51,000 additional shares will be immediately
available for sale in the public market.
. Beginning 180 days after the effective date, approximately 13,780,081
shares will be eligible for sale, 5,020,119 of which will be subject to
volume, manner of sale and other limitations under Rule 144.
. The remaining 2,660,068 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.
54
<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 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
December 31, 1999 there were outstanding options for the purchase of 3,369,037
shares of common stock, of which options to purchase 1,521,050 shares were
exercisable.
55
<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 between 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......................................................
===
</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 the liabilities
described in the underwriting agreement, including liabilities under the
Securities Act as provided in the underwriting agreement, or to contribute to
payments the underwriters may be required to make.
Commissions 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 dealers
selected by the underwriters 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 be changed.
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 Without 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 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.
56
<PAGE>
Over-allotment Option
We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 600,000
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 this option solely to cover over-allotments, if any, made on the
sale of the common stock. To the extent that the underwriters exercise this
option, each underwriter will be obligated, subject to the conditions described
in the underwriting agreement, 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, 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, the rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and 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.
57
<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 Assistant 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 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 31,333 shares of ORATEC'S common stock. As of the
date of this prospectus, partners of Wilson Sonsini Goodrich & Rosati, a
Professional Corporation, beneficially own 45,000 shares of ORATEC's common
stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999, and for each of the three years ended
December 31, 1999, 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 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.
58
<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. There are items 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.
59
<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, 1998 and 1999, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
January 17, 2000
F-2
<PAGE>
ORATEC INTERVENTIONS, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, Pro Forma
------------------ at December 31,
1998 1999 1999
-------- -------- ---------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............... $ 11,583 $ 5,943
Short term investments.................. 3,998 2,931
Accounts receivable, less allowance for
doubtful accounts of $216 in 1998 and
$528 in 1999........................... 2,905 6,306
Inventories............................. 1,421 3,248
Prepaid expenses and other current
assets................................. 513 1,004
-------- --------
Total current assets.................. 20,420 19,432
Property and equipment, net............... 3,775 4,409
-------- --------
$ 24,195 $ 23,841
======== ========
Liabilities and stockholders' equity
Current liabilities:
Bank borrowings......................... $ 1,178 $ 3,427
Accounts payable........................ 1,672 1,735
Accrued compensation and benefits....... 1,327 2,953
Other accrued liabilities............... 1,637 1,817
Current portion of notes payable........ -- 1,705
Current portion of equipment financing
obligations............................ 609 1,425
-------- --------
Total current liabilities............. 6,423 13,062
Long term notes payable................... -- 2,295
Long term equipment financing
obligations.............................. 2,702 2,053
Commitments
Redeemable convertible preferred stock,
$0.001 par value, issuable in series;
12,400,000 shares authorized in 1998 and
1999 (5,000,000 shares pro forma);
12,045,831 and 12,079,948 shares issued
and outstanding in 1998 and 1999, respec-
tively (none pro forma); aggregate re-
demption value of $36,380 at December 31,
1998 and $36,426 at December 31,
1999 (none pro forma).................... 35,816 35,816 $ --
Common stock, $0.001 par value; 19,900,000
shares authorized in 1998 and 1999
(75,000,000 shares pro forma); 4,026,341
and 4,411,201 shares issued and outstand-
ing in 1998 and 1999, respectively
(16,491,149 shares pro forma)............ 4 4 16
Additional paid-in capital................ 266 1,625 37,429
Deferred stock compensation............... -- (320) (320)
Receivable from stockholder............... -- (9) (9)
Accumulated deficit....................... (21,016) (30,685) (30,685)
-------- --------
$ 24,195 $ 23,841
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ORATEC INTERVENTIONS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Sales............................................. $ 2,600 $ 11,129 $31,365
Cost of sales..................................... 1,741 6,566 13,030
------- -------- -------
Gross profit...................................... 859 4,563 18,335
Operating expenses:
Research and development........................ 2,147 4,056 4,709
Sales and marketing............................. 2,622 8,318 17,541
General and administrative...................... 3,088 3,374 5,043
------- -------- -------
Total operating expenses.......................... 7,857 15,748 27,293
------- -------- -------
Loss from operations.............................. (6,998) (11,185) (8,958)
Interest and other income......................... 196 265 646
Interest and other expense........................ (30) (422) (1,357)
------- -------- -------
Net loss.......................................... $(6,832) $(11,342) $(9,669)
======= ======== =======
Net loss per common share, basic and diluted...... $ (1.75) $ (2.83) $ (2.30)
======= ======== =======
Shares used in computing net loss per common
share, basic and diluted......................... 3,912 4,006 4,201
Pro forma net loss per share, basic and diluted
(unaudited)...................................... $ (0.59)
=======
Shares used in computing net loss per share, basic
and diluted (unaudited).......................... 16,276
</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,
1996................... 3,616,911 $ 4,792 3,865,750 $ 4 $ 1 $ -- $ -- $ (2,842)
Issuance of Series C
redeemable convertible
preferred stock........ 1,442,542 4,328 -- -- -- -- -- --
Issuance of Series D
redeemable convertible
preferred stock (net of
issuance costs of
$96)................... 3,228,571 11,204 -- -- -- -- (124) --
Issuance of common stock
upon exercise of stock
options................ -- -- 85,304 -- 23 -- -- --
Net and comprehensive
loss................... -- -- -- -- -- -- -- (6,832)
---------- ------- --------- ---- ------ ----- ----- --------
Balances at December 31,
1997................... 8,288,024 20,324 3,951,054 4 24 -- (124) (9,674)
Warrants to purchase
122,353 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........... -- -- 65,875 -- 100 -- -- --
Grant of common stock in
lieu of compensation... -- -- 9,412 -- 40 -- -- --
Cash payments on
receivable from
stockholders........... -- -- -- -- -- -- 124 --
Issuance of Series E
preferred stock (net of
issuance costs of
$625).................. 3,757,807 15,346 -- -- -- -- -- --
Net and comprehensive
loss................... -- -- -- -- -- -- -- (11,342)
---------- ------- --------- ---- ------ ----- ----- --------
Balances at December 31,
1998................... 12,045,831 35,816 4,026,341 4 266 -- -- (21,016)
Issuance of common stock
upon exercise of
options ............... -- -- 379,860 -- 375 -- (9) --
Exercise of warrants for
Series B redeemable
convertible preferred
stock ................. 34,117 -- -- -- -- -- -- --
Compensation expense for
non-employee options .. -- -- -- -- 584 -- -- --
Grant of common stock in
lieu of compensation .. -- -- 5,000 -- 40 -- -- --
Deferred stock
compensation related to
options granted to
employees and
consultants............ -- -- -- -- 360 (360) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- 40 -- --
Net and comprehensive
loss .................. -- -- -- -- -- -- -- (9,669)
---------- ------- --------- ---- ------ ----- ----- --------
Balances at December 31,
1999 .................. 12,079,948 $35,816 4,411,201 $ 4 $1,625 $(320) $ (9) $(30,685)
========== ======= ========= ==== ====== ===== ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ORATEC INTERVENTIONS, INC.
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Operating activities
Net loss.......................................... $(6,832) $(11,342) $(9,669)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 573 2,097 3,208
Compensation expense for options granted to non-
employees...................................... -- 102 584
Issuance of equity for non-cash benefits........ -- 186 40
Non-cash interest expense....................... -- 108 350
Changes in operating assets and liabilities:
Accounts receivable........................... (897) (2,008) (3,401)
Inventories................................... (419) (919) (1,827)
Prepaid expenses and other current assets..... (491) 80 (491)
Accounts payable.............................. 1,654 203 63
Accrued compensation and benefits............. 228 1,051 1,626
Other accrued liabilities..................... -- 1,205 180
------- -------- -------
Net cash used in operating activities............. (6,184) (9,237) (9,337)
------- -------- -------
Investing activities
Purchases of short term investments............... (3,500) (3,998) (7,154)
Sales of short term investments................... 411 3,650 8,221
Capital expenditures.............................. (2,183) (3,631) (3,802)
------- -------- -------
Net cash used in investing activities............. (5,272) (3,979) (2,735)
------- -------- -------
Financing activities
Proceeds from issuance of preferred stock......... 15,408 15,346 --
Proceeds from issuance of common stock............ 23 100 366
Receipts from stockholder receivables............. -- 124 --
Proceeds from bank borrowings..................... -- 1,178 2,249
Proceeds from notes payable....................... -- -- 4,000
Proceeds from equipment financing obligations..... 506 3,000 633
Repayment of equipment financing obligations...... (163) (484) (816)
------- -------- -------
Net cash provided by financing activities......... 15,774 19,264 6,432
------- -------- -------
Net increase (decrease) in cash and cash
equivalents...................................... 4,318 6,048 (5,640)
Cash and cash equivalents at beginning of period.. 1,217 5,535 11,583
------- -------- -------
Cash and cash equivalents at end of period........ $ 5,535 $ 11,583 $ 5,943
======= ======== =======
Supplemental schedule of noncash investing and
financing activities
Issuance of stock to stockholders for
receivables...................................... $ 124 $ -- $ 9
======= ======== =======
Deferred stock compensation....................... $ -- $ -- $ 360
======= ======== =======
Supplemental disclosure of cash flow information
Cash payments for interest........................ $ 30 $ 272 $ 1,008
======= ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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 modify, cut or
remove damaged or stretched soft tissue. In August 1999, ORATEC's stockholders
authorized the reincorporation of ORATEC in the state of Delaware. The
accompanying financial statements have been adjusted retroactively to reflect
the reincorporation.
Basis Of Presentation
Certain amounts in 1997 and 1998 have been restated to conform to the current
period presentation.
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.
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 December 31,
1999 has been adjusted for the assumed conversion of redeemable convertible
preferred stock based on the shares of redeemable convertible preferred stock
outstanding at December 31, 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.
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.
F-7
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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 lives ranging from two to three 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 December 31, 1999 there have been no such losses.
Revenue Recognition
ORATEC recognizes revenue upon shipment of products to customers or when
inventory provided to customers by ORATEC employees or sales agencies 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 1997, 1998, or 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.
F-8
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") requires unrealized gains or losses on ORATEC's available-
for-sale investments to be included in other comprehensive income. For the
years ended December 31, 1997, 1998 and 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>
Years ended
December 31,
------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Basic and diluted unaudited:
Weighted-average shares of common stock outstanding.... 3,912 4,006 4,201
===== ===== ======
Pro forma basic and diluted (unaudited):
Shares used above...................................... 4,201
Pro forma adjustment to reflect weighted-average effect
of assumed conversion of redeemable convertible
preferred stock....................................... 12,075
------
16,276
======
</TABLE>
The following outstanding options, warrants, and redeemable convertible
preferred stock (on an as converted basis) were excluded from the computation
of diluted net loss per share as they had an antidilutive effect (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Options and warrants..................................... 2,369 2,985 3,582
Redeemable convertible preferred stock................... 8,288 12,046 12,080
</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.
F-9
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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>
Years ended
December 31,
----------------
1997 1998 1999
----- ---- ----
<S> <C> <C> <C>
Balance at beginning of period............................. $ -- $106 $216
Additions charged to costs and expenses.................... 106 151 363
Write-off of uncollectible accounts........................ -- (41) (51)
----- ---- ----
Balance at end of period................................... $ 106 $216 $528
===== ==== ====
</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,
-------------
1998 1999
------ ------
<S> <C> <C>
Raw materials................................................. $ 432 $1,087
Work-in-process............................................... 41 284
Finished goods................................................ 370 790
Electrothermal generators held for sale....................... 578 1,087
------ ------
$1,421 $3,248
====== ======
</TABLE>
4. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Electrothermal generators.................................. $ 4,692 $ 7,581
Computers, machinery and equipment......................... 1,148 1,993
Furniture and fixtures..................................... 459 451
Leasehold improvements..................................... 218 294
------- -------
6,517 10,319
Less accumulated depreciation and amortization............. (2,742) (5,910)
------- -------
Property and equipment, net................................ $ 3,775 $ 4,409
======= =======
</TABLE>
F-10
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
5. Cash Equivalents and Short Term Investments
Cash equivalents and short term investments include the following (in
thousands):
<TABLE>
<CAPTION>
Amortized Cost and
Fair Value at
December 31,
------------------
1998 1999
------ -------
<S> <C> <C> <C>
Certificates of deposit............................... $1,000 $ --
Corporate commercial paper............................ 2,998 3,781
Asset-backed auction rate securities.................. 4,500 2,004
------ -------
$8,498 $ 5,785
====== =======
Reported as:
Cash equivalents.................................... $4,500 $ 2,854
Short term investments.............................. 3,998 2,931
------ -------
$8,498 $ 5,785
====== =======
</TABLE>
At December 31, 1998 and 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, 1998 or 1999.
6. Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Professional fees............................................. $ 529 $ 581
Dealer commissions............................................ 138 299
Clinical and development costs................................ 452 189
Other......................................................... 518 748
------ ------
$1,637 $1,817
====== ======
</TABLE>
7. Operating Lease Commitments
ORATEC leases its facilities under various agreements expiring through March
2005. Rent expense was approximately $230,000, $320,000 and $525,000 for the
years ended December 31, 1997, 1998 and 1999. ORATEC has the option to extend
the term of the majority of its operating leases for three additional years. At
December 31, 1999, minimum future rental payments under operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
Year ended December 31,
2000................................................................. $ 699
2001................................................................. 536
2002................................................................. 531
2003................................................................. 351
2004................................................................. 148
Thereafter........................................................... 37
------
$2,302
======
</TABLE>
F-11
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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 of all amounts available 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, 1999, 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 December 31, 1999, ORATEC had drawn down the
total loan of $2,562,415 with interest rates of 12% to 13%.
Future minimum payments under equipment financing obligations are as follows
at December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Year ended December 31,
2000.............................................................. $ 1,758
2001.............................................................. 1,744
2002.............................................................. 223
-------
Total minimum payments.............................................. 3,725
Less amount representing interest................................... (247)
-------
Present value of minimum payments................................... 3,478
Less current portion................................................ (1,425)
-------
Long term portion................................................... $ 2,053
=======
</TABLE>
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. In October 1999 the line of
credit was increased to $4,000,000. 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 covenants under the terms of the agreement
including a maximum debt to tangible net worth ratio of 3:1. At December 31,
1999, the balance outstanding under this agreement was $3,427,449 and the
unused line of credit was $572,551. The weighted-average interest rate for 1999
was 9.0%.
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 the
set up of the loan arrangement, ORATEC agreed to issue to the financial
institution a warrant to purchase 122,353 shares of ORATEC's Series E preferred
stock at $4.25 per share. For accounting purposes, the warrant was valued at
$145,821 and was fully expensed in 1998. ORATEC drew down the full $4,000,000
in January 1999.
F-12
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
At December 31, 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 December 31,
1999 were as follows: $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,
---------------------------------------------------------------------
1998 1999
---------------------------------- ----------------------------------
Redemption/ Redemption/
Issued and Liquidation Issued and Liquidation
Authorized Outstanding Value Authorized Outstanding Value
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 260,416 260,416 $ 250,000 260,416 260,416 $ 250,000
Series B................ 3,462,050 3,356,495 4,531,268 3,462,050 3,390,612 4,577,326
Series C................ 1,477,542 1,442,542 4,327,638 1,477,542 1,442,542 4,327,638
Series D................ 3,228,571 3,228,571 11,299,998 3,228,571 3,228,571 11,299,998
Series E................ 3,971,421 3,757,807 15,970,680 3,971,421 3,757,807 15,970,680
---------- ---------- ----------- ---------- ---------- -----------
12,400,000 12,045,831 $36,379,584 12,400,000 12,079,948 $36,425,642
========== ========== =========== ========== ========== ===========
</TABLE>
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 $7.00
(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 $0.08, $0.11, $0.24, $0.29, and $0.34 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, 1999.
The Series A, B, C, D, and E preferred stockholders are entitled to receive,
upon liquidation or certain merger transactions, a distribution of $0.96,
$1.35, $3.00, $3.50, and $4.25 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 $10.50 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.
F-13
<PAGE>
ORATEC INTERVENTION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31 , 1999
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 1,000,000 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
1,000,000 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.
Stock Option Plans
In July 1995, ORATEC adopted the 1995 Stock Plan (the "95 Plan") and, in
November 1999, ORATEC adopted the 1999 Stock Plan (the "99 Plan") in
conjunction with ORATEC's reincorporation in Delaware. These plans provide for
the issuance of common stock options and common stock purchase rights to
employees and consultants of ORATEC. The plans permit 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, 1999, ORATEC had issued 19,412 shares of common stock under 95 Plan stock
purchase rights. No stock purchase rights have been issued under the 99 Plan.
Incentive stock options become exercisable ratably generally over four years
from the date of grant. Nonstatutory stock options granted prior to May 1999
become exercisable ratably generally over two years from the date of grant.
Nonstatutory stock options beginning in May 1999 were granted as fully vested.
The term of the plans is 10 years. In July 1999, the ORATEC stockholders
approved an amendment to the 95 Plan to increase the number of shares reserved
for issuance by 1,250,000 shares. ORATEC's board of directors determined that
no grants will be made from the 95 Plan subsequent to October 1999 and the
1,170,062 shares available for grant under the 95 Plan at December 31, 1999
were retired. The number of shares initially reserved for issuance under the 99
Plan was 1,149,000. The number of shares reserved for issuance under the 99
Plan is subject to an automatic annual increase on January 1, 2000, 2001 and
2002 equal to the lesser of (i) 1,250,000 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. At December 31, 1999, ORATEC had 943,700 options available for
future grant under the 99 Plan.
In August 1999, ORATEC stockholders 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 250,000 shares of common
stock have been reserved for issuance under the Directors' Plan. No options had
been granted under this plan as of December 31, 1999.
F-14
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
A summary of option activity under ORATEC's stock option plans is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------
1997 1998 1999
-------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year....... 1,211,750 $0.35 2,228,420 $0.67 2,721,829 $1.46
Granted................. 1,224,600 $0.99 823,688 $3.46 1,281,000 $6.54
Canceled................ (121,304) $0.28 (190,654) $1.88 (253,932) $3.78
Exercised............... (86,626) $0.23 (139,625) $0.76 (379,860) $0.99
--------- ---------- ---------
Outstanding at
end of year............. 2,228,420 $0.67 2,721,829 $1.46 3,369,037 $3.27
========= ========== =========
Weighted-average
fair value of options
granted during the year.. $ 0.15 $ 0.58 $ 1.13
========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Options Life Price Options Price
- ------------------------ --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.001 - $0.10 436,165 7.22 $ 0.08 423,195 $ 0.08
$0.75 - $2.50 1,348,911 8.84 $ 1.05 861,456 $ 0.99
$3.50 - $5.00 989,661 9.03 $ 4.33 203,830 $ 4.37
$7.50 - $9.60 594,300 9.71 $ 8.88 32,569 $ 8.16
--------- ---------
$0.001 - $9.60 3,369,037 8.84 $ 3.27 1,521,050 $ 1.34
========= =========
</TABLE>
Options exercisable at December 31, 1998 and 1999 were 1,220,102 and
1,520,992, respectively.
On March 18 and May 14, 1999, ORATEC granted options to purchase 371,000
shares of common stock at $4.25 per share. On May 24, 1999, ORATEC granted
options to purchase 26,500 shares of common stock at $7.50 per share. On July 1
and July 22, 1999, ORATEC granted options to purchase 207,000 shares of common
stock at $7.50 to $8.00 per share. Deferred compensation of $360,000 has been
recorded in 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.
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 1997, 1998 and 1999 as follows: risk-free interest rates of 6%,
4.5% 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 $11,487,121 ($2.87 per
common share) and $10,036,084 ($2.39 per common share) for the years ended
December 31, 1998 and 1999, respectively. The pro forma effect for the year
ended December 31, 1997 was 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.
F-15
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
ORATEC has granted 87,303 and 82,750 options to nonemployees in 1998 and
1999, respectively, which resulted in compensation expense of $102,000 and
$584,000 in 1998 and 1999, respectively. The options vest primarily over a two-
year period and, therefore, ORATEC will record additional expense related to
these options in 2000 and 2001.
Stock Purchase Plan
In August 1999, the ORATEC stockholders approved the adoption of the 1999
Employee Stock Purchase Plan (the "1999 Purchase Plan"). A total of 425,000
shares of common stock have 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)
425,000 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 ORATEC's initial
public offering.
Warrants
In February 1996, ORATEC issued to an employee a warrant to purchase 50,000
shares of Series B preferred stock at a purchase price of $1.35 per share. In
the year ended December 31, 1999, these warrants were exercised or cancelled.
In March 1996, ORATEC issued a warrant to purchase 55,555 shares of Series B
preferred stock at a purchase price of $1.35 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 35,000 shares of Series C
preferred stock at $3.00 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 122,353 shares of Series E preferred
stock at a purchase price of $4.25 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, 1999, warrants to purchase a total of 55,555 shares of
Series B preferred stock, 35,000 shares of Series C preferred stock and 122,353
shares of Series E preferred stock were outstanding.
Reserved Stock
As of December 31, 1999, ORATEC has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Stock plans....................................................... 4,762,737
Redeemable convertible preferred stock and warrants............... 12,292,856
----------
17,055,593
==========
</TABLE>
F-16
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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............................................. 55,555
Series C preferred stock............................................. 35,000
Series E preferred stock............................................. 122,353
</TABLE>
12. Income Taxes
As of December 31, 1999, ORATEC had federal and state net operating loss
carryforwards of approximately $24,100,000 and $4,500,000. ORATEC also had
federal research and development tax credit carryforwards of approximately
$400,000. The net operating loss and credit carryforwards will expire at
various dates beginning in 2009 through 2019, 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,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards.................. $ 7,200,000 $ 8,500,000
Research credit carryforwards..................... 400,000 600,000
Capitalized research & development................ 300,000 500,000
Inventory reserves ............................... -- 1,100,000
Accrued liabilities .............................. -- 1,700,000
Other-net......................................... 100,000 (500,000)
----------- ------------
Net deferred tax assets........................... 8,000,000 11,900,000
Valuation allowance............................... (8,000,000) (11,900,000)
----------- ------------
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 $2,500,000, $4,300,000 and $3,900,000 during the years ended December 31,
1997, 1998 and 1999.
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
F-17
<PAGE>
ORATEC INTERVENTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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>
Years ended
December 31,
----------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Spine................................................. $ -- $ 1,246 $16,163
Arthroscopy........................................... 2,600 9,883 15,202
------ ------- -------
$2,600 $11,129 $31,365
====== ======= =======
</TABLE>
14. Initial Public Offering
In January 2000, ORATEC's board of directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
ORATEC to sell 4 million shares of its common stock to the public at an assumed
offering price of $11-$13 per share. Upon completion of ORATEC's initial public
offering as described in the registration statement, all outstanding redeemable
convertible preferred stock will be converted into 12,079,948 shares of common
stock.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 Shares
[LOGO OF ORATEC(R)]
Common Stock
------------
PROSPECTUS
------------
Merrill Lynch & Co.
J.P. Morgan & Co.
U.S. Bancorp Piper Jaffray
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............. $ 15,787
NASD filing fee................................................. 6,480
Nasdaq National Market listing fee.............................. 95,000
Printing and engraving expenses................................. 200,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 200,000
Blue Sky qualification fees and expenses........................ 5,000
Transfer Agent and Registrar fees............................... 15,000
Miscellaneous fees and expenses................................. 12,733
--------
Total......................................................... $800,000(1)
========
</TABLE>
- --------
(1) Excludes approximately $1 million in initial public offering expenses,
which were written off in 1999 as a result of the postponement of the
offering.
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
the circumstances described in Section 145 of the Delaware General Corporation
Law, 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 3.2) and Article VI of ORATEC's bylaws
(Exhibit 3.4) 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 10.16)
with its officers and directors. The underwriting agreement (Exhibit 1.1) also
provides for cross-indemnification among ORATEC and the underwriters with
respect to the matters described in the underwriting agreement including
matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since December 31, 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 1,442,542 shares of common
stock to a total of 120 investors for an aggregate purchase price of
$4,327,626.
(2) In October 1997, we issued warrants to purchase shares of Series C
preferred stock convertible into an aggregate of 35,000 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 3,228,571 shares of common
stock to a total of 60 investors for an aggregate purchase price of
$11,299,999.
(4) In December 1998, we issued and sold shares of Series E preferred
stock convertible into an aggregate of 3,757,807 shares of common stock to
a total of 59 investors for an aggregate purchase price of $15,970,680.
II-1
<PAGE>
(5) In January 1999, we issued a warrant to purchase Series E preferred
stock convertible into an aggregate of 122,353 shares of common stock to
one lender.
(6) In February 1999, we issued and sold 34,117 shares of Series B
preferred stock to an executive officer upon his exercise of a warrant.
(7) From December 31, 1996 through December 31, 1999, under our 1995
stock plan, 606,039 shares of common stock had been issued upon exercise of
options, 14,412 shares of common stock had been issued pursuant to
restricted stock purchase agreements and, as of December 31, 1999,
3,163,737 shares of common stock were issuable upon exercise of outstanding
options.
(8) From December 31, 1996 through December 31, 1999, under our 1999
stock plan, no shares of common stock had been issued upon exercise of
options or pursuant to restricted stock purchase agreements and, as of
December 31, 1999, 205,300 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 and Item 8 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 Certificate of Incorporation.
3.2 Amended and Restated Certificate of Incorporation, post-IPO.
3.3 Bylaws, as amended.
3.4 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 Offer letter dated November 29, 1999 between ORATEC and Theresa
Mitchell.
10.7 1995 Stock Plan, as amended, and form of option agreement.
10.8 1995 Stock Plan, as amended (post-IPO).
10.9 1999 Stock Plan and form of option agreement.
10.10 1999 Stock Plan and form of option agreement (post-IPO).
10.11 1999 Directors' Stock Option Plan and form of option agreement.
10.12 1999 Employee Stock Purchase Plan and form of subscription
agreement.
10.13 Lease dated May 7, 1998 between ORATEC and White Properties Joint
Venture (as amended).
10.14 Lease dated August 2, 1996 between ORATEC and Huettig &
Schromm/Heaton & Keyser.
10.15* Lease dated August 25, 1999 between ORATEC and White Properties
Joint Venture.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.16 Form of Indemnification Agreement between ORATEC and directors and
officers.
10.17** 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. Portions of this exhibit have been omitted.
(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 January 31, 2000
ORATEC INTERVENTIONS, INC.
/s/ Kenneth W. Anstey
By: _________________________________
Kenneth W. Anstey
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Kenneth
W. Anstey and Nancy V. Westcott and each of them, as his or her attorney-in-
fact, with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all Registration Statements
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in
connection with or related to the offering contemplated by this Registration
Statement and its amendments, if any, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorney to any and all amendments to said
Registration Statement.
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>
/s/ Kenneth W. Anstey President, Chief Executive January 31, 2000
______________________________________ Officer and Director
Kenneth W. Anstey (Principal Executive
Officer)
/s/ Nancy V. Westcott Chief Financial Officer January 31, 2000
______________________________________ (Principal Financial and
Nancy V. Westcott Accounting Officer)
/s/ Stephen Brackett Director January 31, 2000
______________________________________
Stephen Brackett
/s/ Gary S. Fanton, M.D. Director January 31, 2000
______________________________________
Gary S. Fanton, M.D.
/s/ Richard M. Ferrari Director January 31, 2000
______________________________________
Richard M. Ferrari
/s/ Patrick F. Latterell Director January 31, 2000
______________________________________
Patrick F. Latterell
/s/ Jeffrey A. Saal, M.D. Director January 31, 2000
______________________________________
Jeffrey A. Saal, M.D.
/s/ Hugh R. Sharkey Director January 31, 2000
______________________________________
Hugh R. Sharkey
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement (subject to negotiation).
3.1 Certificate of Incorporation.
3.2 Amended and Restated Certificate of Incorporation, post-IPO.
3.3 Bylaws, as amended.
3.4 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 Offer letter dated November 29, 1999 between ORATEC and Theresa
Mitchell.
10.7 1995 Stock Plan, as amended, and form of option agreement.
10.8 1995 Stock Plan, as amended (post-IPO)
10.9 1999 Stock Plan and form of option agreement.
10.10 1999 Stock Plan and form of option agreement (post-IPO)
10.11 1999 Directors' Stock Option Plan and form of option agreement.
10.12 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.13 Lease dated May 7, 1998 between ORATEC and White Properties Joint
Venture (as amended).
10.14 Lease dated August 2, 1996 between ORATEC and Huettig & Schromm/Heaton
& Keyser.
10.15* Lease dated August 25, 1999 between ORATEC and White Properties Joint
Venture.
10.16 Form of Indemnification Agreement between ORATEC and officers and
directors.
10.17** 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. Portions of this exhibit have been omitted.
<PAGE>
EXHIBIT 1.1
Draft of September 1, 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.
5
<PAGE>
(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
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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
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<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,
16
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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 and has provided the Representatives with an
opinion regarding the invalidity of certain patents as has been requested
by the Representatives.
(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
18
<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) 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>
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
20
<PAGE>
(j) 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.
(k) 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.
(l) 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.
(m) 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.
(n) 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.
(o) 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.
(p) 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.
(q) The Company shall have affected the stock split described in Note 14
to the Financial Statements included in the preliminary prospectus.
(r) 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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<PAGE>
(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).
23
<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
U.S. Patents Issued
Patent Number Date Issued
------------- -----------
5,458,596 10/17/95
5,514,130 10/29/96
5,569,242 05/07/96
5,785,705 07/28/98
5,823,994 10/20/98
U.S. Patents Allowed
Serial Number Date Filed
------------- -----------
08/700,196 08/20/96
08/881,525 06/24/97
08/881,527 06/24/97
08/881,692 06/24/97
08/881,693 06/24/97
08/881,694 06/24/97
09/034,830 03/04/98
09/007,246 10/08/98
09/025,984 02/19/98
U.S. Patents Filed
Serial Number Date Filed
------------- -----------
08/714,981 09/17/95
08/637,095 04/24/96
08/696,051 08/13/96
08/888,359 07/03/97
09/022,612 02/12/98
09/022,688 02/12/98
09/034,885 03/04/98
09/047,182 03/19/98
09/066,615 04/24/98
09/153,552 09/15/98
09/158,320 09/22/98
09/162,704 09/30/98
09/171,213 10/13/98
60/116,724 01/20/99
09/236,816 01/25/99
09/272,806 03/19/99
09/289,459 04/09/99
09/296,690 04/21/99
09/340,065 06/25/99
09/363,894 07/30/99
<PAGE>
SCHEDULE D
List of Non-U.S. Patents Held by Company and
List of Non-U.S. Patent Applications
Submitted by the Company
Foreign Patents Issued
Country Patent Number Date Issued
- ------- ----------------------------
Canada 2,188,668 01/19/99
Foreign Patents Filed
Country Serial Number Date Filed
- ------- ----------------------------
European Patent 95918355.9 05/05/95
Japan 7-529047 05/05/95
Australia 256.0105263 10/08/96
European Patent 97306220.1 08/15/97
Japan 10-514754 09/17/97
Canada 2,265,981 09/17/97
European Patent 9744305.8 09/17/97
European Patent 97912882.4 10/22/97
Japan 10-519638 10/22/97
Canada 2,269,282 10/22/97
PCT US97/19189 10/22/97
PCT US98/02597 02/12/98
PCT US98/02865 02/12/98
PCT US98/03359 02/20/98
PCT US98/19570 09/18/98
PCT US98/19569 09/18/98
PCT US98/19573 09/18/98
PCT US98/21711 10/14/98
PCT US99/00699 01/13/99
PCT US99/06092 03/19/99
PCT = Patent Cooperation Treaty/World Intellectual Property Organization
<PAGE>
EXHIBIT C
---------
SCHEDULE PATENTS (US)
---------------------
U.S. Patents Issued
Patent Number Date Issued
------------- -----------
5,458,596 10/17/95
5,514,130 10/29/96
5,569,242 05/07/96
5,785,705 07/28/98
5,823,994 10/20/98
5,954,716 09/21/99
5,976,127 11/02/99
5,980,504 11/09/99
6,004,320 12/21/99
6,007,533 12/28/99
6,007,570 12/28/99
U.S. Patents Allowed
Serial Number Date Filed
------------- ----------
08/700,196 08/20/96
08/881,525 06/24/97
08/881,692 06/24/97
08/881,694 06/24/97
U.S. Patents Filed
Serial Number Date Filed
------------- ----------
08/714,981 09/17/95
08/637,095 04/24/96
08/696,051 08/13/96
08/888,359 07/03/97
09/022,612 02/12/98
09/022,688 02/12/98
09/047,182 03/19/98
09/066,615 04/24/98
09/153,552 09/15/98
09/158,320 09/22/98
09/162,704 09/30/98
09/171,213 10/13/98
60/116,724 01/20/99
09/236,816 01/25/99
09/272,806 03/19/99
09/289,459 04/15/99
09/296,690 04/21/99
09/340,065 06/25/99
09/363,894 07/30/99
60/151,820 09/01/99
09/412,878 10/05/99
FILED 12/31/99
<PAGE>
EXHIBIT D
---------
SCHEDULE PATENTS (FOREIGN)
--------------------------
Foreign Patents Issued
Country Patent Number Date Issued
------- -------------- -----------
Canada 2188668 01/19/99
Foreign Patents Filed
Country Serial Number Date Filed
------- ------------- -----------
European Patent 95918355.9 05/05/95
Japan 7-529047 05/05/95
Australia 256.010526 10/08/96
European Patent 97306220.1 08/15/97
Japan 10-514754 09/17/97
Canada 2265981 09/17/97
European Patent 9744305.8 09/17/97
European Patent 97912882.4 10/22/97
Japan 10-519638 10/22/97
Canada 2269282 10/22/97
PCT US98/02597 02/12/98
PCT US98/02865 02/12/98
PCT US98/03359 02/20/98
PCT US98/19570 09/18/98
PCT US98/19569 09/18/98
PCT US98/19573 09/18/98
PCT US98/21711 10/14/98
PCT US99/00699 01/13/99
PCT US99/06092 03/19/99
European Patent 98906306.0 08/24/99
European Patent 98907461.2 08/24/99
Japan 10-535026 08/24/99
Japan 10-535079 08/24/99
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
ORATEC INTERVENTIONS, INC.
ARTICLE I
"The name of the corporation is ORATEC Interventions, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The
name of its registered agent at such address is Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) Classes of Stock. This corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the corporation is authorized to issue is
32,300,000 shares, of which 19,900,000 shares shall be Common Stock and
12,400,000 shares shall be Preferred Stock, each with a par value of $0.001 per
share.
(B) Rights, Preferences, Privileges and Restrictions of Preferred Stock.
-------------------------------------------------------------------
There shall initially be five series of Preferred Stock designated as Series A
Preferred Stock ("Series A Preferred"), Series B Preferred Stock ("Series B
------------------ --------
Preferred"), Series C Preferred Stock ("Series C Preferred"), Series D Preferred
- --------- ------------------
Stock ("Series D Preferred") and Series E Preferred Stock ("Series E
------------------ --------
Preferred"). The Series A Preferred shall consist of Two Hundred Sixty Thousand
Four Hundred Sixteen (260,416) shares, the Series B Preferred shall consist of
Three Million Four Hundred Sixty-Two Thousand Fifty (3,462,050) shares, the
Series C Preferred shall consist of One Million Four Hundred Seventy-Seven
Thousand Five Hundred Forty-Two (1,477,542) shares, the Series D Preferred shall
consist of Three Million Two Hundred Twenty-Eight Thousand Five Hundred Seventy-
One (3,228,571) shares and the Series E Preferred shall consist of Three Million
Nine Hundred Seventy-One Thousand Four Hundred Twenty-One (3,971,421) shares.
-1-
<PAGE>
Subject to compliance with applicable protective voting rights which
have been or may be granted to Preferred Stock or any series thereof in the
corporation's Articles of Incorporation and applicable law ("Protective
----------
Provisions"), the Board of Directors of the Company (the "Board of Directors")
- ---------- ------------------
is hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof. Subject to compliance with applicable Protective Provisions, the
rights, privileges, preferences and restrictions of any such additional series
may be subordinate to, pari passu with, or senior to any of those of any present
---- -----
or future class or series of Preferred Stock or Common Stock. Subject to
compliance with applicable Protective Provisions, the Board of Directors is also
authorized to increase or decrease the number of shares of any series, prior or
subsequent to the issue of that series then outstanding. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
The rights, preferences, privileges and restrictions of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred are as follows:
(1) Dividends.
---------
(a) The holders of outstanding Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors, out of any assets at
the time legally available therefor, dividends at the rate of (i) $0.08 per
share of Series A Preferred per annum, (ii) $0.11 per share of Series B
Preferred per annum, (iii) $0.24 per share of Series C Preferred per annum, (iv)
$0.29 per share of Series D Preferred per annum and (v) $0.34 per share of
Series E Preferred per annum (adjusted in each of the foregoing cases to reflect
subsequent stock dividends, stock splits, consolidations or recapitalizations),
before any dividend (payable other than in Common Stock or other securities and
rights convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock of this corporation) is paid on
Common Stock. In the event that the amount of the dividends declared by the
Board of Directors shall be insufficient to permit payment of the full aforesaid
dividends, such dividends will be paid ratably to each holder of the Preferred
Stock in proportion to the dividend amounts to which each such holder is
entitled. After payment of the full amount of the aforesaid dividends, any
additional dividends declared shall be distributed among all holders of
Preferred Stock and Common Stock in proportion to the number of shares of Common
Stock which would be held by each such holder if all shares of Preferred Stock
were converted into Common Stock at the then effective Conversion Prices (as
defined in Section 3). The right to such dividends on shares of Preferred Stock
shall not be cumulative and no right shall accrue to holders of shares of
Preferred Stock by reason of the fact that dividends on said shares are not
declared in any prior year, nor shall any undeclared or unpaid dividend bear or
accrue interest.
(b) In the event this corporation shall declare a distribution payable
in securities of other persons, evidences of indebtedness issued by this
corporation or other persons, assets (excluding cash dividends) or options or
rights not referred to in subsection 3(d)(iii), then,
-2-
<PAGE>
in each such case for the purpose of this Section 1, the holders of the
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the corporation entitled to receive such distribution.
(2) Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
the corporation, either voluntary or involuntary, the holders of the Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the corporation to the holders of the
Common Stock by reason of their ownership thereof, (i) the amount of $0.96 per
share for each share of Series A Preferred (the "Original Series A Issue Price")
-----------------------------
then held by them and, in addition, an amount equal to all declared but unpaid
dividends on the Series A Preferred, (ii) the amount of $1.35 per share for each
share of Series B Preferred (the "Original Series B Issue Price") then held by
-----------------------------
them and, in addition, an amount equal to all declared but unpaid dividends on
the Series B Preferred, (iii) the amount of $3.00 per share for each share of
Series C Preferred (the "Original Series C Issue Price") then held by them and,
-----------------------------
in addition, an amount equal to all declared but unpaid dividends on the Series
C Preferred, (iv) the amount of $3.50 per share of Series D Preferred (the
"Original Series D Issue Price") then held by them and, in addition, an amount
- ------------------------------
equal to all declared but unpaid dividends on the Series D Preferred and (v) the
amount of $4.25 per share for each share of Series E Preferred (the "Original
--------
Series E Issue Price") then held by them and, in addition, an amount equal to
- --------------------
all declared but unpaid dividends on the Series E Preferred (adjusted in each of
the foregoing cases to reflect subsequent stock dividends, stock splits,
consolidations or recapitalizations). If, upon the occurrence of such event,
the assets and funds thus distributed among the holders of the Preferred Stock
shall be insufficient to permit the payment to such holders of the full
preferential amounts for the Preferred Stock, then the entire assets and funds
of the corporation legally available for distribution shall be distributed
ratably among the holders of the Preferred Stock in proportion to the
preferential amount which each such holder is entitled to receive.
(b) Upon the completion of the distribution required by Section 2(a),
the remaining assets of the corporation available for distribution to
shareholders shall be distributed among the holders of the Series D Preferred,
the Series E Preferred and the Common Stock pro rata based on the number of
shares of Common Stock held by each (assuming conversion of all such Series D
Preferred and such Series E Preferred at the then effective applicable
Conversion Price (as defined in Section 3 below)) until (i) with respect to the
holders of Series D Preferred, such holders shall have received an aggregate of
$10.50 per share of Series D Preferred held, including amounts paid pursuant to
Section 2(a) above, and (ii) with respect to the holders of Series E Preferred,
such holders shall have received an aggregate of $10.50 per share of Series E
Preferred held, including amounts paid pursuant to Section 2(a) above (in each
case as adjusted to reflect subsequent stock dividends, stock splits,
consolidations or recapitalizations); thereafter, if assets remain in this
corporation, the holders of the Common
-3-
<PAGE>
Stock shall receive all of the remaining assets of this corporation pro rata
based on the number of shares of Common Stock held by each.
(c) A merger or consolidation of the corporation with or into
any other corporation or corporations in which the corporation is not the
surviving entity or the sale, transfer or lease (other than a pledge or grant of
a security interest to a bona fide lender) of all or substantially all of the
assets of the corporation or any other transaction or series of related
transactions in which the corporation's shareholders immediately prior thereto
own less than a majority of the voting stock of the corporation (or its
successor or parent) immediately thereafter, shall be treated as a liquidation,
dissolution or winding up for purposes of this Section 2 and the shareholders of
the corporation will be entitled to receive in cash and securities the amount
they would have upon liquidation, unless the shareholders of the corporation
immediately preceding such merger, consolidation, sale, transfer or lease own
more than fifty percent (50%) of the surviving entity.
(d) In any of such events, if the consideration received by this
corporation is other than cash, its value will be deemed its fair market value.
Any securities shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange or market over the thirty
(30)-day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter other than
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing bid or sale prices (whichever is applicable) over the thirty
(30)-day period ending three (3) days prior to the closing; and
(C) If there is no active public market, the value shall
be the fair market value thereof, as determined by the Board of Directors in
good faith.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in subsection 2(d)(i)(A), (B) or (C) to reflect the
approximate fair market value thereof, as determined by the Board of Directors
in good faith.
(3) Conversion. The holders of the Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
-----------------
-4-
<PAGE>
(a) Right to Convert. Each share of Preferred Stock shall
----------------
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share at the office of this corporation or any transfer
agent for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Issue Price for such
share by the Conversion Price applicable to such share, determined as hereafter
provided, in effect on the date the certificate is surrendered for conversion.
The initial Conversion Price per share for Series A Preferred shall be the
Original Series A Issue Price, the initial Conversion Price per share for Series
B Preferred shall be the Original Series B Issue Price, the initial Conversion
Price per share for Series C Preferred shall be the Original Series C Issue
Price, the initial Conversion Price per share for the Series D Preferred shall
be the Original Series D Issue Price and the initial Conversion Price per share
for the Series E Preferred shall be the Original Series E Issue Price; provided,
however, that such Conversion Prices shall be subject to adjustment as set forth
in subsection 3(d).
(b) Automatic Conversion. Each share of Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock at the Conversion
Price at the time in effect for such share of Preferred Stock immediately upon
the earlier of (i) this corporation's sale of its Common Stock in a firm
commitment underwritten public offering pursuant to a registration statement
under the Securities Act of 1933, as amended (the "Act"), at a public offering
---
price of at least $7.00 per share (adjusted to reflect subsequent stock
dividends, stock splits, consolidations or recapitalizations) with gross
proceeds to the Company of at least $20,000,000, or (ii) the date specified by
written consent or agreement of the holders of (A) a majority of the outstanding
shares of Preferred Stock, voting together as a single class on an as-converted
basis, and (B) a majority of the outstanding shares of Series D Preferred and
Series E Preferred, voting together as a single class on an as-converted basis.
(c) Mechanics of Conversion. Before any holder of Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of this corporation or of any transfer agent for the Preferred
Stock, and shall give written notice to this corporation at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of Common
Stock are to be issued. This corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Preferred Stock,
or to the nominee or nominees of such holder, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with an underwritten offering
of securities registered pursuant to the Act, the conversion shall be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
-5-
<PAGE>
Common Stock upon conversion of Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
offering.
(d) Conversion Price Adjustments for Certain Dilutive
--------------------------------------------------
Issuances, Splits and Combinations. The Conversion Price of the Preferred Stock
- ----------------------------------
shall be subject to adjustment from time to time as follows:
(i) (A) If this corporation shall issue, after the
date upon which any shares of Series E Preferred were first issued (the
"Purchase Date"), any Additional Stock (as defined below) without consideration
-------------
or for a consideration per share less than the Conversion Price for any series
of Preferred Stock in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price for such series of Preferred Stock in
effect immediately prior to each such issuance shall forthwith (except as
otherwise provided in this subsection 3(d)(i)) be adjusted to a price determined
by multiplying such Conversion Price by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate
consideration received by this corporation for such issuance would purchase at
such Conversion Price, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of such Additional Stock; provided that, for the purposes of
this subsection 3(d)(i), all shares of Common Stock issuable upon conversion of
any outstanding Preferred Stock, options, warrants or convertible securities
shall be deemed to be outstanding, and provided further that the fraction used
in the above calculation will in no event be greater than one (1).
(B) No adjustment of the Conversion Price for any
series of Preferred Stock shall be made in an amount less than one cent (.01)
per share, provided that any adjustments which are not required to be made by
reason of this sentence shall be carried forward and shall be either taken into
account in any subsequent adjustment made prior to three (3) years from the date
of the event giving rise to the adjustment being carried forward, or shall be
made at the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for in
subsections 3(d)(i)(E)(3), 3(d)(i)(E)(4) and 3(d)(iv), no adjustment of the
Conversion Price for any series of Preferred Stock pursuant to this subsection
3(d)(i) shall have the effect of increasing the Conversion Price for such series
of Preferred Stock above the Conversion Price for such series of Preferred Stock
in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be
-6-
<PAGE>
deemed to be the fair value thereof as determined by the Board of Directors in
good faith irrespective of any accounting treatment.
(E) In the case of the issuance (whether before,
on or after the Purchase Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 3(d)(i) and subsection 3(d)(ii):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in subsections 3(d)(i)(C) and (D)), if any,
received by this corporation upon the issuance of such options or rights plus
the minimum exercise price provided in such options or rights for the Common
Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration, if any, received by
this corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any, to be received by
this corporation upon the conversion or exchange of such securities or the
exercise of any related options or rights (the consideration in each case to be
determined in the manner provided in subsections 3(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights, upon conversion of or in
exchange for such convertible or exchangeable securities or upon exercise of
options or rights related to such securities, including, but not limited to, a
change resulting from the antidilution provisions thereof, the Conversion Price
of a series of Preferred Stock, to the extent in any way affected by or computed
using such options, rights, securities or related options or rights, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights, the conversion or exchange of such
securities or the exercise of options or rights related to such securities.
(4) Upon the expiration of any such options
or rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of a series of Preferred Stock, to the extent
in any way affected by or computed using such options, rights or
-7-
<PAGE>
securities or options or rights related to such securities, shall be recomputed
to reflect the issuance of only the number of shares of Common Stock (and
convertible or exchangeable securities which remain in effect) actually issued
upon the exercise of such options or rights, upon the conversion or exchange of
such securities or upon the exercise of the options or rights related to such
securities.
(5) The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor pursuant to subsections
3(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either subsection
3(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of
----------------
Common Stock, or securities convertible into or exercisable for Common Stock,
either directly or indirectly (including securities deemed to have been issued
pursuant to subsection 3(d)(i)(E)) issued by this corporation after the Purchase
Date other than:
(A) Shares of Common Stock issued or deemed to
have been issued pursuant to a transaction described in subsection 3(d)(iii),
(B) Shares of Common Stock issued or deemed to
have been issued to employees, consultants, or directors of this corporation
directly or pursuant to a stock option plan or stock purchase plan or other
incentive stock arrangement approved by the Board of Directors of this
corporation,
(C) Shares of Common Stock issued or deemed to
have been issued in connection with bona fide equipment leases, loans or bank
financings, or similar financing transactions, the terms of which are approved
by the Board of Directors of this corporation,
(D) Shares of Common Stock issued or deemed to
have been issued in connection with strategic relationships or similar
arrangements, the terms of which are approved by a majority of the non-employee
disinterested members of the Board of Directors of this corporation, and
(E) Shares of Common Stock issued or issuable
upon conversion or exercise of convertible or exercisable securities in
existence as of the date of filing these Amended and Restated Articles of
Incorporation.
(iii) In the event this corporation should at any time
or from time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock
------------
-8-
<PAGE>
Equivalents") without payment of any consideration by such holder for the
- -----------
additional shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such split, subdivision, dividend
or distribution if no record date is fixed), the Conversion Price of each series
of Preferred Stock shall be appropriately decreased so that the number of shares
of Common Stock issuable on conversion of each share of such series shall be
increased in proportion to such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to such Common Stock
Equivalents with the number of shares issuable with respect to Common Stock
Equivalents determined from time to time in the manner provided for deemed
issuances in subsection 3(d)(i)(E).
(iv) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for each series of Preferred Stock shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be decreased in proportion to such
decrease in outstanding shares.
(e) Recapitalizations. If at any time or from time to time
-----------------
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3 or Section 2) provision shall be made so that the holders of
Preferred Stock shall thereafter be entitled to receive upon conversion of such
Preferred Stock the number of shares of stock or other securities or property of
this corporation or otherwise, to which a holder of Common Stock deliverable
upon conversion would have been entitled on such recapitalization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 3 with respect to the rights of the holders of Preferred Stock
after the recapitalization to the end that the provisions of this Section 3
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
(f) No Impairment. This corporation will not, by amendment
-------------
of its Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Preferred Stock against impairment.
(g) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the
conversion of any share or shares of Preferred Stock, and the number of shares
of Common Stock to be issued
-9-
<PAGE>
shall be rounded to the nearest whole share (with one-half being rounded
upward). Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, this corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors).
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Preferred Stock pursuant to this Section 3, this
corporation, at its expense, shall, upon the written request at any time of any
holder of Preferred Stock, furnish or cause to be furnished to such holder a
certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price for such Preferred Stock at the time in effect, and (C) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of a share of such Preferred
Stock.
(h) Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Preferred Stock, this corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to these Amended and
Restated Articles of Incorporation.
(i) Notices. Any notice required by the provisions of this
-------
Section 3 to be given to the holders of Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder's address appearing on the books of this
corporation.
(4) Voting Rights.
-------------
(a) Each holder of shares of the Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Preferred Stock could be converted on the record date
for the vote or consent of shareholders and, except as otherwise required by
law, shall have voting rights and powers equal to the voting rights and powers
of the Common Stock. The holder of each share of the Preferred Stock shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the corporation and shall vote with holders of the Common Stock upon the
election of directors
-10-
<PAGE>
and upon any other matter submitted to a vote of shareholders, except in those
matters required by law to be submitted to a class vote. Fractional votes by the
holders of Preferred Stock shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Preferred Stock held by each holder could be converted)
shall be rounded to the nearest whole number.
(b) (i) So long as at least One Million (1,000,000)
shares of Series D Preferred shall remain outstanding (adjusted to reflect stock
splits, stock dividends and recapitalizations), (A) the holders of Series D
Preferred, voting separately as a series, shall have the right to elect one (1)
member of the Board of Directors of this corporation (the "Series D Director")
-----------------
and (B) the Series D Director may be removed from the Board of Directors only by
the affirmative vote of the holders of a majority of the Series D Preferred,
voting separately as a series. The right of the holders of Series D Preferred to
vote for the election of the Series D Director may be exercised at any annual
meeting or at any special meeting called for such purpose or at any adjournment
thereof. Any election to fill a vacancy in the board seat held by the Series D
Director (other than to fill a vacancy created by the removal of the Series D
Director) may be by written consent, delivered to the secretary of the
corporation, of the holders of a majority of the shares of Series D Preferred
outstanding as of the record date of such written consent.
(ii) So long as at least One Million (1,000,000)
shares of Series E Preferred shall remain outstanding (adjusted to reflect stock
splits, stock dividends and recapitalizations), (A) the holders of Series E
Preferred, voting separately as a series, shall have the right to elect one (1)
member of the Board of Directors of this corporation (the "Series E Director")
-----------------
and (B) the Series E Director may be removed from the Board of Directors only by
the affirmative vote of the holders of a majority of the Series E Preferred,
voting separately as a Series. The right of the holders of Series E Preferred to
vote for the election of the Series E Director may be exercised at any annual
meeting or at any special meeting called for such purpose or at any adjournment
thereof. Any election to fill a vacancy in the board seat held by the Series E
Director (other than to fill a vacancy created by the removal of the Series E
Director) may be by written consent, delivered to the secretary of the
corporation, of the holders of a majority of the shares of Series E Preferred
outstanding as of the record date of such written consent.
(iii) In any election of other members of the Board of
Directors of this corporation (collectively, the "Other Directors"), the
---------------
candidates who receive the highest number of affirmative votes of the shares of
Preferred Stock and Common Stock outstanding, voting together as a single class
on an as-converted basis, shall be elected, up to the number of directors to be
elected by such shares. The Other Directors may be removed from the Board of
Directors only by the affirmative vote of the holders of a majority of the
Preferred Stock and Common Stock, voting together as a single class on an as-
converted basis.
(iv) Each director, and any subsequent director
elected pursuant to this paragraph, shall serve as a director until his or her
successor is elected and
-11-
<PAGE>
qualified. In the event of a vacancy in respect of any directorship elected by
the holders of shares of Series D Preferred pursuant to this subsection 4(b)(i),
the holders of a majority of the outstanding shares of Series D Preferred shall
have the right to call a special meeting of shareholders, in order that the
holders of the Series D Preferred may elect a successor director, at which
meeting the holders of Series D Preferred shall be entitled to the same voting
rights as provided in the subsection 4(b)(i), or the holders of Series D
Preferred may fill such vacancy by written consent, delivered to the secretary
of the corporation, of the holders of a majority of all outstanding shares of
Series D Preferred outstanding as of the record date of such written consent. In
the event of a vacancy in respect of any directorship elected by the holders of
shares of Series E Preferred pursuant to subsection 4(b)(ii), the holders of a
majority of the outstanding shares of Series E Preferred shall have the right to
call a special meeting of shareholders, in order that the holders of the Series
E Preferred may elect a successor director, at which meeting the holders of
Series E Preferred shall be entitled to the same voting rights as provided in
the subsection 4(b)(ii), or the holders of Series E Preferred may fill such
vacancy by written consent, delivered to the secretary of the corporation, of
the holders of a majority of all outstanding shares of Series E Preferred
outstanding as of the record date of such written consent.
(5) Protective Provisions.
---------------------
(a) So long as any shares of a particular series of Preferred
Stock are outstanding, the corporation shall not, without first obtaining the
approval by vote or written consent, in the manner provided by law, of the
holders of at least a majority of the total number of shares of such series of
Preferred Stock outstanding, voting together as a separate series, (i) adversely
alter or change any of the powers, preferences, privileges or rights of such
series; (ii) designate or issue any new class or series of shares having
preferences superior to such series as to dividends, conversion rights,
redemption or liquidation; (iii) increase the designated number of shares of
such series; or (iv) amend the provisions of this subsection 5(a).
(b) The corporation shall not, without first obtaining the
approval by vote or written consent, in the manner provided by law, of (i) so
long as any shares of Preferred Stock are outstanding, the holders of at least a
majority of the total number of outstanding shares of Preferred Stock, voting
together as a single class on an as-converted basis and (ii) so long as any
shares of Series D Preferred are outstanding, the holders of a majority of the
total number of outstanding shares of Series D Preferred Stock, voting together
as a single series on an as-converted basis: (x) sell, convey, or otherwise
dispose of all or substantially all of its property or business or merge into or
consolidate with any other corporation (other than a wholly-owned subsidiary
corporation) or effect any transaction or series of related transactions in
which more than fifty percent (50%) of the voting power of this corporation is
disposed of, if the consideration to be received by the shareholders of this
corporation in such transaction (determined as provided in subsection 2(d)
assuming conversion of all outstanding convertible securities and exercise of
all options and warrants by their terms exercisable at the time of such
transaction) is less than $5.50 per share (adjusted to reflect subsequent stock
dividends, stock splits or recapitalizations); or (y) amend the provisions of
this subsection 5(b). Any registered
-12-
<PAGE>
holder of Series D Preferred may proceed to protect and enforce its rights and
the rights of any other holders of Series D Preferred Stock with any and all
remedies available at law or in equity.
(c) So long as any shares of Series E Preferred Stock are
outstanding, the corporation shall not, without first obtaining the approval by
vote or written consent, in the manner provided by law, of the holders of at
least a majority of the total number of outstanding shares of Series E
Preferred, voting together as a single series on an as-converted basis, (i)
sell, convey, or otherwise dispose of all or substantially all of its property
or business or merge into or consolidate with any other corporation (other than
a wholly-owned subsidiary corporation) or effect any transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of this corporation is disposed of, if the consideration to be received by the
shareholders of this corporation in such transaction (determined as provided in
subsection 2(d) assuming conversion of all outstanding convertible securities
and exercise of all options and warrants by their terms exercisable at the time
of such transaction) is less than $7.00 per share (adjusted to reflect
subsequent stock dividends, stock splits or recapitalizations); or (ii) amend
the provisions of this subsection 5(c). Any registered holder of Series E
Preferred may proceed to protect and enforce its rights and the rights of any
other holders of Series E Preferred Stock with any and all remedies available at
law or in equity.
(6) Redemption of Series D and Series E Preferred Stock.
---------------------------------------------------
(a) At the individual option of each holder of shares of Series D
Preferred or, in the case of the redemption of any shares of Series E Preferred,
upon the vote of at least a majority of the outstanding shares of Series E
Preferred (adjusted for stock splits, dividends and the like), the corporation
shall redeem, on the fifth (5th) anniversary of the Purchase Date (the
"Redemption Date"), the number of shares of Series D and Series E Preferred held
- ----------------
by such holder or holders that is specified in a request for redemption
delivered to the corporation by the holder or holders on or prior to the
thirtieth (30th) day immediately preceding the Redemption Date, by paying in
cash therefor the Original Series D Issue Price per share of Series D Preferred
to be redeemed by such holder and the Original Series E Issue Price per share of
Series E Preferred to be redeemed by such holder (as adjusted for any stock
dividends, combinations or splits with respect to such shares) plus all declared
but unpaid dividends on such shares (the "Redemption Price").
----------------
(b) At least fifteen (15) but no more than thirty (30) days prior
to the Redemption Date, written notice (the "Redemption Notice") shall be
-----------------
mailed, first class postage prepaid, to each holder of record (at the close of
business on the business day next preceding the day on which notice is given) of
the Series D Preferred and Series E Preferred to be redeemed, at the address
last shown on the records of the corporation for such holder, notifying such
holder of the redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Redemption Date, the Redemption Price, the place
at which payment may be obtained and calling upon such holder to surrender to
the corporation, in the manner and at the place designated, his, her or its
certificate or certificates representing the shares to be redeemed. Except as
provided in subsection (6)(c) on or after the Redemption Date, each holder of
Series D
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<PAGE>
Preferred and Series E Preferred to be redeemed shall surrender to the
corporation the certificate or certificates representing such shares, in the
manner and at the place designated in the Redemption Notice, and thereupon the
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be canceled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the holders of
shares of Series D Preferred designated for redemption in the Redemption Notice
as holders of Series D Preferred and all rights of the holders of shares of
Series E Preferred designated for redemption in the Redemption Notice as holders
of Series E Preferred (except the right to receive the Redemption Price without
interest upon surrender of their certificate or certificates) shall cease with
respect to such shares, and such shares shall not thereafter be transferred on
the books of the corporation or be deemed to be outstanding for any purpose
whatsoever. If the funds of the corporation legally available for redemption of
shares of Series D Preferred and Series E Preferred on the Redemption Date are
insufficient to redeem the total number of shares of Series D Preferred and
Series E Preferred to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of such shares
ratably among the holders of such shares to be redeemed based upon such holder's
percentage holding of the total number of shares of Series D Preferred and
Series E Preferred outstanding immediately prior to the Redemption Date. The
shares of Series D Preferred and Series E Preferred not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein. At
any time thereafter when additional funds of the corporation are legally
available for the redemption of shares of Series D Preferred Stock and Series E
Preferred Stock, such funds will immediately be used to redeem the balance of
the shares which the corporation has become obliged to redeem on the Redemption
Date but which it has not redeemed.
(7) Repurchase of Shares. In connection with repurchases by this
--------------------
corporation of its Common Stock pursuant to its agreements with certain of the
holders thereof, Sections 502 and 503 of the California General Corporation Law
shall not apply in whole or in part with respect to such repurchases.
(8) No Reissuance of Preferred Stock. No share or shares of
--------------------------------
Preferred Stock acquired by the corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the corporation shall be
authorized to issue.
(C) Common Stock.
-------------
(1) Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any
-14-
<PAGE>
assets of the corporation legally available therefor, such dividends as may be
declared from time to time by the Board of Directors.
(2) Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of the corporation, the assets of the corporation shall be distributed as
provided in Section 2 of Division B of Article III.
(3) Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote, and shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal Bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision."
ARTICLE IX
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<PAGE>
The name and mailing address of the incorporator are as follows:
Laurel Finch
c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
-16-
<PAGE>
Executed this ___ day of ______, 1999.
/s/ Laurel Finch
-------------------------------
Laurel Finch, Incorporator
-17-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ORATEC INTERVENTIONS, INC.
Kenneth Anstey and Mark B. Weeks hereby certify that:
1. The date of filing the original Certificate of Incorporation of this
corporation with the Secretary of State of the State of Delaware is July 15,
1999.
2. They are the duly elected and acting President and Secretary,
respectively, of ORATEC Interventions, Inc., a Delaware corporation.
3. The Certificate of Incorporation of this corporation is hereby amended
and restated to read as follows:
ARTICLE I
"The name of this corporation is ORATEC Interventions, Inc. (the
"Corporation").
-----------
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is:
Corporation Trust Company
1209 Orange Street
Wilmington, County of New Castle
Delaware, 19801
The name of the Corporation's registered agent at said address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the Corporation is authorized to issue is
80,000,000 shares, each with a par value of
<PAGE>
$0.001 per share. 75,000,000 of such shares shall be Common Stock, and 5,000,000
of such shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Certificate of Incorporation, to determine or alter
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and the number of shares
constituting any such series and the designation thereof, or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to time
by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
"Listing Event" as used in this Amended and Restated Certificate of
-------------
Incorporation shall mean the first annual meeting of stockholders following such
time as the Corporation meets the criteria set forth in subdivisions (1), (2) or
(3) of Section 2115(c) the California Corporations Code as of the record date of
such meeting.
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, its directors and its stockholders or any class
thereof, as the case may be, it is further provided that, effective upon the
occurrence of the Listing Event:
(i) The number of directors which shall constitute the entire Board of
Directors, and the number of directors in each class, shall be fixed exclusively
by one or more resolutions adopted from time to time by the Board of Directors.
The Board of Directors shall be divided into three classes, designated as Class
I, Class II and Class III, respectively. Directors shall be assigned to each
class in accordance with a resolution or resolutions adopted by the Board of
Directors. Until changed by a resolution of the Board of Directors, Class I
shall consist of three directors, each of whom shall be designated by the
Board of Directors; Class II shall consist of three directors, each of whom
shall be designated by the Board of Directors; and Class III shall consist of
three directors, each of whom shall be designated by the Board of Directors
Upon the occurrence of the Listing Event, the terms of office of
the Class I directors shall expire, and Class I directors shall be elected for a
full term of three years. At the first annual meeting of stockholders following
the Listing Event, the term of office of the Class II directors shall expire,
and Class II directors shall be elected for a full term of three years. At the
second annual meeting of the stockholders following the Listing Event, the term
of office of the Class III directors shall expire, and Class III directors shall
be elected for a full term of three years. At each succeeding annual meeting of
stockholders,
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<PAGE>
directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting.
Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of voting stock of the corporation entitled to
vote generally in the election of directors (the "Voting Stock") voting together
------------
as a single class; or (ii) by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors. Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
In addition to the requirements of law and any other provisions
hereof (and notwithstanding the fact that approval by a lesser vote may be
permitted by law or any other provision hereof), the affirmative vote of the
holders of at least 66 2/3 percent of the voting power of the then outstanding
shares of stock of all classes and all series of the Corporation entitled to
vote generally in the election of directors, voting together as a single class,
shall be required to amend, alter, repeal, or adopt any provision inconsistent
with this Section (i) of this Article VI.
(ii) There shall be no right with respect to shares of stock of the
Corporation to cumulate votes in the election of directors.
(iii) Any director, or the entire Board of Directors, may be removed
from office at any time (i) with cause by the affirmative vote of the holders of
at least a majority of the voting power of the then-outstanding shares of the
Voting Stock, voting together as a single class; or (ii) without cause by the
affirmative vote of the holders of at least 66-2/3% of the voting power of the
then-outstanding shares of the Voting Stock.
ARTICLE VII
No action shall be taken by the stockholders of the Corporation other than
at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Corporation's bylaws.
ARTICLE VIII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or
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<PAGE>
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE IX
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal Bylaws of the Corporation.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
The Corporation shall have perpetual existence.
ARTICLE XII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is hereafter amended to authorize,
with the approval of a corporation's stockholders, further reductions in the
liability of the Corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this Article
XII shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIII
(A) To the fullest extent permitted by applicable law, the Corporation is
also authorized to provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits the Corporation
to provide indemnification) though bylaw provisions, agreements with such agents
or other persons, vote of stockholders or disinterested directors or otherwise,
in excess of the indemnification and advancement otherwise permitted by Section
145 of the Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions
for breach of duty to a corporation, its stockholders, and others.
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<PAGE>
(B) Any repeal or modification of any of the foregoing provisions of this
Article XIII shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
-5-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at __________, California, on ____________________, 1999.
_________________________________
Kenneth Anstey
President
_________________________________
Mark B. Weeks
Secretary
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
ORATEC INTERVENTIONS, INC.
(a Delaware Company)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES..................................................... 1
1.1 Registered Office........................................................ 1
1.2 Other Offices............................................................ 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................................. 1
2.1 Place Of Meetings........................................................ 1
2.2 Annual Meeting........................................................... 1
2.3 Special Meeting.......................................................... 1
2.4 Notice Of Stockholders' Meetings......................................... 2
2.5 Manner Of Giving Notice; Affidavit Of Notice............................. 2
2.6 Quorum................................................................... 2
2.7 Adjourned Meeting; Notice................................................ 2
2.8 Conduct Of Business...................................................... 3
2.9 Voting................................................................... 3
2.10 Waiver Of Notice........................................................ 3
2.11 Stockholder Action By Written Consent Without A Meeting................. 3
2.12 Record Date For Stockholder Notice; Voting; Giving Consents............. 4
2.13 Proxies................................................................. 4
ARTICLE III - DIRECTORS........................................................... 5
3.1 Powers................................................................... 5
3.2 Number Of Directors...................................................... 5
3.3 Election, Qualification And Term Of Office Of Directors.................. 5
3.4 Resignation And Vacancies................................................ 5
3.5 Place Of Meetings; Meetings By Telephone................................. 6
3.6 Regular Meetings......................................................... 6
3.7 Special Meetings; Notice................................................. 7
3.8 Quorum................................................................... 7
3.9 Waiver Of Notice......................................................... 7
3.10 Board Action By Written Consent Without A Meeting....................... 8
3.11 Fees And Compensation Of Directors...................................... 8
3.12 Approval Of Loans To Officers........................................... 8
3.13 Removal Of Directors.................................................... 8
3.14 Chairman Of The Board Of Directors...................................... 8
ARTICLE IV - COMMITTEES........................................................... 9
4.1 Committees Of Directors.................................................. 9
4.2 Committee Minutes........................................................ 9
4.3 Meetings And Action Of Committees........................................ 9
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE V - OFFICERS.............................................................. 10
5.1 Officers................................................................. 10
5.2 Appointment Of Officers.................................................. 10
5.3 Subordinate Officers..................................................... 10
5.4 Removal And Resignation Of Officers...................................... 10
5.5 Vacancies In Offices..................................................... 10
5.6 Chief Executive Officer.................................................. 11
5.7 President................................................................ 11
5.8 Vice Presidents.......................................................... 11
5.9 Secretary................................................................ 11
5.10 Chief Financial Officer................................................. 12
5.11 Representation Of Shares Of Other Corporations.......................... 12
5.12 Authority And Duties Of Officers........................................ 12
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.. 13
6.1 Indemnification Of Directors And Officers................................ 13
6.2 Indemnification Of Others................................................ 13
6.3 Payment Of Expenses In Advance........................................... 13
6.4 Indemnity Not Exclusive.................................................. 13
6.5 Insurance................................................................ 14
6.6 Conflicts................................................................ 14
ARTICLE VII - RECORDS AND REPORTS................................................. 14
7.1 Maintenance And Inspection Of Records.................................... 14
7.2 Inspection By Directors.................................................. 15
7.3 Annual Statement To Stockholders......................................... 15
ARTICLE VIII - GENERAL MATTERS.................................................... 15
8.1 Checks................................................................... 15
8.2 Execution Of Corporate Contracts And Instruments......................... 15
8.3 Stock Certificates; Partly Paid Shares................................... 15
8.4 Special Designation On Certificates...................................... 16
8.5 Lost Certificates........................................................ 16
8.6 Construction; Definitions................................................ 17
8.7 Dividends................................................................ 17
8.8 Fiscal Year.............................................................. 17
8.9 Seal..................................................................... 17
8.10 Transfer Of Stock....................................................... 17
</TABLE>
-3-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.11 Stock Transfer Agreements............................................... 18
8.12 Registered Stockholders................................................. 18
ARTICLE IX - AMENDMENTS........................................................... 18
</TABLE>
-4-
<PAGE>
BYLAWS
OF
ORATEC INTERVENTIONS, INC.
(a Delaware Company)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location 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.
--------------
The annual meeting of stockholders shall be held on such date, time
and place, either within or without the State of Delaware, as may be designated
by resolution of the Board of Directors each year. At the meeting, directors
shall be elected and any other proper business may be transacted.
2.3 Special Meeting.
---------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the chairman of the board, the president or by one or more
stockholders holding shares in the aggregate entitled to cast not less than ten
percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
Board of Directors, the president or the chairman of the board, the request
shall be in writing, specifying
<PAGE>
the time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the chairman of the board, the
president, any vice president, or the secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The officer receiving the request shall cause notice to be promptly
given to the stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time
requested by the person or persons calling the meeting, not less than thirty-
five (35) nor more than sixty (60) days after the receipt of the request. If the
notice is not given within twenty (20) days after the receipt of the request,
the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
2.4 Notice Of Stockholders' Meetings.
--------------------------------
All notices of meetings with stockholders shall be in writing and
shall be sent or otherwise given in accordance with Section 2.5 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. 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.
2.5 Manner Of Giving Notice; Affidavit Of Notice.
--------------------------------------------
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.
2.6 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
-2-
<PAGE>
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.
2.9 Voting.
------
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.12 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).
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 Stockholder Action By Written Consent Without A Meeting.
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
the corporation, or any action that may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice, and without a vote if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
-3-
<PAGE>
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 Record Date For Stockholder Notice; Voting; Giving Consents.
-----------------------------------------------------------
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 express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board 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 entitled to consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first written
consent is delivered to the corporation.
(c) 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.
2.13 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting 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
-4-
<PAGE>
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.
-------------------
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be seven (7). Thereafter, this
number may be changed by a resolution of the Board of Directors or of the
stockholders, subject to Section 3.4 of these Bylaws. No reduction of the
authorized number of directors shall have the effect of removing any director
before such director's term of office expires.
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 office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
-5-
<PAGE>
(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 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.
-6-
<PAGE>
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 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.
-7-
<PAGE>
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.
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.
-8-
<PAGE>
ARTICLE IV
COMMITTEES
----------
4.1 Committees Of Directors.
-----------------------
The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate 1 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 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 these Bylaws,
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 which may
require it; but no such committee shall have the power or authority in reference
to the following matters: (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by this chapter to be
submitted to stockholders for approval or (ii) adopting, amending or repealing
any Bylaw of the corporation.
4.2 Committee Minutes.
-----------------
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.
-9-
<PAGE>
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the corporation shall be a president, a secretary, and
a chief financial officer. The corporation may also have, at the discretion of
the Board of Directors, a chief executive officer, 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.
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.
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<PAGE>
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 (if such an officer is appointed) 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
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.
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<PAGE>
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.
----------------------------------------------
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.
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<PAGE>
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 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,
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<PAGE>
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.
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,
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<PAGE>
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, 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
-15-
<PAGE>
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
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 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 cancelled 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
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<PAGE>
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.
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.
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<PAGE>
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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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
ORATEC INTERVENTIONS, INC.
ADOPTION BY INCORPORATOR
------------------------
The undersigned person appointed in the certificate of incorporation to act
as the Incorporator of ORATEC Interventions, Inc. hereby adopts the foregoing
bylaws as the Bylaws of the corporation.
Executed this 15th day of July, 1999.
/s/ Laurel Finch
_______________________________________
Laurel Finch, Incorporator
CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR
----------------------------------------------------
The undersigned hereby certifies that the undersigned is the duly elected,
qualified, and acting Secretary of ORATEC Interventions, Inc. and that the
foregoing Bylaws were adopted as the Bylaws of the corporation on July 15,
1999 by the person appointed in the certificate of incorporation to act as the
Incorporator of the corporation.
Executed this 16th day of July, 1999.
/s/ Mark B. Weeks
_______________________________________
Mark B. Weeks, Secretary
<PAGE>
Exhibit 3.4
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>
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<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>
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<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.
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<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
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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.
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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.
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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
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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
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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
-14-
<PAGE>
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.
-15-
<PAGE>
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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<PAGE>
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
-17-
<PAGE>
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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<PAGE>
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.
-19
<PAGE>
EXHIBIT 10.1
ORATEC INTERVENTIONS, INC.
______________________________________________________________________________
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
______________________________________________________________________________
December 7, 1998
<PAGE>
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
----------------------------------------------
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Agreement") is
---------
entered into as of the 7th day of December, 1998, by and among Oratec
Interventions, Inc., a California corporation (the "Company"), the holders of
-------
the Company's securities listed on Exhibit A hereto (the "Existing Investors"),
--------- ------------------
the holders of warrants to purchase shares of Preferred Stock listed on Exhibit
-------
A hereto (the "Warrant Holders") and the holders of the Company's securities
- - ---------------
listed on Exhibit B hereto (the "New Investors," and collectively with the
--------- -------------
Existing Investors and the Warrant Holders, the "Investors").
---------
RECITAL
The Company and the Existing Investors entered into an Amended and Restated
Investor Rights Agreement dated as of November 26, 1997 (the "Prior Rights
------------
Agreement").
- ---------
The Company and certain of the Existing Investors and the New Investors are
parties to a Series E Preferred Stock Purchase Agreement of even date herewith
(the "Series E Purchaser Agreement"), pursuant to which the Company will sell
----------------------------
and issue to such Investors shares of the Company's Series E Preferred Stock
(the "Series E Preferred Stock").
------------------------
The Company has issued warrants to purchase shares of Preferred Stock (the
"Warrants") to certain entities and wishes to grant certain registration rights
--------
to the Warrant Holders.
The Company and the undersigned Existing Investors, who hold a majority of
the "Registrable Securities" (as such term is defined in the Prior Rights
----------------------
Agreement), wish to amend and restate the Prior Rights Agreement in its entirety
in accordance with Section 3.7 of the Prior Rights Agreement on the terms and
conditions set forth in this Agreement in order to include the New Investors and
the shares of Series E Preferred Stock, and the Warrant Holders and the Warrant
Shares hereunder.
AGREEMENT
SECTION 1
Restrictions on Transferability;
--------------------------------
Registration Rights
-------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Conversion Shares" means the Common Stock issued or issuable upon
-----------------
conversion of the Securities.
<PAGE>
"Holder" shall mean any Investor holding Registrable Securities and
------
any person holding Registrable Securities to whom the rights under this
Agreement have been transferred in accordance with Section 1.14 hereof.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any regular or special
audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company which shall be paid in any
event by the Company).
"Registrable Securities" means (i) the Conversion Shares; and (ii) any
----------------------
Common Stock of the Company issued or issuable in respect of the Conversion
Shares or other securities issued or issuable with respect to the Conversion
Shares upon any stock split, stock dividend, recapitalization, or similar event,
or any Common Stock otherwise issued or issuable with respect to the Conversion
Shares; provided, however, that shares of Common Stock or other securities shall
-------- -------
only be treated as Registrable Securities if and so long as they have not been
(A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) thereof so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such sale.
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legend set forth in Section 1.3 of this Agreement.
"Securities" shall mean (i) shares of the Company's Series A Preferred
----------
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock held by the Investors as of the date hereof,
(ii) shares of the Company's Series B Preferred Stock, Series C Preferred Stock
and Series E Preferred Stock issuable upon exercise of warrants (the "Warrant
-------
Shares") held by certain Investors as of the date hereof, provided that the
- ------ --------
Warrant Shares shall only be considered "Securities" and the holders of Warrant
Shares shall only be considered as "Holders" for the purposes of Sections 1.1,
1.2, 1.3, 1.4, 1.6, 1.7, 1.8, 1.9, 1.10, 1.11, 1.12, 1.13, 1.14, 1.15, 1.16 and
Section 3 of this Agreement, and (iii) shares of Series E Preferred Stock issued
or issuable to persons or entities that become parties to this Agreement
pursuant to Section 3.7.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
-2-
<PAGE>
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Section 1.8).
1.2 Restrictions. The Securities and the Conversion Shares shall not be
------------
sold, assigned, transferred or pledged except upon the conditions specified in
this Agreement, which conditions are intended to ensure compliance with the
provisions of the Securities Act. The Investors will cause any proposed
purchaser, assignee, transferee or pledgee of the Securities and the Conversion
Shares to agree to take and hold such securities subject to the provisions and
upon the conditions specified in this Agreement.
1.3 Restrictive Legend. Each certificate representing (i) the Securities,
------------------
(ii) the Conversion Shares and (iii) any other securities issued in respect of
the securities referenced in clauses (i) and (ii) upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted by the provisions of Section 1.4 below) be stamped
or otherwise imprinted with legends in the following form (in addition to any
legend required under applicable state securities laws):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF
SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL
(WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING
THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SAID ACT."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY."
Each Investor and Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
this Section 1.
1.4 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (i) an unqualified written
opinion of legal counsel who shall be, and whose legal opinion shall be,
reasonably satisfactory
-3-
<PAGE>
to the Company, addressed to the Company, to the effect that the proposed
transfer of the Restricted Securities may be effected without registration under
the Securities Act, or (ii) a "no action" letter from the Commission to the
effect that the transfer of such securities without registration will not result
in a recommendation by the staff of the Commission that action be taken with
respect thereto, whereupon the holder of such Restricted Securities shall be
entitled to transfer such Restricted Securities in accordance with the terms of
the notice delivered by the holder to the Company. The Company will not require
such a legal opinion or "no action" letter (a) in any transaction in compliance
with Rule 144, (b) in any transaction in which an Investor which is a
corporation distributes Restricted Securities solely to its majority-owned
subsidiaries or affiliates for no consideration, or (c) in any transaction in
which an Investor which is a partnership distributes Restricted Securities
solely to partners or retired partners thereof for no consideration, provided
that each transferee agrees in writing to be subject to the terms of this
Section 1.4. Each certificate evidencing the Restricted Securities transferred
as above provided shall bear, except if such transfer is made pursuant to Rule
144, the appropriate restrictive legend set forth in Section 1.3 above, except
that such certificate shall not bear such restrictive legend if, in the opinion
of counsel for such holder and the Company, such legend is not required in order
to establish compliance with any provisions of the Securities Act. The Company
shall be required to promptly reissue unlegended certificates at the request of
any holder thereof if the Holder shall have obtained an opinion of counsel who
shall be, and whose legal opinion shall be, reasonably acceptable to the
Company, at such Holder's expense, to the effect that the securities proposed to
be disposed of may lawfully be so disposed of without registration,
qualification or legend. Notwithstanding the foregoing, a legend endorsed on an
instrument pursuant to applicable state securities laws and the stop-transfer
instructions with respect to such securities shall be removed upon receipt by
the Company of an order of the appropriate blue sky authority authorizing such
removal.
1.5 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Holders of at least forty percent (40%) of the Registrable Securities a written
request that the Company effect any registration, qualification or compliance of
the Registrable Securities, the anticipated aggregate offering price to the
public of which would exceed $5,000,000, the Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky law or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written
-4-
<PAGE>
notice from the Company by any Holder; provided, however, that the Company shall
-------- -------
not be obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 1.5:
(1) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(2) Prior to the earlier of December __ , 2000 or six (6) months
following the bona fide firm commitment underwritten (by an underwriter of
nationally recognized standing) initial public offering of the Company's Common
Stock pursuant to an effective registration statement under the Securities Act;
(3) If at the time of the request to register Registrable
Securities the Company gives notice within thirty (30) days of such request that
it is engaged or has fixed plans to engage within ninety (90) days of the time
of the request in a bona fide firm commitment underwritten public offering of
its Common Stock pursuant to an effective registration statement under the
Securities Act;
(4) After the Company has effected two (2) such registrations
pursuant to this subparagraph 1.5(a), such registrations have been declared or
ordered effective and the securities offered pursuant to such registrations have
been sold; or
(5) If the Company shall furnish to such Holders a certificate,
signed by the President of the Company, stating that in the good faith judgment
of the Board of Directors it would be seriously detrimental to the Company or
its shareholders for registration statements to be filed in the near future,
then the Company's obligation to use it best efforts to register, qualify or
comply under this Section 1.5 shall be deferred for up to one (1) period, not to
exceed one hundred twenty (120) days each from the date of receipt of written
request from the Holders, in any twelve (12) month period.
Subject to the foregoing clauses (1) through (5), the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt of the request
or requests of the Holders.
(b) Underwriting. In the event that a registration pursuant to
------------
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by Section 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested and to the
extent provided in this Agreement.
The Company shall (together with all Holders) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by majority in interest of the Holders requesting such
registration (which managing underwriter
-5-
<PAGE>
shall be reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 1.5, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration. The Company shall so advise all Holders, and
the number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all such Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares
allocated to any Holder to the nearest one hundred (100) shares. If any Holder
disapproves of the terms of any such underwriting, he or she may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public
distribution prior to 180 days after the effective date of the registration
statement relating thereto.
1.6 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time, the
----------------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved in
such registration, all the Registrable Securities specified in a written request
or requests made within twenty (20) days after receipt of such written notice
from the Company by any Holder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the written notice given pursuant
to Section 1.6(a)(i). In such event, the right of any Holder to registration
pursuant to Section 1.6 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company)
enter into an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by the Company (or the Holders who
have demanded such registration). Notwithstanding any other provision of this
Section 1.6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may limit the Registrable Securities to be included in such
registration provided, however, that, except in the case of the initial public
offering of the Company's Common Stock pursuant to a registration statement
under the Securities Act (where securities (including Registrable Securities) to
be included in such registration by the Company's shareholders (including the
Holders) may be excluded entirely if the managing underwriter determines that
marketing factors require a
-6-
<PAGE>
limitation of the number of shares to be underwritten), the aggregate value of
securities (including Registrable Securities) to be included in such
registration by the Company's shareholders (including the Holders) may not be so
reduced to less than thirty percent (30%) of the total value of all securities
included in such registration. The Company shall so advise all Holders, and the
number of shares Registrable Securities that may be included in the registration
and underwriting shall be allocated among all such Holders in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities held
by such Holders at the time of filing the registration statement. To facilitate
the allocation of shares in accordance with the above provisions, the Company or
the underwriters may round the number of shares allocated to any Holder to the
nearest one hundred (100) shares. If any Holder disapproves of the terms of any
such underwriting, such person may elect to withdraw therefrom by written notice
to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall not be transferred in a public distribution prior to 180 days after the
effective date of the registration statement relating thereto.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Section 1.6
prior to the effectiveness of such registration, whether or not any Holder has
elected to include securities in such registration.
1.7 Registration on Form S-3.
------------------------
(a) If Holders of at least thirty percent (30%) of the Registrable
Securities then outstanding request that the Company file a registration
statement on Form S-3 (or any successor form to Form S-3) for a public offering
of shares of the Registrable Securities, the reasonably anticipated aggregate
price to the public of which would exceed $1,000,000, and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form; provided,
--------
however, that the Company shall not be required to effect more than two (2)
- -------
registrations, and provided, further, that the Company shall not be required to
-------- -------
pay Registration Expenses incurred in connection with more than one (1)
registration pursuant to this Section 1.7 in any twelve (12) month period. The
Company will (i) promptly give written notice of the proposed registration to
all other Holders, and (ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company
-7-
<PAGE>
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act, (ii) during the period starting with the date sixty (60)
days prior to the filing of, and ending on a date six (6) months following the
effective date of, a registration statement (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities), provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective, or (iii) if the Company shall furnish to such
Holder a certificate signed by the president of the Company stating that, in the
good faith judgment of the Board of Directors, it would be seriously detrimental
to the Company or its shareholders for registration statements to be filed in
the near future, then the Company's obligation to register, qualify or comply
under this Section 1.7 shall be deferred for up to one (1) period, not to exceed
one hundred twenty (120) days each from the receipt of the request to file such
registration by such Holder or Holders, in any twelve (12) month period.
1.8 Expenses of Registration. Subject to the limitation set forth in
------------------------
Section 1.7, all Registration Expenses incurred in connection with any
registration pursuant to Sections 1.5, 1.6 and 1.7 and the reasonable cost of
one (1) special legal counsel to represent all of the Holders together in any
such registration shall be borne by the Company. Unless otherwise stated, all
other Selling Expenses relating to securities registered on behalf of the
Holders shall be borne by the Holders of the registered securities included in
such registration pro rata on the basis of the number of shares so registered.
1.9 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for at least one hundred eighty (180)
days or until the distribution described in the registration statement has been
completed;
(b) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(c) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective for such period
as any seller of Registrable Securities pursuant to such registration statement
shall request and to comply with the provisions of the Securities Act with
respect to the sale or other disposition of all Registrable Securities covered
-8-
<PAGE>
by such registration statement in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement;
(d) use commercially reasonable efforts to register or qualify the
Registrable Securities covered by such registration statement under such other
securities or "blue sky" laws of such jurisdictions as any sellers of
Registrable Securities or any managing underwriter, if any, shall reasonably
request, and do any and all other acts and things which may be reasonably
necessary or advisable to enable such sellers or underwriter, if any, to
consummate the disposition of the Registrable Securities in such jurisdictions,
except that in no event shall the Company be required to qualify to do business
as a foreign corporation in any jurisdiction where it would not, but for the
requirements of this paragraph (d), be required to be so qualified, to subject
itself to taxation in any such jurisdiction or to consent to general service of
process in any such jurisdiction;
(e) promptly notify each Holder selling Registrable Securities covered
by such registration statement and each managing underwriter, if any: (i) when
the registration statement, any pre-effective amendment, the prospectus or any
prospectus supplement related thereto or post-effective amendment to the
registration statement has been filed and, with respect to the registration
statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the SEC or state securities authority for amendments or
supplements to the registration statement or the prospectus related thereto or
for additional information; (iii) of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement or the initiation of
any proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any
Registrable Securities for sale under the securities or blue sky laws of any
jurisdiction or the initiation of any proceeding for such purpose; and (v) of
the existence of any fact of which the Company becomes aware which results in
the registration statement, the prospectus related thereto or any document
incorporated therein by reference containing an untrue statement of a material
fact or omitting to state a material fact required to be stated therein or
necessary to make any statement therein not misleading; and, if the notification
relates to an event described in clause (v), the Company shall promptly prepare
and furnish to each such seller and each underwriter, if any, a reasonable
number of copies of a prospectus supplemented or amended so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include 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 in the light of the circumstances under which they were made not
misleading;
(f) comply with all applicable rules and regulations of the SEC, and
make generally available to its security holders, as soon as reasonably
practicable after the effective date of the registration statement (and in any
event within sixteen (16) months thereafter), an earnings statement (which need
not be audited) covering the period of at least twelve consecutive months
beginning with the first day of the Company's first calendar quarter after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder;
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<PAGE>
(g) (i) cause all such Registrable Securities covered by such
registration statement to be listed on the principal securities exchange on
which similar securities issued by the Company are then listed (if any), if the
listing of such Registrable Securities is then permitted under the rules of such
exchange, or (ii) if no similar securities are then so listed, to either cause
all such Registrable Securities to be listed on a national securities exchange
or to secure designation of all such Registrable Securities as a National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ")
------
"national market system security" within the meaning of Rule 11Aa2-1 of the
-------------------------------
Exchange Act or, failing that, secure NASDAQ authorization for such shares and,
without limiting the generality of the foregoing, take all actions that may be
required by the Company as the issuer of such Registrable Securities in order to
facilitate the managing underwriter's arranging for the registration of at least
two (2) market makers as such with respect to such shares with the National
Association of Securities Dealers, Inc. (the "NASD");
----
(h) provide and cause to be maintained a transfer agent and registrar
for all such Registrable Securities covered by such registration statement not
later than the effective date of such registration statement;
(i) enter into such customary agreements (including, if applicable, an
underwriting agreement) and take such other actions as the Holders of a majority
of the Registrable Securities participating in such offering shall reasonably
request in order to expedite or facilitate the disposition of such Registrable
Securities. The Holders of the Registrable Securities which are to be
distributed by such underwriters shall be parties to such underwriting
agreement;
(j) obtain an opinion from the Company's counsel in customary form and
covering such matters as are customarily covered by such opinions delivered to
underwriters in underwritten public offerings, which opinion shall be reasonably
satisfactory to the underwriter, if any, and furnish to each Holder
participating in the offering and to each underwriter, if any, a copy of such
opinion addressed to such Holder or underwriter;
(k) deliver promptly to each Holder participating in the offering and
each underwriter, if any, copies of all correspondence between the SEC and the
Company, its counsel or auditors and all memoranda relating to discussions with
the SEC or its staff with respect to the registration statement, other than
those portions of any such memoranda which contain information subject to
attorney-client privilege with respect to the Company, and, upon receipt of such
confidentiality agreements as the Company may reasonably request, make
reasonably available for inspection by any seller of such Registrable Securities
covered by such registration statement, by any underwriter, if any,
participating in any disposition to be effected pursuant to such registration
statement and by any attorney, accountant or other agent retained by any such
seller or any such underwriter, all pertinent financial and other records,
pertinent corporate documents and properties of the Company, and cause all of
the Company's officers, directors and employees to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement;
-10-
<PAGE>
(l) use commercially reasonable efforts to obtain the withdrawal of
any order suspending the effectiveness of the registration statement;
(m) provide a CUSIP number for all Registrable Securities, not later
than the effective date of the registration statement;
(n) make reasonably available its employees and personnel and
otherwise provide reasonable assistance to the underwriters (taking into account
the needs of the Company's businesses and the requirements of the marketing
process) in the marketing of Registrable Securities in any underwritten
offering;
(o) promptly after the filing of any document which is to be
incorporated by reference into the registration statement or the prospectus
(after the initial filing of such registration statement) provide copies of such
document to counsel for the selling holders of Registrable Securities and to
each managing underwriter, if any, and make the Company's representatives
reasonably available for discussion of such document and make such changes in
such document;
(p) furnish to each Holder participating in the offering and the
managing underwriter, without charge, at least one signed copy of the
registration statement and any post-effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(q) cooperate with the selling Holders of Registrable Securities and
the managing underwriter, if any, to facilitate the timely preparation and
delivery of certificates not bearing any restrictive legends representing the
Registrable Securities to be sold, and cause such Registrable Securities to be
issued in such denominations and registered in such names in accordance with the
underwriting agreement prior to any sale of Registrable Securities to the
underwriters or, if not an underwritten offering, in accordance with the
instructions of the selling Holders of Registrable Securities at least three
business days prior to any sale of Registrable Securities and instruct any
transfer agent and registrar of Registrable Securities to release any stop
transfer orders in respect thereto; and
(r) take all such other commercially reasonable actions as are
necessary or advisable in order to expedite or facilitate the disposition of
such Registrable Securities.
1.10 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities, joint or several (or actions or proceedings in
respect thereof) ("Claims"), including any of the foregoing incurred in
------
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue
-11-
<PAGE>
statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or any
violation by the Company of any federal or state securities law, rule or
regulation applicable to the Company, and relating to action required of or
inaction by the Company, in connection with any such registration, qualification
or compliance, and the Company will reimburse each such Holder, each of its
officers and directors, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, for any legal and
any other expenses as reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
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 an instrument duly executed by such Holder, controlling person or
underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and, only out of the
net proceeds received by such Holder from the offering of the securities covered
by such a registration statement, will reimburse the Company, such Holders, such
directors, officers, persons, underwriters or control persons for any legal or
any other expenses as reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein. In
no event shall any indemnity under this Section 1.10(b) exceed the net proceeds
from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 1.10
(the "Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved
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<PAGE>
by the Indemnified Party (whose approval shall not unreasonably be withheld),
and the Indemnified Party may participate in such defense at such party's
expense, and provided further that (i) if the Indemnifying Party fails to take
reasonable steps necessary to defend diligently the action or proceeding within
twenty (20) days after receiving notice from such Indemnified Party; or (ii) if
such Indemnified Party who is a defendant in any action or proceeding which is
also brought against the Indemnifying Party reasonably shall have concluded that
there may be one or more legal defenses available to such Indemnified Party
which are not available to the Indemnifying Party; or (iii) if representation of
both parties by the same counsel is otherwise inappropriate under applicable
standards of professional conduct, then, in any such case, the Indemnified Party
shall have the right to assume or continue its own defense as set forth above
(but with no more than one firm of counsel for all Indemnified Parties in each
jurisdiction), and the Indemnifying Party shall be liable for any expenses
therefor. The failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Section 1
unless the failure to give such notice is materially prejudicial to an
Indemnifying Party's ability to defend such action. No settlement of any such
claim, loss, damage, liability or action shall be made by the Indemnified Party
without the prior written consent of the Indemnifying Party (such consent to not
be unreasonably withheld). No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation.
(d) If for any reason the foregoing indemnity is unavailable or is
insufficient to hold harmless an Indemnified Party under Sections 1.10(a) or
(b), then each Indemnifying Party shall contribute to the amount paid or payable
by such Indemnified Party as a result of any Claim in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party, on the one
hand, and the Indemnified Party, on the other hand, with respect to such
offering of securities. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Indemnifying Party or the Indemnified Party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. If, however, the
allocation provided in the second preceding sentence is not permitted by
applicable law, then each Indemnifying Party shall contribute to the amount paid
or payable by such Indemnified Party in such proportion as is appropriate to
reflect not only such relative faults but also the relative benefits of the
Indemnifying Party and the Indemnified Party as well as any other relevant
equitable considerations. The parties hereto agree that it would not be just and
equitable if contributions pursuant to this Section 1.10(d) were to be
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
preceding sentences of this Section 1.10(d). The amount paid or payable in
respect of any Claim shall be deemed to include any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such Claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding anything in this Section 1.10(d) to the
contrary, no
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<PAGE>
Indemnifying Party (other than the Company) shall be required pursuant to this
Section 1.10(d) to contribute any amount in excess of the net proceeds received
by such indemnifying party from the sale of Registrable Securities in the
offering to which the Claims of the Indemnified Parties relate, less the amount
of any indemnification payment made by such Indemnifying Party pursuant to
Section 1.10(b).
(e) The indemnification and contribution agreements contained herein
shall be in addition to any other rights to indemnification or contribution
which any Indemnified Party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless of any investigation
made or omitted by or on behalf of any Indemnified Party and shall survive the
transfer of the Registrable Securities by any such party.
(f) The indemnification and contribution required by this Section
1.10 shall be made by periodic payments of the amount thereof during the course
of the investigation or defense, as and when bills are received or expense,
loss, damage or liability is incurred.
1.11 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.12. Limitations on Subsequent Registration Rights; No Inconsistent
--------------------------------------------------------------
Agreements. Without the prior written consent of the Holders of a majority of
- ----------
the Registrable Securities, the Company will not, on or after the date of this
Agreement, enter into any agreement with respect to its securities with any
holder or prospective holder of any securities of the Company giving such holder
or prospective holder any registration rights, the terms of which are more
favorable than the registration rights granted to the Holders thereunder. The
Company further agrees that if any other registration rights agreement entered
into after the date of this Agreement with respect to any of its securities
contains terms which are more favorable to, or less restrictive on, the other
party thereto than the terms and conditions in this Agreement are (insofar as
they are applicable) to the Holders, then the terms and conditions of this
Agreement shall immediately be deemed to have been amended without further
action by the Company or any of the Holders of Registrable Securities so that
the Holders shall be entitled to the benefit of any such more favorable or less
restrictive terms or conditions.
1.13 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act");
------------
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<PAGE>
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) So long as an Investor owns any Restricted Securities, to furnish
to the Investor forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company and other information as an Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing an Investor
to sell any such securities without registration.
1.14 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by an
Investor (together with any affiliate); provided, that (a) such transfer may
--------
otherwise be effected in accordance with applicable securities laws, (b) notice
of such assignment is given to the Company, and (c) such transferee or assignee
(i) is a wholly-owned subsidiary or constituent partners (including limited
partners) of such Investor, or (ii) acquires from such Investor the lesser of
(A) 100,000 or more shares of Restricted Securities (as appropriately adjusted
for stock splits, stock dividends and the like) or (B) all of the Restricted
Securities then owned by such Investor.
1.15 Standoff Agreement. Each Holder agrees in connection with any
------------------
registration of the Company's securities, upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days from the effective date of such registration in the
case the initial public offering of the Company's Common Stock pursuant to a
registration statement under the Securities Act and ninety (90) days in any
subsequent offering) as may be requested by the Company or such managing
underwriters; provided, that (a) the officers and directors of the Company who
--------
own stock of the Company (and "affiliates" and "associates" thereof (as such
terms are defined in Rule 12b 2 under the Exchange Act) agree to such
restrictions, and (b) the Company has used commercially reasonable efforts to
cause shareholders holding over 200,000 shares of Common Stock or Common Stock
equivalents to agree to such restrictions.
1.16 Termination of Rights. The rights of any particular Holder to cause
---------------------
the Company to register securities under Sections 1.5, 1.6 and 1.7 shall
terminate with respect to such Holder (i) five (5) years following a bona fide
firm underwritten public offering of shares of the Company's Common Stock
registered under the Securities Act, (ii) with respect to any Holder, at such
time as such Holder is able to dispose of all its Registrable Securities in one
three (3)-month
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<PAGE>
period pursuant to the provisions of Rule 144; or (iii) with respect to any
Holder, at such time as such Holder holds Registrable Securities constituting
less than one percent (1%) of the outstanding voting stock of the Company.
SECTION 2
Affirmative Covenants of the Company
The Company hereby covenants and agrees as follows:
2.1 Financial Information. As long as a Holder holds at least 500,000
---------------------
shares of the Securities (as adjusted for stock splits, stock dividends and the
like), the Company will mail the following reports to such Holder:
(a) As soon as practicable after the end of each fiscal year, and in
any event within ninety (90) days thereafter, audited consolidated balance
sheets of the Company and its subsidiaries, if any, as of the end of such fiscal
year, and audited consolidated statements of income, audited consolidated
statements of changes in financial position and audited consolidated statements
of shareholders' equity of the Company and its subsidiaries, if any, for such
year, prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and certified by
independent public accountants of recognized national standing selected by the
Company.
(b) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company and in any
event within forty-five (45) days thereafter, an unaudited consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and unaudited consolidated statements of income, unaudited
consolidated statements of cash flow and unaudited consolidated statements of
shareholders' equity of the Company and its subsidiaries, if any, for such
period and for the current fiscal year to date, and comparisons to budget and
the corresponding prior year period, prepared in accordance with generally
accepted accounting principles (other than for accompanying notes and subject to
normal year-end audit adjustments), all in reasonable detail.
(c) As soon as practicable after the end of each month (other than
the last month of a fiscal quarter) and in any event within forty-five (45) days
after the end of each such month through November 30, 1998 and within thirty
(30) days after the end of each such month thereafter, an unaudited consolidated
balance sheet of the Company and its subsidiaries, if any, as of the end of each
such month, and unaudited consolidated statements of income, unaudited
consolidated statements of cash flow and unaudited consolidated statements of
shareholders' equity of the Company and its subsidiaries, if any, for such month
and for the current fiscal year to date, and comparisons to budget and the
corresponding prior year period, prepared in accordance with generally accepted
accounting principles (other than for accompanying notes and subject to normal
year-end audit adjustments), all in reasonable detail.
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<PAGE>
(d) As soon as practicable, but in any event not less than thirty
(30) days nor more than ninety (90) days prior to the end of each fiscal year, a
budget and business plan for the next fiscal year, prepared on a monthly basis,
including balance sheets and sources and applications of funds statements for
such months and, as soon as prepared, any other budgets or revised budgets
prepared by the Company.
(e) Contemporaneously with delivery to holders of Common Stock, a
copy of each report of the Company delivered to holders of the Company's Common
Stock.
2.2 Subsidiaries. If for any period the Company shall have any subsidiary
------------
or subsidiaries whose accounts are consolidated with those of the Company, then,
in respect of such period, the financial statements and information delivered
pursuant to the foregoing Section 2.1 shall be the consolidated and
consolidating financial statements of the Company and all such consolidated
subsidiaries.
2.3 Access to Records.
-----------------
(a) Each Holder shall have access to the Company's books, records and
properties for purposes reasonably related to such Holder's interests as a
shareholder.
(b) The Company shall afford each Holder of at least 500,000 shares
of Series D Preferred Stock and/or Series E Preferred Stock (a "Major Holder"),
------------
and their employees, counsel and other authorized representatives full access,
during normal business hours, upon reasonable advance notice, with due regard to
its ongoing operations, to the assets, properties, plants, offices, warehouses
and other facilities, contracts and books and records of the Company, and to the
outside auditors of the Company and their work papers relating thereto, in each
case, as the Major Holders may from time to time reasonably request. The Major
Holders and their representatives shall be entitled to consult with the
representatives, officers, employees and accountants of the Company with respect
to the Company, and the Company will instruct such persons to cooperate with the
Major Holders. The Company shall permit representatives of the Major Holders to
discuss the affairs, finances and accounts of the Company with, and to make
proposals and furnish advice with respect thereto to, the principal officers of
the Company, all at such reasonable times, upon reasonable notice and as often
as the Major Holders may reasonably request; provided, however, that neither the
Board of Directors nor the officers of the Company shall be under any obligation
pursuant to this Section 2.3 to take any action with respect to any proposals
made or advice furnished by the Major Holders in their capacities as
shareholders of the Company, other than to take such proposals or advice
seriously and give due consideration thereto.
(c) The Company agrees to furnish to each Major Holder, within ten
(10) business days of any Major Holder's request, a capitalization table setting
forth the class, series of each class, the name of the holder of each class or
series thereof, and the number of shares held by each such holder.
2.4 System of Accounting. The books of account and other financial and
--------------------
corporate records of the Company shall be maintained in accordance with good
business and accounting
-17-
<PAGE>
practices and the financial condition of the Company shall be accurately
reflected in the financial statements required to be provided to the Major
Holders under the terms of this Agreement.
2.5 Transfer of Information Rights. The information rights set forth in
------------------------------
Section 2.1 and 2.3 may be assigned to a transferee or assignee reasonably
acceptable to the Company in connection with any transfer or assignment or
assignment of Registrable Securities by an Investor (together with an affiliate)
(which acceptance shall not be unreasonably withheld); provided, that (a) such
--------
transfer may otherwise be effected in accordance with applicable securities
laws, (b) notice of such assignment is given to the Company, and (c) such
transferee or assignee (i) is a wholly-owned subsidiary or constituent partner
(including limited partners) of such Investor, or (ii) acquires from such
Investor the lesser of (A) 100,000 or more shares of Registered Securities
(500,000 shares of Series D Preferred Stock and/or Series E Preferred Stock in
the case of a transfer of rights pursuant to Section 2.3(b)) as appropriately
adjusted for stock splits, stock dividends and the like or (B) all of the
Restricted Securities then owned by such Investor. In the event that the Company
reasonably determines that provision of information to a transferee pursuant to
this Section 2.5 would materially adversely affect its proprietary position,
such information may be edited in the manner necessary to avoid such effect.
2.6 Right to Maintain Interest. Subject to the terms and conditions
--------------------------
specified in this Section 2.6, the Company hereby grants to each Major Holder a
right to maintain the percentage ownership interest of such Major Holder in the
Company with respect to future sales by the Company of any shares of, or
securities convertible into or exercisable for any shares of, any class of its
capital stock ("Shares"), such that each time the Company proposes to offer
------
Shares, the Company shall first make an offering of such Shares to each Major
Holder in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail ("Notice")
------
to each Major Holder stating the aggregate number of such Shares to be offered
and the price and terms upon which it proposes to offer such Shares.
(b) Within twenty (20) days after delivery of the Notice, each Major
Holder may elect to purchase at the price and on the terms specified in the
Notice, up to such number of Shares equal to (x) the total number of Shares
being offered, multiplied by (y) a fraction, the numerator of which equals the
total number of shares of Common Stock issued and held, or issuable upon
conversion or exercise of all convertible or exercisable securities (including
shares of Common Stock issuable upon conversion of convertible securities
issuable upon exercise of outstanding warrants) then held by such Major Holder,
and the denominator of which equals the total number of shares of Common Stock
of the Company then outstanding (assuming full conversion and exercise of all
then outstanding convertible or exercisable securities and conversion of all
convertible securities issuable upon exercise of outstanding warrants).
(c) The Company may, during the ninety (90)-day period following the
expiration of the period provided in Section 2.6(b), offer the remaining
unsubscribed portion of
-18-
<PAGE>
the Shares to any person or persons at a price not less than, and upon terms no
more favorable to the offeree than those specified in the Notice.
(d) The right to maintain interest set forth in this Section 2.6
shall not be applicable to:
(i) Shares issued or deemed to have been issued pursuant to a
split, subdivision or recapitalization of the outstanding shares of Common
Stock, or a payment in respect of outstanding shares of Common Stock of a
dividend of Common Stock or securities or rights convertible into Common Stock;
(ii) Shares issued or deemed to have been issued to employees,
consultants or directors of the Company directly or pursuant to a stock option
plan or stock purchase plan or other stock incentive arrangement approved by the
Company's Board of Directors;
(iii) Shares issued or deemed to have been issued in connection
with bona fide equipment lease financings or similar financing transactions, the
terms of which are approved by the Company's Board of Directors, or warrants
(and the shares issuable upon exercise of such warrants) to purchase up to
122,353 shares of Series E Preferred Stock in connection with the subordinated
debt financing with Transamerica that has been approved by the Company's Board
of Directors prior to the date of this Agreement;
(iv) Shares issued or deemed to have been issued in connection
with strategic relationships or similar transactions, the terms of which are
approved by a majority of the non-employee disinterested members of the
Company's Board of Directors;
(v) Shares issued or deemed to have been issued upon conversion
of Preferred Stock; or
(vi) Shares issued in connection with a public offering of the
Company's securities pursuant to a registration statement under the Securities
Act.
2.7 Effectiveness and Termination of Covenants. The covenants set
------------------------------------------
forth in this Section 2 shall terminate on and be of no further force or effect
upon the earlier of (i) the consummation of the Company's sale of shares of its
Common Stock in an underwritten public offering pursuant to an effective
registration statement filed under the Securities Act or (ii) the registration
by the Company of a class of its equity securities under Section 12(b) or 12(g)
of the Securities Exchange Act of 1934, or (iii) upon the consummation of an
acquisition of the Company in one or a series of related transactions in which
the shareholders of the Company immediately prior thereto own less than 50% of
the voting stock of the Company (or its successor or parent) thereafter, and
pursuant to which a Public Market exists for the Company's capital stock (or
other stock issued in exchange therefore). For the purpose of this Agreement, a
"Public Market" shall be deemed to exist if: (i) such stock is listed on a
-------------
national securities exchange (as that term is used in the 1934 Act or (ii) such
stock is traded on the over-the-counter market and prices are published daily on
business days in a recognized financial journal.
-19-
<PAGE>
SECTION 3
Miscellaneous
-------------
3.1 Assignment. Except as otherwise provided in this Agreement, the terms
----------
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties to this Agreement.
3.2 Third Parties. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
3.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California in the United States of America.
3.4 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
3.5 Notices. Any notice required or permitted by this Agreement shall be
-------
in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, or otherwise delivered by hand or by messenger addressed to
the other party at the address shown on the signature page to the Series E
Preferred Stock Purchase Agreement of even date herewith or at such other
address for which such party gives notice under this Agreement. Such notice
shall be deemed to have been given when delivered if delivered personally, by
overnight courier, or by facsimile transmission (as evidenced by the sender's
confirmation receipt), or, if sent by mail, at the earlier of its receipt or
three (3) days after deposit in the mail. Any notice to the Company shall be
given as follows:
Oratec Interventions, Inc.
3700 Haven Court
Menlo Park, CA 94025
Telephone: (650) 369-9904
Facsimile: (650) 369-9905
Attention: President
with a copy to:
Venture Law Group
A Professional Corporation
2775 Sand Hill Road
Menlo Park, CA 94025
Telephone: (650) 854-4488
Facsimile: (650) 233-8386
-20-
<PAGE>
Attn.: Mark B. Weeks
3.6 Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
3.7 Amendment and Waiver. Any provision of this Agreement may be amended
--------------------
or waived with the written consent of the Company and the Holders of at least a
majority of the outstanding shares of the Registrable Securities. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon each
Holder of Registrable Securities and the Company. In addition, the Company may
waive performance of any obligation owing to it, as to some or all of the
Holders of Registrable Securities, or agree to accept alternatives to such
performance, without obtaining the consent of any Holder of Registrable
Securities. In the event that an underwriting agreement is entered into, and
such underwriting agreement contains terms differing from this Agreement, as to
any such Holder the terms of such underwriting agreement shall govern. In the
event of the issuance of (a) additional shares of Series E Preferred Stock
permitted to be sold pursuant to the Series E Preferred Stock Purchase Agreement
of even date herewith, or (b) warrants to purchase additional shares of Series E
Preferred Stock in connection with bona fide equipment lease or bank financings,
subordinated debt financings or similar financing transactions, the terms of
which are approved by the Board of Directors of the Company, the holders of such
shares or warrants may become parties to this Agreement, without any further
action by the Holders, by executing and delivering an additional counterpart
signature page to this Agreement and shall be deemed to be "Holders" for all
-------
purposes of this Agreement as of the date of execution and delivery of such
counterpart signature page. In the case of such an issuance, upon execution and
delivery of an additional counterpart signature page by any such person or
entity, the Company shall add such person or entity's name to Exhibit B hereto.
---------
3.8 Effect of Amendment or Waiver. The Investors and their successors and
-----------------------------
assigns acknowledge that by the operation of Section 3.7 of this Agreement the
holders of a majority of the outstanding Registrable Securities, acting in
conjunction with the Company, will have the right and power to diminish or
eliminate any or all rights or increase any or all obligations pursuant to this
Agreement.
3.9 Rights of Holders. Each holder of Registrable Securities shall have
-----------------
the absolute right to exercise or refrain from exercising any right or rights
that such holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.
3.10 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default
-21-
<PAGE>
be deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any party of any breach or default under this Agreement, or any
waiver on the part of any party of any provisions or conditions of this
Agreement, must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or by law or otherwise afforded to any holder, shall be cumulative
and not alternative.
3.11 Termination of Prior Rights Agreement. Pursuant to Section 3.7 of
-------------------------------------
the Prior Rights Agreement, the Company and the undersigned Existing Investors,
being the holders of the requisite majority of the outstanding Registrable
Securities (as defined in the Prior Rights Agreement), hereby amend and restate
the Prior Rights Agreement to read in its entirety as set forth in this
Agreement.
3.12 Waiver of Right to Maintain Interest; Termination of Certain
------------------------------------------------------------
Covenants in Series D Purchase Agreement. Pursuant to Section 14.8 of the
- ----------------------------------------
Series D Preferred Stock Purchase Agreement dated November 26, 1997 between the
Company and certain of the Existing Investors (the "Series D Purchase
-----------------
Agreement"), the Company and the undersigned holders of a majority of the shares
- ---------
of Series D Preferred Stock, being the holders of the requisite majority of the
shares of Stock (as defined in the Series D Purchase Agreement) needed to amend
the Series D Purchase Agreement, do hereby (i) waive the Right to Maintain
Interest contained in Section 7.18 of the Series D Purchase Agreement (including
notice requirements) with respect to the issuance of the shares of Series E
Preferred Stock pursuant to the Series E Purchase Agreement, and (ii) terminate
Sections 7.1, 7.2, 7.3, 7.4 and 7.18 of the Series D Purchase Agreement.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Investor Rights Agreement as of the day and year first above written.
COMPANY:
ORATEC INTERVENTIONS, INC., a California corporation
By: /s/ Kenneth Anstey
---------------------------------
Title: President
------------------------------
WARRANTHOLDERS:
____________________________________
(Warrantholder Name - Please print)
By:_________________________________
(Signature)
Title:______________________________
(if any)
EXISTING INVESTORS:
____________________________________
(Investor Name - Please print)
By:_________________________________
(Signature)
Title:______________________________
(if any)
NEW INVESTORS:
____________________________________
(Investor Name - Please print)
By:_________________________________
(Signature)
Title:______________________________
(if any)
<PAGE>
EXHIBIT A
EXISTING INVESTORS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
First Name Last Name or Entity Name Type of Stock
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael Dillingham Series A
- -------------------------------------------------------------------------------------------------------
Gary Fanton Series A
- -------------------------------------------------------------------------------------------------------
Michael Franz Series A
- -------------------------------------------------------------------------------------------------------
Hartzler, Geoffrey, Trustee of the Geoffrey Hartzler
Revocable Trust dated 1/8/97, as amended Series A
- -------------------------------------------------------------------------------------------------------
Alan Johnson Series A
- -------------------------------------------------------------------------------------------------------
Stephen Marcus Series A
- -------------------------------------------------------------------------------------------------------
Jeffrey Saal Series A
- -------------------------------------------------------------------------------------------------------
Joel Saal Series A
- -------------------------------------------------------------------------------------------------------
Greg Barrett Series B
- -------------------------------------------------------------------------------------------------------
David Birnbach Series B
- -------------------------------------------------------------------------------------------------------
Randy Birnbach Series B
- -------------------------------------------------------------------------------------------------------
Scott Blumenthal Series B
- -------------------------------------------------------------------------------------------------------
Smith Barney IRA Custodian FBO Jeffrey I. Bragman Series B
- -------------------------------------------------------------------------------------------------------
Steve Caria Series B
- -------------------------------------------------------------------------------------------------------
Chris Casscells Series B
- -------------------------------------------------------------------------------------------------------
CN Investment Partners, L.P. Series B
- -------------------------------------------------------------------------------------------------------
Mike Crocker Series B
- -------------------------------------------------------------------------------------------------------
Norma Crocker Series B
- -------------------------------------------------------------------------------------------------------
Delphi BioInvestments III, L.P. Series B
- -------------------------------------------------------------------------------------------------------
Delphi Ventures III, L.P. Series B
- -------------------------------------------------------------------------------------------------------
Michael Dillingham Series B
- -------------------------------------------------------------------------------------------------------
David Jr., M.D. Drez Series B
- -------------------------------------------------------------------------------------------------------
William Elting Series B
- -------------------------------------------------------------------------------------------------------
Peter W. & Mary R. Fanton Series B
- -------------------------------------------------------------------------------------------------------
Gary Fanton Series B
- -------------------------------------------------------------------------------------------------------
Vincent and Marjorie Fanton Series B
- -------------------------------------------------------------------------------------------------------
Michael Franz Series B
- -------------------------------------------------------------------------------------------------------
Michael Franz Series B
- -------------------------------------------------------------------------------------------------------
Lesley Gimbel Series B
- -------------------------------------------------------------------------------------------------------
Lesley and Barry Gimbel, JTWROS Series B
- -------------------------------------------------------------------------------------------------------
Richard Goode Series B
- -------------------------------------------------------------------------------------------------------
Fred and Eleanor Goren Series B
- -------------------------------------------------------------------------------------------------------
Ralph Grant Series B
- -------------------------------------------------------------------------------------------------------
Jean Johnson Series B
- -------------------------------------------------------------------------------------------------------
Jonathan Krass Series B
- -------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass and Stephanie M. Bryan, Tenants in
Common Series B
- -------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass, custodian for Rebecca May Krass Series B
- -------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass, custodian for Daniel Gould Krass Series B
- -------------------------------------------------------------------------------------------------------
Joseph Lagatutta Series B
- -------------------------------------------------------------------------------------------------------
Richard Mastaloni Series B
- -------------------------------------------------------------------------------------------------------
R. Hardwin Mead Series B
- -------------------------------------------------------------------------------------------------------
Munkdale, Steve Munkdale (IRA Account) Account #568-63873-16
Smith Barney Series B
- -------------------------------------------------------------------------------------------------------
Robert and Janet Paul Series B
- -------------------------------------------------------------------------------------------------------
Peloza, John, H., P.A. Profit Sharing Plan & Trust, #101 Series B
- -------------------------------------------------------------------------------------------------------
Richard Randall Series B
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT A
EXISTING INVESTORS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
First Name Last Name or Entity Name Type of Stock
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
???? and Carolyn Ross, JTWROS Series B
- ---------------------------------------------------------------------------------------------------------------
Bruce Saal Series B
- ---------------------------------------------------------------------------------------------------------------
Jeffrey Saal Series B
- ---------------------------------------------------------------------------------------------------------------
Jeffrey Saal Series B
- ---------------------------------------------------------------------------------------------------------------
Joel Saal Series B
- ---------------------------------------------------------------------------------------------------------------
Saal, Laura, TTEE, Laura P. Saal Living Trust Series B
- ---------------------------------------------------------------------------------------------------------------
Sable, Ltd. Series B
- ---------------------------------------------------------------------------------------------------------------
Sharkey, Hugh, Custondia for Zoe Alexandr Sharkey under the CA
Uniform Transfers to Minors Act til 21 Series B
- ---------------------------------------------------------------------------------------------------------------
Sharkey, Hugh, Custondia for Zoe Alexandr Sharkey under the CA
Uniform Transfers to Minors Act til 21 Series B
- ---------------------------------------------------------------------------------------------------------------
Sharkey, Hugh, R. and Kathleen A. Daly, Trustees of the Sharkey-
Daly Family Trust U/D/T dated 9-23-96 Series B
- ---------------------------------------------------------------------------------------------------------------
Six C's Investment Corp. Series B
- ---------------------------------------------------------------------------------------------------------------
C. Thomas Vangness Series B
- ---------------------------------------------------------------------------------------------------------------
Venrock Associates Series B
- ---------------------------------------------------------------------------------------------------------------
Venrock Associates II, L.P. Series B
- ---------------------------------------------------------------------------------------------------------------
Micheline Yuan Series B
- ---------------------------------------------------------------------------------------------------------------
James Zimmerman Series B
- ---------------------------------------------------------------------------------------------------------------
Douglas Zipes Series B
- ---------------------------------------------------------------------------------------------------------------
Mary Jo Anstey Series C
- ---------------------------------------------------------------------------------------------------------------
David & Meleah Arnold Series C
- ---------------------------------------------------------------------------------------------------------------
John Ashley Series C
- ---------------------------------------------------------------------------------------------------------------
Atherton Venture Fund I, LLC Series C
- ---------------------------------------------------------------------------------------------------------------
Bruce Benedick Series C
- ---------------------------------------------------------------------------------------------------------------
Alan Beyer Series C
- ---------------------------------------------------------------------------------------------------------------
Thomas Biesheuvel Series C
- ---------------------------------------------------------------------------------------------------------------
Biesheuvel, Thomas R. Biesheuvel Trustee of Karl W. Bowen
Rodkey Trust Series C
- ---------------------------------------------------------------------------------------------------------------
David Birnbach Series C
- ---------------------------------------------------------------------------------------------------------------
Bovee, The Bovee 1984 Trust DTD 11-24-84 FBO Alexander &
Matthew Saal Series C
- ---------------------------------------------------------------------------------------------------------------
Ann Bowers Series C
- ---------------------------------------------------------------------------------------------------------------
David Bradley Series C
- ---------------------------------------------------------------------------------------------------------------
Burks, Robert Burks Trust Series C
- ---------------------------------------------------------------------------------------------------------------
Dudley Burwell Series C
- ---------------------------------------------------------------------------------------------------------------
Kenneth Caldwell Series C
- ---------------------------------------------------------------------------------------------------------------
Cardiovascular Medicine & Cardiac Arrhythmias Profit Sharing
Plan FBO Roger Winkle Series C
- ---------------------------------------------------------------------------------------------------------------
Cardiovascular Medicine & Cardiac Arrhythmia FBO: Edward
Anderson Series C
- ---------------------------------------------------------------------------------------------------------------
David Chao Series C
- ---------------------------------------------------------------------------------------------------------------
Mark Curtis Series C
- ---------------------------------------------------------------------------------------------------------------
Kathleen Daly Series C
- ---------------------------------------------------------------------------------------------------------------
DB Futures Series C
- ---------------------------------------------------------------------------------------------------------------
Christine DeCaria Series C
- ---------------------------------------------------------------------------------------------------------------
DeLee Ltd. Series C
- ---------------------------------------------------------------------------------------------------------------
Eric and Kyung-Hee Doelling Series C
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT A
EXISTING INVESTORS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
First Name Last Name or Entity Name Type of Stock
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
David Drez, Jr., M.D. Series C
- ---------------------------------------------------------------------------------------------------------------
John Dunning Series C
- ---------------------------------------------------------------------------------------------------------------
William Elting Series C
- ---------------------------------------------------------------------------------------------------------------
Dieter Enzman Series C
- ---------------------------------------------------------------------------------------------------------------
Robert Eppley Series C
- ---------------------------------------------------------------------------------------------------------------
Wade Faerber Series C
- ---------------------------------------------------------------------------------------------------------------
Peter W. and Mary R. Fanton, JTWROS Series C
- ---------------------------------------------------------------------------------------------------------------
Vincent and Marjorie Fanton Series C
- ---------------------------------------------------------------------------------------------------------------
Gary Fanton Series C
- ---------------------------------------------------------------------------------------------------------------
Fitzwilson, Robert C. Fitzwilson Trust U/A DTD 6/24/87 Series C
- ---------------------------------------------------------------------------------------------------------------
Michael Franz Series C
- ---------------------------------------------------------------------------------------------------------------
Fred and Eleanor Goren, JTWROS Series C
- ---------------------------------------------------------------------------------------------------------------
GBP Partners Series c
- ---------------------------------------------------------------------------------------------------------------
James Goode Series C
- ---------------------------------------------------------------------------------------------------------------
Richard Goode Series C
- ---------------------------------------------------------------------------------------------------------------
Alan M. and Kathleen E.
Smith Goodman JTWROS Series C
- ---------------------------------------------------------------------------------------------------------------
William Gow Series C
- ---------------------------------------------------------------------------------------------------------------
Robert Gray, Jr. Series c
- ---------------------------------------------------------------------------------------------------------------
Dean Greenberg Series C
- ---------------------------------------------------------------------------------------------------------------
Jerry M. and Susan G. Harris Series C
- ---------------------------------------------------------------------------------------------------------------
Hess, Gabriela Hess Trust UAD 11/30/94, Mark Milani Ttee Series C
- ---------------------------------------------------------------------------------------------------------------
Hess, Verena Hess Trust UAD 11/30/94, Mark Milani Tttee Series C
- ---------------------------------------------------------------------------------------------------------------
Stephen Hochschuler Series C
- ---------------------------------------------------------------------------------------------------------------
Harold Hohbach Series C
- ---------------------------------------------------------------------------------------------------------------
Douglas Huntington Series C
- ---------------------------------------------------------------------------------------------------------------
Jackson, Susan Jackson Trust U/A DTD 9/15/89 Series C
- ---------------------------------------------------------------------------------------------------------------
Jean Johnson Series C
- ---------------------------------------------------------------------------------------------------------------
Linda Kan Series C
- ---------------------------------------------------------------------------------------------------------------
Raj Kapany Series C
- ---------------------------------------------------------------------------------------------------------------
Patricia Kelleher Series C
- ---------------------------------------------------------------------------------------------------------------
Michael Kimball Series C
- ---------------------------------------------------------------------------------------------------------------
Byron King Series C
- ---------------------------------------------------------------------------------------------------------------
Michele Klein Series C
- ---------------------------------------------------------------------------------------------------------------
Howard and Susan
Jeffries Klevens, JTWROS Series C
- ---------------------------------------------------------------------------------------------------------------
Theodore Klint Series C
- ---------------------------------------------------------------------------------------------------------------
Klint Family Trust U/A DTD 2/1/93 Series C
- ---------------------------------------------------------------------------------------------------------------
Kevin Knight Series C
- ---------------------------------------------------------------------------------------------------------------
Franklin Koenig Series C
- ---------------------------------------------------------------------------------------------------------------
Patrick Kraft Series C
- ---------------------------------------------------------------------------------------------------------------
Jonathan Krass Series C
- ---------------------------------------------------------------------------------------------------------------
Jonathan Krass Series C
- ---------------------------------------------------------------------------------------------------------------
Jonathan Krass Series C
- ---------------------------------------------------------------------------------------------------------------
Jonathan Krass Series C
- ---------------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass and Stephanie M. Bryan, Tenants in
Common Series C
- ---------------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass, custodian for Rebecca May Krass Series C
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT A
EXISTING INVESTORS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
First Name Last Name or Entity Name Type of Stock
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Krass, Jonathan G. Krass, custodian for Daniel Gould Krass Series C
- ----------------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass, Smith Barney Inc. Rollover Custodian,
Acct #565-68067-1-7-017 Series C
- ----------------------------------------------------------------------------------------------------------------
Mordecai Kurz Series C
- ----------------------------------------------------------------------------------------------------------------
Kurz, Mordecai Kurz and Linda C. Kurz, Trustees of the Kurz Trust
of 8/17/1987 Series C
- ----------------------------------------------------------------------------------------------------------------
Mordecai Kurz, Guardian for David M. Kurz Series C
- ----------------------------------------------------------------------------------------------------------------
Mordecai Kurz, Guardian for Nathaniel Series C
- ----------------------------------------------------------------------------------------------------------------
Jerry Latta Series C
- ----------------------------------------------------------------------------------------------------------------
Latterman Family Limited Trust Series C
- ----------------------------------------------------------------------------------------------------------------
Le Le Series C
- ----------------------------------------------------------------------------------------------------------------
Calvin Lee Series C
- ----------------------------------------------------------------------------------------------------------------
Betsy Levy Leight Series C
- ----------------------------------------------------------------------------------------------------------------
Carol Light Series C
- ----------------------------------------------------------------------------------------------------------------
John Lopez Series C
- ----------------------------------------------------------------------------------------------------------------
Robert Mack Series C
- ----------------------------------------------------------------------------------------------------------------
Jayne Maggipinto Series C
- ----------------------------------------------------------------------------------------------------------------
Gregory Maletis Series C
- ----------------------------------------------------------------------------------------------------------------
David Marshall Series C
- ----------------------------------------------------------------------------------------------------------------
Marshall, Stuart C. Marshall Trust Series C
- ----------------------------------------------------------------------------------------------------------------
J. Lindsey McLean Series C
- ----------------------------------------------------------------------------------------------------------------
R. Hardwin Mead Series C
- ----------------------------------------------------------------------------------------------------------------
Robert Millard Series C
- ----------------------------------------------------------------------------------------------------------------
Jeffrey Miller Series C
- ----------------------------------------------------------------------------------------------------------------
Munkdale, Steve Munkdale (IRA Account) Series C
- ----------------------------------------------------------------------------------------------------------------
Paul Murphy Series C
- ----------------------------------------------------------------------------------------------------------------
David Musket Series C
- ----------------------------------------------------------------------------------------------------------------
David Nee Series C
- ----------------------------------------------------------------------------------------------------------------
Robert Pelosi Series C
- ----------------------------------------------------------------------------------------------------------------
Jackie Peraza Series C
- ----------------------------------------------------------------------------------------------------------------
Joshua Pickus Series C
- ----------------------------------------------------------------------------------------------------------------
Carlos Prietto Series C
- ----------------------------------------------------------------------------------------------------------------
ProMed Partners, L.P. Series C
- ----------------------------------------------------------------------------------------------------------------
River Edge Partners, Inc. Series C
- ----------------------------------------------------------------------------------------------------------------
Rivers, Christi Rivers and Kevin Van Bladel Series C
- ----------------------------------------------------------------------------------------------------------------
Daniel Robertson Series C
- ----------------------------------------------------------------------------------------------------------------
Rodkey, First Trust Corp TTEE FOB William G. Rodkey Series C
- ----------------------------------------------------------------------------------------------------------------
Rollins, John S. and Elizabeth M., Trustees of the Rollins Living
Trust UDT dtd 9-19-90 Series C
- ----------------------------------------------------------------------------------------------------------------
Douglas Rousse Series C
- ----------------------------------------------------------------------------------------------------------------
Ruder Revocable Intervivos Trust DTD 9/15/93 Series C
- ----------------------------------------------------------------------------------------------------------------
Joel Saal Series C
- ----------------------------------------------------------------------------------------------------------------
Saal, Joel, Custodian for Rachel until age 21 under the UTMA Series C
- ----------------------------------------------------------------------------------------------------------------
Saal, Joel, S. custodian for Nicole Saal until age 21 under the CA
UTMA Series C
- ----------------------------------------------------------------------------------------------------------------
Saratoga Ventures Series C
- ----------------------------------------------------------------------------------------------------------------
David Schurman Series C
- ----------------------------------------------------------------------------------------------------------------
Hugh Sharkey Series C
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT A
EXISTING INVESTORS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
First Name Last Name or Entity Name Type of Stock
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Silverman Series C
- ------------------------------------------------------------------------------------------------------------------------------
Allen Smoot Series C
- ------------------------------------------------------------------------------------------------------------------------------
Daren Stewart Series C
- ------------------------------------------------------------------------------------------------------------------------------
Robert Stoll Series C
- ------------------------------------------------------------------------------------------------------------------------------
George Thabbit Series C
- ------------------------------------------------------------------------------------------------------------------------------
Jim Tibone, M.D. Series C
- ------------------------------------------------------------------------------------------------------------------------------
Francisco Valencia Series C
- ------------------------------------------------------------------------------------------------------------------------------
Van dick, Steven M. and Deborah A. Van Dick, Trustees of the
Van Dick Family Trust - 1998 U/I/T dtd. 5-2-98 Series C
- ------------------------------------------------------------------------------------------------------------------------------
Vaupel, Geoffrey L. Vaupel, M.D. Pension and Profit Sharing Plan Series C
- ------------------------------------------------------------------------------------------------------------------------------
Eric Verploeg Series C
- ------------------------------------------------------------------------------------------------------------------------------
VLG Investments 1997 Series C
- ------------------------------------------------------------------------------------------------------------------------------
Michael Wall Series C
- ------------------------------------------------------------------------------------------------------------------------------
Warden, Carl and Vickie Warden Family Foundation Series C
- ------------------------------------------------------------------------------------------------------------------------------
Russell Warren Series C
- ------------------------------------------------------------------------------------------------------------------------------
Lee Weissman Series C
- ------------------------------------------------------------------------------------------------------------------------------
Alan Wood Series C
- ------------------------------------------------------------------------------------------------------------------------------
Micheline Yuan Series C
- ------------------------------------------------------------------------------------------------------------------------------
Atherton Venture Fund 1, LLC Series D
- ------------------------------------------------------------------------------------------------------------------------------
Scott Blumenthal Series D
- ------------------------------------------------------------------------------------------------------------------------------
Robert Bonahoom Series D
- ------------------------------------------------------------------------------------------------------------------------------
Bowers, Ann S. Bowers, TTEE Separate Property Trust Series D
- ------------------------------------------------------------------------------------------------------------------------------
Ray Caputo Series D
- ------------------------------------------------------------------------------------------------------------------------------
Cowen and Company, Custodian FBO David B. Musket SEP IRA Series D
- ------------------------------------------------------------------------------------------------------------------------------
Mark Curtis Series D
- ------------------------------------------------------------------------------------------------------------------------------
DB Futures Series D
- ------------------------------------------------------------------------------------------------------------------------------
Delphi BioInvestments III, L.P. Series D
- ------------------------------------------------------------------------------------------------------------------------------
Delphi Ventures III. L.P. Series D
- ------------------------------------------------------------------------------------------------------------------------------
William Elting Series D
- ------------------------------------------------------------------------------------------------------------------------------
Emerald Capital Corporation for John Lopez Series D
- ------------------------------------------------------------------------------------------------------------------------------
Robert Gamburd Series D
- ------------------------------------------------------------------------------------------------------------------------------
Lisa Giannone Series D
- ------------------------------------------------------------------------------------------------------------------------------
Goode, James, IRA Rollover with Smith Barney as Cust. Series D
- ------------------------------------------------------------------------------------------------------------------------------
Gray, MLPF&S Custodian FPO Robert L. Gray, Sr. IRRA FBO
Robert L. Gray, Sr. Series D
- ------------------------------------------------------------------------------------------------------------------------------
Cory Helm Series D
- ------------------------------------------------------------------------------------------------------------------------------
Hochschuler Family Partnership, Stephen J. Hochschuler Series D
- ------------------------------------------------------------------------------------------------------------------------------
Jay Jansen Series D
- ------------------------------------------------------------------------------------------------------------------------------
Tony Jelincik Series D
- ------------------------------------------------------------------------------------------------------------------------------
Raj Kapany Series D
- ------------------------------------------------------------------------------------------------------------------------------
Kevin Knight Series D
- ------------------------------------------------------------------------------------------------------------------------------
Jonathan Krass Series D
- ------------------------------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass and Stephanie M. Bryan, Tenants in
Common Series D
- ------------------------------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass, custodian for Rebecca May Krass Series D
- ------------------------------------------------------------------------------------------------------------------------------
Krass, Jonathan G. Krass, custodian for Daniel Gould Krass Series D
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT A
EXISTING INVESTORS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
First Name Last Name or Entity Name Type of Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Krass, Jonathan G. Krass, Smith Barney Inc. Rollover Custodian,
Acct #565-68067-1-7-017 Series D
-----------------------------------------------------------------------------------------------------------------------------------
Kurz, Mordecai Kurz and Linda C. Kurz, Trustees of the Kurz Trust
of 8/17/1987 Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Mordecai Kurz, Guardian for David M. Kurz Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Mordecai Kurz, Guardian for Nathaniel A. Kurz Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Smith Barney Custodian for the IRA of Jerry D. Latta Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Latterman Family Limited Partnership Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Edward Lauing Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Connie Lee Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Betsy Levy Leight Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Lawrence Lemak Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Irwin Lieber Series D
- -----------------------------------------------------------------------------------------------------------------------------------
John Lopez Series D
- -----------------------------------------------------------------------------------------------------------------------------------
Lopez, Smith Barney Custodian for the IRA of John Lopez Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Terence Matthews Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Peter McGann Series D
- ------------------------------------------------------------------------------------------------------------------------------------
McGann, Peter D. McGann, Profit Sharing Series D
- ------------------------------------------------------------------------------------------------------------------------------------
R. Meisterling Series D
- ------------------------------------------------------------------------------------------------------------------------------------
David Nee Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific Medical Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Pequot Offshore Private Equity Fund, L.P. Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Pequot Private Equity Fund, L.P. Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Prima Associates, L.P. Series D
- ------------------------------------------------------------------------------------------------------------------------------------
R.R.G. #1 Family Ltd. Partnership Series D
- ------------------------------------------------------------------------------------------------------------------------------------
River Edge Partners, Inc. Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Reid, Inc. Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Saratoga Ventures Series D
- ------------------------------------------------------------------------------------------------------------------------------------
David Siegel Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Joshua Siegel Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Smith Barney Custodian for the IRA of Linda C. Kurz Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas Storm Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Joel Swartz Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Team Surgical, Inc. Series D
- ------------------------------------------------------------------------------------------------------------------------------------
William and Judy Thorpe Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Venrock Associates Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Venrock Associates II, L.P. Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Mark Vreede Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Russell Warren Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Micheline Yuan Series D
- ------------------------------------------------------------------------------------------------------------------------------------
Roger Lipton B Warrant
- ------------------------------------------------------------------------------------------------------------------------------------
Venture Lending and Leasing B Warrant
- ------------------------------------------------------------------------------------------------------------------------------------
MMC/GATX Partnership No. 1 C Warrant
- ------------------------------------------------------------------------------------------------------------------------------------
Silicon Valley Bank C Warrant
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
---------
NEW INVESTORS
Name (in Alphabetical Order)
- ----------------------------
Allen, Glen, Curtis
An, Howard S. and Sue K.
Anderson, Gunnar
Arnold, David M. and Meleah T.
Birnbach, David J.
BP-1, LLC
Capen, Daniel, A.
Casper, G. David and/or Mary Lou
Curtis, Mark T.
Delaney, Terence and Caroline, JTWROS
Delaney, Terence J. SSB Sep IRA Custodian
Richard and Deborah Derby
Richard Derby, Jr. IRA Rollover
Franz, Michael
Gimbel, Lesley and Barry K.
Hacker, Robert J.
Harris, Jerry M. and Susan G., JTWROS
Jelincik, Tony
Jarolem, Kenneth, M.D.
Kapany, Raj
Karasek, Dennis and Sheryl L.
The Trust Co. of Oklahoma Custodian for Dennis E. Karasek IRA
Karasek, Michael and Jean Diamond
Kim, Daniel K
Knight, Kevin T.
Kraft, Mark MD
Krass, Jonathan, Smith Barney Inc. Rollover Custodian, Acct. #565-68067-1-7-017
Krass, Jonathan G. Custodian for Rebecca May Krass
Krass, Jonathan G. Custodian for Daniel Gould Krass
Krass, Jonathan G.
Krass, Jonathan G. and Stephanie M. Bryan, Tenants in Common
Krull, David G.
Kurz, Mordecai and Linda C., Trustees of the Kurz Trust of 8-17-87
Kurzweil, Peter R., M.D.
Larsen, John M.
Lee, Calvin, K.
Lee, Connie, C., M.D.
Leight, Betsy Levy, Trustee of the Betty Levy Leight Trust dtd 9-19-93
Lopez, John
Marshall, David J.
Mitchell, Scott A. and/or Laura E.
Gerlach & Co., nominee for The Manufacturers Life Insurance Company (USA)
Nee, David M. and Karen, Trustees of the Nee Family Trust UAD 8-27-92
Nelson, Russell, W.
PM Investments (Oratec), LLC
Pequot Offshore Private Equity Fund, L.P.
Pequot Private Equity Fund, L.P.
Rhodes, Arthur and Bonnie G.
RiverEdge Partners, Inc.
Roschuk, John Robert
Stonecipher, Thomas K. and Brenda D.
Team Surgical
The Travelers Insurance Company
Venrock Associates
Venrock Associates L.P., II
Warden, Carl Eric
Wheatley Partners, L.P.
Wheatley Foreign Partners, L.P.
White, Howard and Carolee White 1986 Trust
<PAGE>
EXHIBIT 10.2
October 29, 1997
Ms. Nancy V. Westcott
510 Brierhill Road
Deerfield, Illinois 60015
Dear Nancy:
On behalf of Oratec Interventions, Inc. (the "Company"), I am pleased to
-------
offer you the position of Chief Financial Officer and Vice President
Administration of the Company. Speaking for myself, as well as the other
members of the Company's management team, we are all very impressed with your
credentials and we look forward to your future success in this position.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become the Chief Financial Officer and Vice President
Administration of the Company, working out of the Company's headquarters office
in Menlo Park, CA. You will report to the Company's President and Chief
Executive Officer.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties and
obligations required of and from you pursuant to the terms hereof. During the
term of your employment, you further agree that you will devote all of your
business time and attention to the business of the Company, the Company will be
entitled to all of the benefits and profits arising from or incident to all such
work services and advice, you will not render commercial or professional
services of any nature to any person or organization, whether or not for
compensation, without the prior written consent of the Company's President and
Chief Executive Officer, and you will not directly or indirectly engage or
participate in any business that is competitive in any manner with the business
of the Company. Nothing in this letter agreement will prevent you from
accepting speaking or presentation engagements in exchange for honoraria or from
serving on boards of charitable organizations, or from owning no more than one
percent (1%) of the outstanding equity securities of a corporation whose stock
is listed on a national stock exchange.
2. Start Date. Subject to fulfillment of any conditions imposed by this
----------
letter agreement, you will commence this new position with the Company on
November 3, 1997 (the "Start Date").
<PAGE>
June 28, 1999
Page 2
3. Proof of Right to Work. For purposes of federal immigration law, you
----------------------
will be required to provide to the Company documentary evidence of your identity
and eligibility for employment in the United States. Such documentation must be
provided to us within three (3) business days of your Start Date, or our
employment relationship with you may be terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a monthly salary of $12,500, which
-----------
is equivalent to $150,000 on an annualized basis (the "Base Salary"). Your
salary will be payable in two equal payments per month pursuant to the Company's
regular payroll policy (or in the same manner as other officers of the Company).
b. Signing Bonus. In connection with the commencement of your
-------------
employment, you will be paid a cash bonus of $37,500 (as reduced applicable tax
withholdings) on your Start Date. In the event that you voluntarily terminate
your employment with the Company before the end of the first year of employment,
you agree to repay the Company 100% of such bonus by personal check or other
negotiable instrument.
c. Incentive Bonus. You will be eligible to receive an annual
---------------
incentive bonus of up to 25% of your Base Salary for the calendar year ending
December 31, 1998. Payment of the bonus will be based on achievement of
specified corporate and individual performance targets mutually agreed upon by
you and the Company's President and Chief Executive Officer within 60 days of
your Start Date. You will also be eligible to earn incentive bonuses in future
years, again based on achievement of objectives. With respect to the remainder
of the 1997 calendar year, you will be eligible to receive a prorated portion of
the annual incentive bonus specified above based on achievement of specified
corporate and individual performance targets mutually agreed upon by you and the
Company's President and Chief Executive Officer within 30 days of your Start
Date.
d. Annual Review. Your Base Salary will be reviewed at the end of
-------------
each calendar year as part of the Company's normal salary review process.
5. Stock Options.
-------------
a. Initial Grant. In connection with the commencement of your
-------------
employment, the Company will recommend that the Board of Directors grant you an
option to purchase 150,000 shares of the Company's Common Stock ("Shares") with
------
an exercise price equal to the fair market value on the date of the grant. These
option shares will become exercisable at the rate of twelve forty-eighths
(12/48) of the Shares twelve months after the Vesting Commencement Date and one
forty-eighth (1/48) of the Shares at the end of each calendar month thereafter.
The Vesting Commencement Date will be your Start Date. Vesting will, of course,
depend on your continued employment with the Company. Notwithstanding the above,
in the event that (i) your employment is terminated by the Company or a
successor other than for Cause (as defined below), or (ii) your job duties,
responsibilities and requirements or compensation are materially reduced or
changed such that they are inconsistent with your prior duties, responsibilities
and requirements or
<PAGE>
June 28, 1999
Page 3
compensation, in either case in connection with, or as a result of, a Change of
Control (as defined below), one hundred percent (100%) of the option that has
not yet become exercisable shall become exercisable on the effective date of
such termination, reduction or change. For purposes of this letter, a
termination or material reduction or change will be deemed to have occurred in
connection with, or as a result of, a Change in Control if it occurs within 12
months of such Change in Control. The option will be an incentive stock option
to the maximum extent allowed by the tax code and will be subject to the terms
of the Company's 1995 Stock Plan and the Stock Option Agreement between you and
the Company.
b. Subsequent Option Grants. Subject to the discretion of the
------------------------
Company's Board of Directors, you may be eligible to receive additional grants
of stock options from time to time in the future, on such terms and subject to
such conditions as the Board of Directors shall determine as of the date of any
such grant.
6. Benefits.
--------
a. Employee Benefits. You will be entitled to participate, to the
-----------------
extent you are eligible under the terms and conditions thereof, in any medical
insurance plans, 401(k) plans, deferred compensation plans, life insurance
plans, vacation, retirement or other employee benefit plans which are generally
available to executives of the Company or are available to senior executives or
a select group of executives of the Company and which may be in effect from time
to time during your employment with the Company. The Company shall be under no
obligation to institute or continue the existence of any employee benefit plan
described herein and may from time to time amend, modify or terminate any such
employee benefit plan.
b. Relocation Expenses. In connection with your relocation from the
-------------------
Chicago area to the San Francisco Bay Area, the Company will reimburse you for
the relocation expenses estimated on Schedule 1 hereto. Any amounts received by
you for relocation expense reimbursement will be reported as taxable income to
you in the year received as required by applicable tax law; provided that you
will be fully "grossed up" for the taxes you pay as a result of this relocation
expense reimbursement.
In the event that you voluntarily terminate your employment with the
Company before the end of your first year of employment, you agree to repay the
Company 100% of the relocation expenses estimated in Schedule 1 hereto by
personal check or other negotiable instrument.
7. Severance Agreement. If your employment is terminated by the Company
-------------------
or its successor for any reason other than Cause, as defined below, you will be
entitled to receive continuation of your Base Salary and medical insurance
benefits for the number of months following the date of termination of your
employment as set forth below:
a. Twelve (12) months if the termination occurs within two (2) years
of your Start Date.
<PAGE>
June 28, 1999
Page 4
b. Six (6) months if the termination occurs more than two (2) years
after your Start Date.
c. Twelve (12) months if the termination or the material reduction or
change (as described in Section 5(a)(ii)) occurs at any time during your
employment with the Company in connection with, or as a result of, a Change of
Control of the Company.
In addition, if your employment is terminated by the Company or its
successor for any reason other than Cause, the Company will provide executive-
level outplacement services to you.
8. Definitions.
-----------
a. Cause. For purposes of this letter agreement, "Cause" shall mean
----- -----
(a) willful misconduct or gross negligence in performance of your duties
hereunder; (b) refusal to comply in any material respect with the legal
directives of the Company's Board of Directors so long as such directives are
not inconsistent with your position and duties, which is not remedied (if
remediable) within twenty (20) working days after written notice from the
Company's Board of Directors, which written notice shall state that failure to
remedy such conduct may result in termination for Cause; (c) a deliberate
attempt to do an injury to the Company; (d) conduct, dishonest, fraudulent or
otherwise, that materially discredits the Company or is materially detrimental
to the reputation of the Company; (e) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company; or (f) material breach of any element of the Company's
Proprietary Information Agreement, including without limitation, the theft or
other misappropriation of the Company's proprietary information, in each case as
determined in good faith by the Company's Board of Directors.
b. Change of Control. For purposes of this letter agreement, a
-----------------
"Change of Control" shall mean the occurrence of any of the following events:
-----------------
(i) an acquisition of the Company by another entity by means of any transaction
or series of related transactions (including, without limitation, any
reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company), or (ii) a
sale of all or substantially all of the assets of the Company (collectively, a
"Merger"), so long as in either case (x) the Company's shareholders of record
immediately prior to such Merger will, immediately after such Merger, hold less
than fifty percent (50%) of the voting power of the surviving or acquiring
entity, or (y) the Company's shareholders of record immediately prior to such
Merger will, immediately after such Merger, hold less than sixty percent (60%)
of the voting power of the surviving or acquiring entity and a majority of the
members of the Board of Directors of the surviving or acquiring entity
immediately after such Merger were not members of the Board of Directors of the
Company immediately prior to such Merger.
9. Limitation on Change of Control Benefits. In the event that the
----------------------------------------
severance and stock option acceleration benefits provided in this letter
agreement in connection with, or as a result of, a Change of Control of the
Company (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section, would be subject to the excise tax imposed by Section 4999 of the
Code,
<PAGE>
June 28, 1999
Page 5
then such benefits shall be payable either: (a) in full, or (b) as to such
lesser amount which would result in no portion of such benefits being subject to
excise tax under Section 4999 of the Code, whichever of the foregoing amounts,
taking into account the applicable federal, state and local income taxes and the
excise tax imposed by Section 4999, results in your receipt on an after-tax
basis, of the greatest amount of benefits, notwithstanding that all or some
portion of such benefits may be taxable under Section 4999 of the Code. Unless
you and the Company otherwise agree in writing, any determination required under
this Section 9 shall be made in writing by independent public accountants
appointed by you and reasonably acceptable to the Company (the "Accountants"),
whose determination shall be conclusive and binding upon you and the Company for
all purposes. For purposes of making the calculations required by this Section
9, the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Section 280G and 4999 of the Code. The Company and
you shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section. The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 9.
10. Proprietary Information Agreement. Your acceptance of this offer and
---------------------------------
commencement of employment with the Company is contingent upon the execution,
and delivery to an officer of the Company, of the Company's Proprietary
Information Agreement, a copy of which is enclosed for your review and execution
(the "Proprietary Information Agreement"), prior to or on your Start Date.
---------------------------------
11. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or indirectly, any
information, including any of the terms of this agreement, regarding salary,
bonuses, or stock purchase or option allocations to any person, including other
employees of the Company; provided, however, that you may discuss such terms
with members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or accounting advice.
12. At-Will Employment. Notwithstanding the Company's obligation
------------------
described in Sections 5a, 7 or elsewhere herein, your employment with the
Company will be on an "at will" basis, meaning that either you or the Company
may terminate your employment at any time for any reason or no reason, without
obligation or liability, except as specifically provided herein. We are all
delighted to be able to extend you this offer and look forward to working with
you. To indicate your acceptance of the Company's offer, please sign and date
this letter in the space provided below and return it to me, along with a signed
and dated copy of the Proprietary Information Agreement. This letter, together
with the Proprietary Information Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
<PAGE>
June 28, 1999
Page 6
ORATEC INTERVENTIONS, INC.
By: /s/ Kenneth W. Anstey
---------------------
Title: President and Chief Executive Officer
ACCEPTED AND AGREED:
NANCY V. WESTCOTT
/s/ Nancy V. Westcott
- ---------------------
Signature
10/30/97
- ---------------------
Date
Enclosure: Proprietary Information Agreement
<PAGE>
SCHEDULE 1
ESTIMATED RELOCATION EXPENSES
-----------------------------
<PAGE>
EXHIBIT 10.3
ORATEC INTERVENTIONS, INC.
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is dated as of July 14, 1997 by
---------
and between Kenneth W. Anstey ("Employee") and Oratec Interventions, Inc., a
--------
California corporation (the "Company").
-------
1. Employment Term. The Company agrees to employ Employee, and Employee
---------------
agrees to be employed by the Company, under the terms and conditions set forth
in this Agreement, for a period commencing on July 14, 1997 and ending July 13,
2001, unless such period is terminated earlier pursuant to Section 5 below (the
"Initial Term"). This Agreement may be extended for additional one (1) year
term(s) after the end of the Initial Term if Employee and the Company mutually
agree in writing to such extension(s).
2. Duties.
------
(a) Position. Employee shall be employed as President and Chief
--------
Executive Officer of the Company. In such capacity he shall report to and be
subject to the direction and control of the Company's Board of Directors.
Employee shall also continue to serve on, and be a member of, the Company's
Board of Directors.
(b) Obligations to the Company. Employee agrees to the best of his
--------------------------
ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the terms hereof. During the term of Employee's employment relationship with
the Company, Employee further agrees that he will devote all of his business
time and attention to the business of the Company, he will not render commercial
or professional services of any nature to any person or organization, whether or
not for compensation, without the prior written consent of the Company's Board
of Directors, and he will not directly or indirectly engage or participate in
any business that is competitive in any manner with the business of the Company.
Nothing in this Agreement will prevent Employee from accepting speaking
engagements in exchange for honoraria, from serving on boards of charitable
organizations or on the boards of up to three for-profit corporations other than
the Company (provided that Employee may serve on the boards of up to four such
corporations until December 31, 1997), or from investing in other businesses
provided he is not actively participating in any such business as a director,
employee, independent contractor, partner, principal, agent or otherwise, and
provided further that any such business is not competitive with the business
conducted by the Company (as conducted now or during the term of Employee's
employment), and no consent from the Company's Board of Directors shall be
required for any such activities. Employee will comply with and be bound by the
Company's operating policies, procedures and practices from time to time in
effect during the term of Employee's employment.
3. At-Will Employment. The Company and Employee acknowledge that
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by either party at any time for any or no reason, subject only to the
specific provisions of this Agreement. If Employee's
<PAGE>
employment terminates for any reason, Employee shall not be entitled to any
payments, benefits, damages, award or compensation other than as provided in
this Agreement. The rights and duties created by this Section 3 may not be
modified in any way except by a written agreement executed by Company's Board of
Directors and Employee.
4. Compensation. For the duties and services to be performed by Employee
------------
hereunder, the Company shall pay Employee, and Employee agrees to accept, the
salary, bonuses stock options, and other benefits described below in this
Section 4 during the Initial Term.
(a) Salary. Employee shall receive a monthly salary of $16,667
------
payable in two equal payments per month pursuant to the Company's normal payroll
practices. The Base Salary shall be reviewed annually by the Company's Board of
Directors or its Compensation Committee, and any adjustment will be effective as
of the date determined appropriate by the Board of Directors or its Compensation
Committee.
(b) Bonuses. For each fiscal year of the Company during the Initial
-------
Term, Employee shall be eligible to receive a cash bonus of up to 40% of the
Base Salary. At such time as the Company completes an initial public offering
of its Common Stock, the eligible bonus amount shall increase to 50% of the Base
Salary. Such bonus shall be based on achievement of specified corporate and
individual performance targets established by the Board of Directors or its
Compensation Committee. The bonus shall be structured to provide for a portion
of the bonus to be earned upon partial achievement of the targets, and to
provide for an overachievement bonus upon achieving results in excess of the
targets, in each case based on a formula to be determined by the Board of
Directors or its Compensation Committee.
(c) Stock Options. In connection with the commencement of Employee's
-------------
employment, the Board of Directors shall grant to Employee an option to purchase
420,000 shares of the Company's Common Stock (the "Shares"). The option shall
------
be granted with an exercise price equal to the fair market value on the date of
the grant. The option shall become exercisable during Employee's employment at
the rate of six forty-eighths (6/48) of the Shares six (6) months after the
Vesting Commencement Date and one-forty-eighth (1/48) of the Shares at the end
of each calendar month thereafter. The Vesting Commencement Date shall be the
date on which Employee commences his employment with the Company.
Notwithstanding the above, in the event that (i) Employee's employment is
terminated by the Company or a successor other than for Cause (as defined in
Section 6 below), or (ii) Employee's job duties, responsibilities and
requirements are materially reduced or changed such that they are inconsistent
with Employee's prior duties, responsibilities and requirements, in either case
in connection with, or as a result of, a Change of Control (as defined in
Section 8 below), one hundred percent (100%) of the option has not yet become
exercisable shall become exercisable on the effective date of such termination,
reduction or change. The option will be an incentive stock option to the
maximum extent allowed by the Internal Revenue Code of 1986, as amended, and
will be subject to the terms of the Company's 1995 Stock Plan and the Stock
Option Agreement between Employee and the Company. Subject to the discretion of
the Company's Board of Directors, Employee shall be eligible to receive
additional grants of stock options from
-2-
<PAGE>
time to time in the future, on such terms and subject to such conditions as the
Board of Directors shall determine as of the date of any such grant.
(d) Employee Benefits. Employee shall be entitled to participate, to
-----------------
the extent he is eligible under the terms and conditions thereof, in any medical
insurance plans, 401(k) plans, deferred compensation plans, life insurance
plans, vacation, retirement or other employee benefit plans which are generally
available to executives of the Company or are available to senior executives or
a select group of executives of the Company and which may be in effect from time
to time during Employee's employment with the Company. The Company shall be
under no obligation to institute or continue the existence of any employee
benefit plan described herein and may from time to time amend, modify or
terminate any such employee benefit plan.
(e) Relocation. Upon submission of appropriate receipts, the Company
----------
shall reimburse Employee for the following relocation expenses incurred during
Employee's employment with the Company:
(i) Closing costs incurred on the sale of Employee's
apartment in Boston if such sale occurs within two (2) years of commencement of
Employee's employment with the Company;
(ii) Closing costs incurred on the purchase of a new
residence for Employee in California if such purchase occurs within two (2)
years of commencement of Employee's employment with the Company;
(iii) All reasonable out-of-pocket moving expenses incurred
by Employee in moving to a new residence in California;
(iv) Reasonable travel expenses for up to three (3)
househunting trips for Employee and his family, including transportation,
accommodations and reasonable expenses for meals and other incidentals; and
(v) Housing expenses in California for Employee and his
family for up to ninety (90) days after commencement of Employee's employment
with the Company until Employee moves into a new residence in California.
Employee shall be responsible for the payment of any taxes payable
under applicable tax law on the relocation payments payable under this section
4(e).
(f) Car Allowance. The Company shall provide to Employee a car
-------------
allowance of $500 a month. Employee shall be responsible for the payment of any
taxes payable under applicable tax law on such allowance.
(g) Reimbursement of Expenses. Employee shall be authorized to incur
-------------------------
on behalf and for the benefit of, and shall be reimbursed by, the Company for
reasonable expenses, provided that such expenses are substantiated in accordance
with Company policies.
-3-
<PAGE>
5. Termination of Employment and Severance Benefits.
------------------------------------------------
(a) Termination of Employment. This Agreement may be terminated upon
-------------------------
the occurrence of any of the following events:
(i) The date written notice is delivered to Employee by the
Company stating that the Company terminating Employee for Cause (as defined in
Section 6 below) ("Termination for Cause"); provided that nothing contained in
---------------------
this Section 5(a)(i) shall limit or otherwise modify Employee's right to contest
in the manner set forth in Section 15(h) below the Company's determination that
such termination is for Cause (as defined in Section 6 below).
(ii) The date written notice is delivered to Employee by the
Company stating that the Company is terminating Employee without Cause, which
determination may be made by the Company at any time at the Company's sole
discretion, for any or no reason ("Involuntary Termination");
-----------------------
(iii) The date written notice is delivered to the Company by
Employee stating that Employee is electing to terminate his employment with the
Company ("Voluntary Termination"); or
---------------------
(iv) Following Employee's death or disability (as defined in
Section 9 below).
(b) Severance Benefits. Employee shall be entitled to receive
------------------
severance benefits upon termination of employment only as set forth in this
Section 5(b):
(i) Termination for Cause. If Employee's employment is
---------------------
terminated for Cause, then Employee shall not be entitled to receive payment of
any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies to the extent, if any, provided for under such plans
and policies in effect on the date of termination and in accordance with
applicable law.
(ii) Involuntary Termination. If Employee's employment is
-----------------------
terminated as a result of an Involuntary Termination other than for Cause (as
defined in Section 6 below) and other than by reason of Employee's Voluntary
Termination, Employee will be entitled to receive a severance payment equal to
twelve (12) months of the Base Salary plus the amount of Employee's target bonus
for the fiscal year in which the termination occurs to the extent that the bonus
has been earned as of such date, as determined by the Board of Directors or its
Compensation Committee based upon the specific corporate and individual
performance targets established for such fiscal year. Such payment shall be
reduced by applicable income and employment taxes and shall be made in two equal
installments as follows: (i) one-half within seven (7) days of the effective
date of the termination, and (ii) one-half on the six-month anniversary thereof.
Health insurance benefits with the same coverage provided to Employee prior to
the termination and in all other respects significantly comparable to those in
place immediately prior to the termination will be provided at the Company's
cost for a period of
-4-
<PAGE>
twelve (12) months through reimbursement of premiums paid by Employee for such
coverage (which coverage shall be provided pursuant to the terms of the
Consolidated Omnibus Reconciliation Act of 1985, as amended, ("COBRA") once
available to employees of the Company). In addition, the stock option held by
Employee that is unexercisable as of the date of such termination shall become
exercisable on the effective date of such termination with respect to fifty
percent (50%) of the Shares (as defined in Section 4(c) above) subject to such
unexercisable option. As a condition of, and in exchange for, the receipt of
such severance benefits, Employee shall execute and deliver to the Company (and
remain in full compliance with): (i) a Settlement Agreement and Release of
Claims in a form satisfactory to the Company; and (ii) a resignation from all of
Employee's positions with the Company, including from the Board of Directors and
any committee thereof on which Employee serves, in a form satisfactory to the
Company.
(iii) Voluntary Termination. If Employee's employment terminates
---------------------
by Voluntary Termination, then Employee shall not be entitled to receive payment
of any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
plus the amount of Employee's target bonus for the fiscal year in which the
termination occurs to the extent that the bonus has been earned as of such date,
as determined by the Board of Directors or its Compensation Committee based upon
the specific corporate and individual performance targets established for such
fiscal year. In addition, Employee's benefits will be continued under the
Company's then existing benefit plans and policies to the extent, if any,
provided for under such plans and policies in effect on the date of termination
and in accordance with applicable law.
(iv) Termination by Reason of Death or Disability. In the event
--------------------------------------------
that Employee's employment with the Company terminates as a result of Employee's
death or Disability (as defined in Section 9 below), Employee or Employee's
estate or representative will receive all salary and unpaid vacation accrued as
of the date of Employee's death or Disability and any other benefits payable
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of death or Disability and in
accordance with applicable law. In addition, Employee's estate or representative
will receive the amount of Employee's target bonus for the fiscal year in which
the death or Disability occurs to the extent that the bonus has been earned as
of the date of Employee's death or Disability, as determined by the Board of
Directors or its Compensation Committee based on the specific corporate and
individual performance targets established for such fiscal year.
6. Definition of Cause. For purposes of this Agreement, "Cause" for
------------------- -----
Employee's termination will exist at any time after the happening of one or more
of the following events, in each case as determined in good faith by the
Company's Board of Directors:
(a) Employee's
(i) willful misconduct or gross negligence in performance of his
duties hereunder, or
-5-
<PAGE>
(ii) refusal to comply in any material respect with the legal
directives of the Company's Board of Directors so long as such directives are
not inconsistent with the Employee's position and duties,
which is not remedied (if remediable) within twenty (20) working days after
written notice from the Company's Board of Directors, which written notice shall
state that failure to remedy such conduct may result in Termination for Cause;
(b) Employee's deliberate attempt to do an injury to the Company;
(c) Employee's conduct, dishonest, fraudulent or otherwise, that
materially discredits the Company or is materially detrimental to the reputation
of the Company;
(d) Employee's conviction of a felony or a crime involving moral
turpitude causing material harm to the standing and reputation of the Company;
or
(e) Employee's material breach of any element of the Company's
Proprietary Information Agreement, including without limitation, Employee's
theft or other misappropriation of the Company's proprietary information.
7. Definition of Involuntary Termination. For purposes of this Agreement,
-------------------------------------
"Involuntary Termination" shall include (a) any termination by the Company other
-----------------------
than for Cause, (b) any reduction in Employee's base salary except as part of a
general salary reduction applicable to all of the Company's executive officers,
and (c) any Voluntary Termination by Employee following a material reduction or
change in job duties, responsibilities and requirements inconsistent with
Employee's position with the Company and Employee's prior duties,
responsibilities, and requirements or a change in Employee's reporting
relationship such that Employee is no longer reporting to the Company's Board of
Directors, provided that, in the case of subsection (c), Employee provides
written notice to the Company within thirty (30) days of the effective date of
such reduction or change.
8. Definition of Change of Control. For purposes of this Agreement, a
-------------------------------
"Change of Control" shall mean the occurrence of any of the following events:
- ------------------
(i) an acquisition of the Company by another entity by means of any transaction
or series of related transactions (including, without limitation, any
reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company), or (ii) a
sale of all or substantially all of the assets of the Company (collectively, a
"Merger"), so long as in either case (x) the Company's shareholders of record
immediately prior to such Merger will, immediately after such Merger, hold less
than fifty percent (50%) of the voting power of the surviving or acquiring
entity, or (y) the Company's shareholders of record immediately prior to such
Merger will, immediately after such Merger, hold less than sixty percent (60%)
of the voting power of the surviving or acquiring entity and a majority of the
members of the Board of Directors of the surviving or acquiring entity
immediately after such Merger were not members of the Board of Directors of the
Company immediately prior to such Merger.
9. Definition of Disability. For purposes of this Agreement, "Disability"
------------------------ ----------
shall mean that Employee has been unable to perform his duties hereunder as the
result of his
-6-
<PAGE>
incapacity due to physical or mental illness, and such inability, which
continues for at least 120 consecutive calendar days or 150 calendar days during
any consecutive twelve-month period, if shorter, after its commencement, is
determined to be total and permanent by a physician selected by the Company and
its insurers and acceptable to Employee or to Employee's legal representative
(with such agreement on acceptability not to be unreasonably withheld).
10. Proprietary Agreement. Employee shall sign a Proprietary Information
---------------------
Agreement (the "Proprietary Agreement") in the form attached hereto as Exhibit
--------------------- -------
A. Employee hereby agrees to continue to abide by the terms of the Proprietary
Agreement and further agrees that the provisions of the Proprietary Agreement
shall survive any termination of this Agreement or of Employee's employment
relationship with the Company.
11. Noncompetition Covenant. Employee hereby agrees that he shall not,
-----------------------
during the term of his employment pursuant to this Agreement and for six (6)
months thereafter, without the prior written consent of the Company's Board of
Directors, participate in any business or activity (as a director, employee,
independent contractor, partner, principal, agent, shareholder or otherwise)
which is competitive with the business conducted by the Company (as conducted
now or during the term of Employee's employment), nor engage in any other
activities that conflict with Employee's obligations to the Company.
12. Nonsolicitation Covenant. Employee hereby agrees that he shall not,
------------------------
during the term of his employment pursuant to this Agreement and for twelve (12)
months thereafter, do any of the following, directly or indirectly, without the
prior written consent of the Company's Board of Directors:
(a) Solicit Business. Solicit or influence or attempt to influence
----------------
any client, customer or other person either directly or indirectly, to direct
his or its purchase of the Company's products and/or services to any person,
firm, corporation, institution or other entity in competition with the business
of the Company; and
(b) Solicit Personnel. Solicit, induce, recruit or encourage any
-----------------
person employed by the Company to terminate or otherwise cease his employment
with the Company. This Section 12(b) is to be read in conjunction with Section
7 of the Confidentiality Agreement executed by Employee.
13. Limitation on Stock Option Acceleration Benefit. In the event that
-----------------------------------------------
the stock option acceleration benefits provided for in this Agreement to the
Employee (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section, would be subject to the excise tax imposed by Section 4999 of the
Code, then the Employee's acceleration benefits under Section 4(c) shall be
payable either:
(a) in full, or
(b) as to such lesser amount which would result in no portion of such benefits
being subject to excise tax under Section 4999 of the Code, whichever of
the foregoing amounts, taking into
-7-
<PAGE>
account the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by the Employee on an after-tax
basis, of the greatest amount of benefits under Section 4(c), notwithstanding
that all or some portion of such benefits may be taxable under Section 4999 of
the Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 13 shall be made in writing by
independent public accountants appointed by the Employee and reasonably
acceptable to the Company (the "Accountants"), whose determination shall be
conclusive and binding upon the Employee and the Company for all purposes. For
purposes of making the calculations required by this Section 13, the Accountants
may make reasonable assumptions and approximations concerning applicable taxes
and may rely on reasonable, good faith interpretations concerning the
application of Section 280G and 4999 of the Code. The Company and the Employee
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section. The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 13.
14. Conflicts. Employee represents that his performance of all the terms
---------
of this Agreement will not breach any other agreement to which Employee is a
party. Employee has not, and will not during the term of this Agreement, enter
into any oral or written agreement in conflict with any of the provisions of
this Agreement. Employee further represents that he is entering into or has
entered into an employment relationship with the Company of his own free will.
15. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. Employee shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any earnings that Employee may
receive from any other source.
(b) Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the parties.
(c) Sole Agreement. This Agreement, including any Exhibits hereto,
--------------
constitutes the sole agreement of the parties and supersedes all oral
negotiations and prior writings with respect to the subject matter hereof.
(d) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or forty-eight (48) hours after being deposited in the U.S.
mail as certified or registered mail with postage prepaid, if such notice is
addressed to the party to be notified at such party's address as set forth below
or as subsequently modified by written notice.
-8-
<PAGE>
(e) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(f) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(g) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(h) Arbitration. Any dispute or claim arising out of or in
-----------
connection with this Agreement shall be finally settled by binding arbitration
in San Mateo County, California in accordance with the rules of the American
Arbitration Association applicable to commercial arbitration by one arbitrator
appointed in accordance with said rules. The arbitrator shall apply California
law, without reference to rules of conflicts of law or rules of statutory
arbitration, to the resolution of any dispute. Judgment on the award rendered
by the arbitrator may be entered in any court having jurisdiction thereof.
Notwithstanding the foregoing, the parties may apply to any court of competent
jurisdiction for preliminary or interim equitable relief, or to compel
arbitration in accordance with this paragraph, without breach of this
arbitration provision. This Section 15(h) shall not apply to the Proprietary
Agreement.
(i) Advice of Counsel Each Party to this Agreement acknowledges that,
-----------------
in executing this Agreement, such party has had the opportunity to seek the
advice of independent legal counsel, and has read and understood all of the
terms and provisions of this Agreement. This Agreement shall not be construed
against any party by reason of the drafting of preparation hereof.
[SIGNATURE PAGE FOLLOWS]
-9-
<PAGE>
The parties have executed this Agreement the date first written above.
ORATEC INTERVENTIONS, INC.
By: /s/ Hugh Sharkey
________________________________
Title:_____________________________
Address: 3700 Haven Court
Menlo Park, CA 94025
KENNETH W. ANSTEY
Signature: /s/ Kenneth W. Anstey
-------------------------
Address:___________________________
___________________________
-10-
<PAGE>
EXHIBIT A
---------
PROPRIETARY INFORMATION AGREEMENT
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of this 21st day of August 1996, by and between Oratec
Interventions, Inc., a California corporation (the "Company") and Hugh Sharkey
("Executive").
RECITALS
--------
A. The Executive is currently an employee of the Company; and
B. The Company and Executive desire to enter into an agreement to set
forth certain of the terms and conditions of Executive's employment as President
and Chief Executive Officer of the Company and, after the hiring of a new
President and Chief Executive Officer, as Executive Vice President of the
Company;
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties hereto agree as follows:
AGREEMENT
---------
1. Employment. The Company shall employ Executive as President and Chief
----------
Executive Officer of the Company, and, after the hiring of a new President and
Chief Executive Officer, as Executive Vice President of the Company.
2. Term of Agreement. This Agreement shall be effective as of August 21,
-----------------
1996 and shall have a term of two (2) years. This Agreement will be renewable
for one (1) year periods after the expiration of the original term if mutually
agreed in writing by Executive and the Company.
3. Duties; Compensation.
--------------------
(a) Duties. Subject to the authority of the Board of Directors (the
------
"Board") while Executive is President and Chief Executive Officer, and of the
President and Chief Executive Officer once Executive becomes Executive Vice
President, Executive shall have authority associated with such offices, and
shall perform, on behalf of the Company, all duties and services as are
customarily incident to such offices. Executive shall devote his full time,
effort and attention during regular business hours to the business and affairs
of the Company and shall perform his duties and services hereunder to the best
of his ability. The Company acknowledges that Executive may in the future serve
as a director, as a trustee or in a similar position with other corporations or
entities. Any fees or other compensation received by Executive for service as a
director, as a trustee or in a similar position with another corporation or
entity shall be retained by Executive.
(b) Confidentiality. On August 21, 1996, Executive executed the
---------------
Proprietary Information Agreement attached as Exhibit A hereto (the
"Confidentiality Agreement"). Executive hereby represents and warrants to the
Company that he has complied with all
<PAGE>
obligations under the Confidentiality Agreement and agrees to continue to abide
by the terms of the Confidentiality Agreement and further agrees that the
provisions of the Confidentiality Agreement shall survive any termination of
this Agreement or his employment by the Company.
4. Compensation. For the duties and services to be performed by Executive
------------
hereunder in his capacity as President and Chief Executive Officer of the
Company, the Company shall pay Executive and Executive agrees to accept, the
salary, stock options, bonuses and other benefits described below in this
Section 4.
(a) Salary. Executive shall receive a monthly base salary of
------
$11,666.67, which is the equivalent of $140,000 per year, payable in bi-weekly
installments (or at such other times as the other executive officers of the
Company are paid). The base salary shall be reviewed annually by the Board or
its Compensation Committee and any annual increases will be effective as of the
date determined appropriate by the Board or its Compensation Committee.
(b) Bonuses. Executive shall be eligible for an annual bonus based on
-------
achievement of performance objectives established and agreed to by Executive and
the Board or its Compensation Committee.
(c) Employee Benefits. Executive shall be entitled to participate, to
-----------------
the extent he is eligible under the terms and conditions thereof, in any
hospitalization or medical insurance plans, 401(k) plans, deferred compensation
plans, life insurance plans, vacation, retirement or other employee benefit
plans which are generally available to executives of the Company or are
available to senior executives or a select group of executives of the Company
and which may be in effect from time to time during Executive's employment with
the Company. The Company shall be under no obligation to institute or continue
the existence of any employee benefit plan described herein and may from time to
time amend, modify or terminate any such employee benefit plan. For purposes of
the right to the continuation of medical coverage under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, Executive's employment shall not
be deemed terminated until the expiration of the Company's obligation to make
payments to Executive under Section 5 below.
(d) Car Allowance. Executive shall be entitled to receive a car
-------------
allowance payment of $500 per month.
(e) Reimbursement of Expenses. Executive shall be authorized to incur
-------------------------
and shall be reimbursed by the Company for reasonable expenses, provided that
such expenses are substantiated in accordance with Company policies.
5. Termination and Termination Payments.
------------------------------------
(a) Voluntary Termination. Executive has the right to terminate his
---------------------
employment by the Company upon not less than one (1) month prior written notice
to the Company. In the event of such election, Executive's employment shall
terminate effective upon the date set forth in such notice. In such event, the
Company shall pay Executive all compensation (including base salary but
excluding bonus) due him to the date of termination.
<PAGE>
(b) Involuntary Termination Without Cause. The Company shall have the
-------------------------------------
right to terminate Executive's employment without Cause upon not less than one
month prior written notice to Executive. If the Company shall terminate
Executive's employment without Cause the Company shall (i) pay Executive all
compensation (including the base salary and an amount equal to the most recent
annual bonus, if any, paid to Executive) and benefits due him to the date of his
termination and for a period of one (1) year following the date of such
termination if such termination occurs during the first year of the term of this
Agreement, and for a period of six (6) months if such termination occurs during
the second year of the term of this Agreement or any renewal period; and (ii)
accelerate the vesting of all restricted stock and stock options held by
Executive such that the restricted stock and options shall be immediately vested
or exercisable in full, as applicable, as of the date of termination. During
such period, Executive shall continue to be entitled to participate in the
Company's employee benefits plans or arrangements (as set forth in Section 4
above) on the same basis as if he were an employee.
(c) Involuntary Termination With Cause. The Company shall have the
----------------------------------
right to terminate Executive's employment with "Cause" upon three (3) days
written notice to Executive. In such event, the Company shall pay Executive all
compensation (including base salary but excluding bonus) due him to the date of
his termination.
(d) "Cause" Defined. For the purposes of this Agreement, "Cause"
--------------
shall mean (A) willful and repeated failure to comply with the lawful written
directions of the Board while Executive is President and Chief Executive
Officer, and of the President and Chief Executive Officer, once Executive
becomes Executive Vice President, (B) gross negligence or willful misconduct in
the performance of duties to the Company and/or it subsidiaries, (C) commission
of any act of fraud with respect to the Company and/or its subsidiaries, or (D)
conviction of a felony or a crime involving moral turpitude causing material
harm to the standing and reputation of the Company and/or it subsidiaries, in
each case as determined in good faith by the Board while Executive is President
and Chief Executive Officer, and by the President and Chief Executive Officer
once Executive becomes Executive Vice President. In each of the foregoing
circumstances except (D), written notice shall be given to Executive specifying
in reasonable detail the facts giving rise thereto and that continuation may be
cause for termination unless such conduct is cured to the satisfaction of the
Board while Executive is President and Chief Executive Officer, and of the
President and Chief Executive Officer once Executive becomes Executive Vice
President within five (5) business days of receipt of such notice by Executive.
6. Noncompetition Covenant. During the period specified below, Executive
-----------------------
hereby agrees that he shall not do any of the following without the prior
written consent of the Board:
(a) Compete. Carry on anywhere in the United State any business or
-------
activity (whether directly or indirectly, as a partner, shareholder, principal,
agent, director, affiliate or consultant) which is directly competitive with the
Business conducted by the Company. It is agreed that ownership of no more than
one percent of the outstanding voting stock of a publicly traded corporation,
ownership of no more than five percent of the outstanding voting stock of a
privately held corporation or ownership of no more than ten percent of the
limited partnership interests of a partnership shall not constitute a violation
of this provision. As used herein, the
<PAGE>
"Business" conducted by the Company shall consist of the ablation of neural and
other tissues in and around the spine (to exclude the brain) and coagulation of
collagenous musculo-skeletal structures.
(b) Solicit Business. Solicit or influence or attempt to influence
----------------
any client, customer or other person either directly or indirectly, to direct
his or its purchase of the Company's products and/or services to any person,
firm, corporation, institution or other entity in competition with the Business
of the Company.
(c) Solicit Personnel. Solicit or influence or attempt to influence
-----------------
any person employed by the Company to terminate or otherwise cease his
employment with the Company or become an employee of any competitor of the
Company.
(d) Termination. The covenants set forth in this Section 6 shall be
-----------
effective commencing as of the date hereof and shall continue for so long as
cash payments are made to Executive under this Agreement.
7. Successors. Any successor to the Company (whether direct or indirect
----------
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Executive's rights hereunder
shall inure to the benefit of, and be enforceable by, Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
8. Notice. Notices and all other communications contemplated by this
------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or sent by facsimile or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. Mailed notices to
Executive shall be addressed to Executive at the address recorded in Executive's
personnel file. In the case of the Company, mailed notices shall be addressed
to its corporate headquarters, and all notices shall be directed to the
attention of its Secretary.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. Employee shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor shall any such payment be reduced by any
earnings that Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by Executive and by an authorized officer of the Company
(other than Executive). No waiver by either party or any breach of, or of
compliance with, any condition or provision of this
<PAGE>
Agreement by the other party shall be considered a waiver of any other condition
or provision or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understanding
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereto.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. If any term or provision of this Agreement or the
------------
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such terms or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(g) Assignment of Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company. In the
case of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs you.
(h) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of this together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
ORATEC INTERVENTIONS, INC.
By: /s/ Patrick Latterell
----------------------
Title:
HUGH SHARKEY, an individual
/s/ Hugh Sharkey
--------------------------
Hugh Sharkey
<PAGE>
EXHIBIT A
CONFIDENTIALITY AGREEMENT
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "First Amendment") is
---------------
entered into as of July 14, 1997 (the "Effective Date") between Oratec
--------------
Interventions, Inc., a California corporation ("Oratec"), and Hugh Sharkey
------
("Executive").
---------
RECITALS
--------
A. The Company and Executive entered into an Employment Agreement dated as
of August 21, 1996 (the "Agreement").
---------
B. On the Effective Date, the Company hired a new President and Chief
Executive Officer, as contemplated in the Agreement, and Executive resigned from
such positions.
C. The Compensation Committee of the Board of Directors has approved
certain amendments to the Agreement, and the parties wish to amend the Agreement
in accordance therewith. Terms used herein but not defined herein shall have
the same meanings ascribed to them in the Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties hereto agree as follows:
AGREEMENT
---------
1. Employment. Executive hereby resigns as President and Chief Executive
----------
Officer of the Company. The Company shall employ Executive as Executive Vice
President and Chief Technical Officer of the Company.
2. Duties. Subject to the authority of the Board, Executive shall have
------
the authority associated with the offices of Executive Vice President and Chief
Technical Officer, and shall perform, on behalf of the Company, all duties and
services as are customarily incident to such offices. Among other things,
Executive is expected to participate in business development and fund raising,
including participation in "working group" meetings associated with an initial
public offering of the Company's securities. In addition, Executive may
continue to attend a reasonable number of business conferences, seminars,
meetings of professional societies to the extent such activities contribute to
the performance of Executive's duties.
3. Bonus. The Company shall pay Executive, within seven (7) days of the
-----
closing of the Company's Series D financing, the amount of $70,000, representing
a 25% annual bonus of Executive's base salary of $11,666.67 per month for
Executive's two (2) years of service as the Company's President and Chief
Executive Officer. In addition, within a reasonable period of time following
the Effective Date, the Company shall institute a performance bonus plan for
Executive based upon milestones determined by the President of the Company.
<PAGE>
4. Common Stock. Executive shall be entitled to keep 5,000 shares of the
------------
Company's Common Stock currently registered in Executive's name on certificate
CS-81 which Executive repurchased from Ron Lax on October 25, 1995.
5. Acceleration of Vesting. In the event of a Change of Control, (a)
-----------------------
Executive's option for 40,000 shares of Common Stock granted on April 25, 1996
will be deemed to be 100% vested, and (b) the Company's repurchase option with
respect to (i) 150,000 shares of Common Stock held in the name of Smith Barney
Shearson as IRA Custodian FBO Hugh Sharkey IRA Account #595-62497-1-7-019 and
(ii) 444,000 shares of Common Stock held in the name of Sharkey-Daly Family
Trust U/D/T dated 9-23-96, will lapse in its entirety, in each case as of the
date of consummation of such Merger. For purposes of the Agreement, a "Change
------
of Control" shall mean the occurrence of any of the following events: (i) an
- ----------
acquisition of the Company by another entity by means of any transaction or
series of related transactions (including, without limitation, any
reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company), or (ii) a
sale of all or substantially all of the assets of the Company (collectively, a
"Merger"), so long as in either case (x) the Company's shareholders of record
immediately prior to such Merger will, immediately after such Merger, hold less
than fifty percent (50%) of the voting power of the surviving or acquiring
entity, or (y) the Company's shareholders of record immediately prior to such
Merger will, immediately after such Merger, hold less than sixty percent (60%)
of the voting power of the surviving or acquiring entity and a majority of the
members of the Board of Directors of the surviving or acquiring entity
immediately after such Merger were not members of the Board of Directors of the
Company immediately prior to such Merger.
6. Except as expressly amended by this First Amendment, the Agreement
shall remain in full force and effect, and the terms of the Agreement are
incorporated herein and made a part hereof.
The parties have executed this First Amendment to Employment Agreement,
effective as of the Effective Date.
ORATEC INTERVENTIONS, INC. HUGH SHARKEY, An individual
By: /s/ Kenneth Anstey /s/ Hugh Sharkey
----------------------------- -----------------------------
Kenneth Anstey, President and CEO Hugh Sharkey
<PAGE>
EXHIBIT 10.5
January 1, 1996
Mr. Roger Lipton
[Address]
Dear Roger:
On November 29, 1995, (the "Grant Date") Oratec's Board of Directors
granted you an option to purchase 110,000 shares of Oratec's Common Stock (the
"Option") and a warrant to purchase 50,000 shares of Oratec's Series B Preferred
Stock (the Warrant"). Both the Option and the Warrant contain certain vesting
provisions.
The Board has determined to modify the terms of the Option and the Warrant.
In the event of a merger or consolidation of the Company in which the Company is
not the surviving corporation or a sale of all or substantially all of the
Company's assets (collectively, a "Merger"), the Option and the Warrant shall
become fully exercisable immediately prior to the completion of the Merger.
Please let me know if you have questions regarding the above..
Sincerely,
/s/ Hugh Sharkey
Hugh Sharkey
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.6
November 29, 1999
Ms. Theresa M. Mitchell
296 Maywood Drive
San Francisco, CA 94127
Dear Theresa:
On behalf of ORATEC Interventions, Inc. (the "Company"), I am pleased to
-------
offer you the position of Vice President, Regulatory and Clinical Affairs, and
Quality Assurance of the Company. Speaking for myself, as well as the other
members of the Company's management team, we are all very impressed with your
credentials and we look forward to your future success in this position.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become the Vice President, Regulatory and Clinical Affairs
and Quality Assurance of the Company, working out of the Company's headquarters
office in Menlo Park, CA. You will report to the Company's President and Chief
Executive Officer.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties and
obligations required of and from you pursuant to the terms hereof. During the
term of your employment, you further agree that you will devote all of your
business time and attention to the business of the Company, the Company will be
entitled to all of the benefits and profits arising from or incident to all such
work services and advice, you will not render commercial or professional
services of any nature to any person or organization, whether or not for
compensation, without the prior written consent of the Company's President and
Chief Executive Officer, and you will not directly or indirectly engage or
participate in any business that is competitive in any manner with the business
of the Company. Nothing in this letter agreement will prevent you from accepting
speaking or presentation engagements in exchange for honoraria or from serving
on boards of charitable organizations, or from owning no more than one percent
(1%) of the outstanding equity securities of a corporation whose stock is listed
on a national stock exchange.
<PAGE>
November 29, 1999
Page 2
2. Start Date. Subject to fulfillment of any conditions imposed by this
----------
letter agreement, you will commence this new position with the Company on
December 13, 1999 (the "Start Date").
3. Proof of Right to Work. For purposes of federal immigration law, you
----------------------
will be required to provide to the Company documentary evidence of your identity
and eligibility for employment in the United States. Such documentation must be
provided to us within three (3) business days of your Start Date, or our
employment relationship with you may be terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a bi-weekly salary of $5,769.23,
-----------
which is equivalent to $150,000 on an annualized basis (the "Base Salary").
Your salary will be payable in two equal payments per month pursuant to the
Company's regular payroll policy (or in the same manner as other officers of the
Company).
b. Incentive Bonus. You will be eligible to receive an annual
---------------
incentive bonus of $25,000 for the calendar year ending December 31, 2000.
Payment of the bonus will be based on achievement of specified corporate and
individual performance targets mutually agreed upon by you and the Company's
President and Chief Executive Officer within 60 days of your Start Date. You
will also be eligible to earn incentive bonuses in future years, again based on
achievement of objectives.
c. Annual Review. Your Base Salary will be reviewed at the end of
-------------
each calendar year as part of the Company's normal salary review process.
5. Stock Options.
-------------
a. Initial Grant. In connection with the commencement of your
-------------
employment, the Company will recommend that the Board of Directors grant you an
option to purchase 120,000 shares of the Company's Common Stock ("Shares") with
------
an exercise price equal to the fair market value on the date of the grant. These
option shares will become exercisable at the rate of twelve forty-eighths
(12/48) of the Shares twelve months after the Vesting Commencement Date and one
forty-eighth (1/48) of the Shares at the end of each calendar month thereafter.
The Vesting Commencement Date will be your Start Date. Vesting will, of course,
depend on your continued employment with the Company. Notwithstanding the above,
in the event that (i) your employment is terminated by the Company or a
successor other than for Cause (as defined below), or (ii) your job duties,
responsibilities and requirements or compensation are materially reduced or
changed such that they are inconsistent with your prior duties, responsibilities
and requirements or compensation, in either case in connection with, or as a
result of, a Change of Control (as defined below), one hundred percent (100%) of
the option that has not yet become exercisable shall become exercisable on the
effective date of such termination, reduction or change. For purposes of this
letter, a termination or material reduction or change will be deemed to have
occurred in connection with, or as a result of, a Change in Control if it occurs
within 24 months of such Change in Control. The option will be an incentive
stock option to the maximum extent allowed
-2-
<PAGE>
November 29, 1999
Page 3
by the tax code and will be subject to the terms of the Company's 1999 Stock
Plan and the Stock Option Agreement between you and the Company.
b. Subsequent Option Grants. Subject to the discretion of the
------------------------
Company's Board of Directors, you may be eligible to receive additional grants
of stock options from time to time in the future, on such terms and subject to
such conditions as the Board of Directors shall determine as of the date of any
such grant.
6. Employee Benefits. You will be entitled to participate, to the extent
-----------------
you are eligible under the terms and conditions thereof, in any medical
insurance plans, 401(k) plans, deferred compensation plans, life insurance
plans, vacation, retirement or other employee benefit plans which are generally
available to executives of the Company or are available to senior executives or
a select group of executives of the Company and which may be in effect from time
to time during your employment with the Company. The Company shall be under no
obligation to institute or continue the existence of any employee benefit plan
described herein and may from time to time amend, modify or terminate any such
employee benefit plan.
7. Severance Agreement. If your employment is terminated by the Company
-------------------
or its successor for any reason other than Cause, as defined below, you will be
entitled to receive continuation of your Base Salary and medical insurance
benefits for a period of 6 months following the date of termination.
8. Definitions.
-----------
a. Cause. For purposes of this letter agreement, "Cause" shall mean
----- -----
(a) willful misconduct or gross negligence in performance of your duties
hereunder; (b) refusal to comply in any material respect with the legal
directives of the Company's Board of Directors so long as such directives are
not inconsistent with your position and duties, which is not remedied (if
remediable) within twenty (20) working days after written notice from the
Company's Board of Directors, which written notice shall state that failure to
remedy such conduct may result in termination for Cause; (c) a deliberate
attempt to do an injury to the Company; (d) conduct, dishonest, fraudulent or
otherwise, that materially discredits the Company or is materially detrimental
to the reputation of the Company; (e) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company; or (f) material breach of any element of the Company's
Proprietary Information Agreement, including without limitation, the theft or
other misappropriation of the Company's proprietary information, in each case as
determined in good faith by the Company's Board of Directors.
b. Change of Control. For purposes of this letter agreement, a
-----------------
"Change of Control" shall mean the occurrence of any of the following events:
-----------------
(i) an acquisition of the Company by another entity by means of any transaction
or series of related transactions (including,
-3-
<PAGE>
November 29, 1999
Page 4
without limitation, any reorganization, merger or consolidation but excluding
any merger effected exclusively for the purpose of changing the domicile of the
Company), or (ii) a sale of all or substantially all of the assets of the
Company (collectively, a "Merger"), so long as in either case (x) the Company's
shareholders of record immediately prior to such Merger will, immediately after
such Merger, hold less than fifty percent (50%) of the voting power of the
surviving or acquiring entity, or (y) the Company's shareholders of record
immediately prior to such Merger will, immediately after such Merger, hold less
than sixty percent (60%) of the voting power of the surviving or acquiring
entity and a majority of the members of the Board of Directors of the surviving
or acquiring entity immediately after such Merger were not members of the Board
of Directors of the Company immediately prior to such Merger.
9. Limitation on Change of Control Benefits. In the event that the
----------------------------------------
severance and stock option acceleration benefits provided in this letter
agreement in connection with, or as a result of, a Change of Control of the
Company (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section, would be subject to the excise tax imposed by Section 4999 of the
Code, then such benefits shall be payable either: (a) in full, or (b) as to such
lesser amount which would result in no portion of such benefits being subject to
excise tax under Section 4999 of the Code, whichever of the foregoing amounts,
taking into account the applicable federal, state and local income taxes and the
excise tax imposed by Section 4999, results in your receipt on an after-tax
basis, of the greatest amount of benefits, notwithstanding that all or some
portion of such benefits may be taxable under Section 4999 of the Code. Unless
you and the Company otherwise agree in writing, any determination required under
this Section 9 shall be made in writing by independent public accountants
appointed by you and reasonably acceptable to the Company (the "Accountants"),
whose determination shall be conclusive and binding upon you and the Company for
all purposes. For purposes of making the calculations required by this Section
9, the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Section 280G and 4999 of the Code. The Company
and you shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section. The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 9.
10. Proprietary Information Agreement. Your acceptance of this offer and
---------------------------------
commencement of employment with the Company is contingent upon the execution,
and delivery to an officer of the Company, of the Company's Proprietary
Information Agreement, a copy of which is enclosed for your review and execution
(the "Proprietary Information Agreement"), prior to or on your Start Date.
---------------------------------
11. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or indirectly, any
information, including any of the terms of this agreement, regarding salary,
bonuses, or stock purchase or option allocations to any person, including other
employees of the Company; provided, however, that you may discuss such terms
with members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or accounting advice.
-4-
<PAGE>
November 29, 1999
Page 5
12. At-Will Employment. Notwithstanding the Company's obligation
------------------
described in Sections 5a, 7 or elsewhere herein, your employment with the
Company will be on an "at will" basis, meaning that either you or the Company
may terminate your employment at any time for any reason or no reason, without
obligation or liability, except as specifically provided herein. We are all
delighted to be able to extend you this offer and look forward to working with
you. To indicate your acceptance of the Company's offer, please sign and date
this letter in the space provided below and return it to me, along with a signed
and dated copy of the Proprietary Information Agreement. This letter, together
with the Proprietary Information Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
ORATEC Interventions, Inc.
By: _______________________________________
Title: President and Chief Executive Officer
ACCEPTED AND AGREED:
THERESA M. MITCHELL
____________________________
Signature
____________________________
Date
Enclosure: Proprietary Information Agreement
-5-
<PAGE>
SCHEDULE 1
ESTIMATED RELOCATION EXPENSES
-----------------------------
<PAGE>
EXHIBIT 10.7
ORATEC INTERVENTIONS, INC.
1995 STOCK PLAN
(As amended through August 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 Delaware
-------
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 4,990,000 shares of Common Stock 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) 1,250,000 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 13 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 the time of
grant of the Option and not exceeding three (3) months) after the date of such
termination (but in no
-8-
<PAGE>
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 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.
-9-
<PAGE>
(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 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,
-10-
<PAGE>
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 minimum statutory withholding amount for federal and state tax
purposes, including payroll taxes, applicable to the exercise. 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 minimum statutory withholding amount for federal and state tax purposes,
including payroll taxes, applicable to the exercise.
(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(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 rights of repurchase 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>
ORATEC INTERVENTIONS, INC.
1995 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
{Optionee}
{Optionee Address1}
{Optionee Address2}
You have been granted an option to purchase Common Stock of ORATEC
Interventions, Inc., (the "Company") as follows:
Board Approval Date: _________________________
Date of Grant (Later of Board
Approval Date or
Commencement of
Employment/Consulting): {Grant Date}
Exercise Price Per Share: {Exercise Price}
Total Number of Shares Granted: {Shares Granted}
Total Price of Shares Granted: {Total Exercise Price}
Type of Option: {No Shares ISO}Shares Incentive Stock
Option
{No Shares NSO} Shares Nonstatutory Stock
Option
Term/Expiration Date: {Term}{Expir Date}
Vesting Commencement Date: {Vesting Start Date}
Vesting Schedule: {Vesting Schedule}
Termination Period: Option may be exercised for a period of 60
days after termination of employment or
consulting relationship except as set out
in
<PAGE>
Sections 7 and 8 of the Stock Option
Agreement (but in no event later than the
Expiration Date).
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 ORATEC Interventions, Inc. 1995 Stock Plan and the
Stock Option Agreement, all of which are attached and made a part of this
document.
OPTIONEE: ORATEC INTERVENTIONS, INC.
By:
- ---------------------------- --------------------------------
Signature
Title:
- ---------------------------- -----------------------------
Print Name
<PAGE>
ORATEC INTERVENTIONS, INC.
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. ORATEC Interventions, Inc., a Delaware corporation
---------------
(the "Company"), hereby grants to the Optionee named in the Notice of Stock
-------
Option Grant attached to this Agreement ("Optionee"), an option (the "Option")
-------- ------
to purchase the total number of shares of Common Stock (the "Shares") 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,
--------------
definitions and provisions of the 1995 Stock Plan (the "Plan") adopted by the
----
Company, which is incorporated in this Agreement by reference. In the event of
a conflict between the terms of the Plan and the terms of this Agreement, the
terms of the Plan shall govern. Unless otherwise defined in this Agreement, the
terms used in this Agreement shall have the meanings defined in the Plan.
To the extent designated an Incentive Stock Option in the Notice of
Stock Option Grant, this Option is intended to qualify as an Incentive Stock
Option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and, to the extent not so designated, this Option is
----
intended to be a Nonstatutory Stock Option.
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant and with the provisions of Sections 9 and 10 of the Plan as follows:
(a) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below, subject to the limitations contained in paragraphs
(iii) and (iv) below.
(iii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Stock Option
Grant.
(iv) If designated an Incentive Stock Option in the Notice of
Stock Option Grant, in the event that the Shares subject to this Option (and all
other Incentive Stock Options granted to Optionee by the Company or any Parent
or Subsidiary) that vest in any calendar year have an aggregate fair market
value (determined for each Share as of the Date of Grant of the option covering
such Share) in excess of $100,000, the Shares in excess of $100,000 shall be
treated as subject to a Nonstatutory Stock Option, in accordance with Section 5
of the Plan.
<PAGE>
(b) Method of Exercise.
------------------
(i) This Option shall be exercisable by delivering to the
Company a written notice of exercise (in the form attached as Exhibit A) which
---------
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such Shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the Exercise Price. This Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
(ii) As a condition to the exercise of this Option, Optionee
agrees to make adequate provision for federal, state or other tax withholding
obligations, if any, which arise upon the exercise of the Option or disposition
of Shares, whether by withholding, direct payment to the Company, or otherwise.
(iii) No Shares will be issued pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes the
Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
--------------
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; or (d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
------------
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the
<PAGE>
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Termination of Relationship. In the event of termination of Optionee's
---------------------------
Continuous Status as an Employee or Consultant, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period set out in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant, the
Option shall terminate.
7. Disability of Optionee.
----------------------
(i) Notwithstanding the provisions of Section 6 above, in the event of
termination of Optionee's Continuous Status as an Employee or Consultant as a
result of total and permanent disability (as defined in Section 22(e)(3) of the
Code), Optionee may, but only within twelve (12) months from the date of
termination of employment (but in no event later than the date of expiration of
the term of this Option as set forth in Section 10 below), exercise the Option
to the extent otherwise so entitled 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
otherwise so entitled) within the time specified in this Agreement, the Option
shall terminate.
(ii) In the event of termination of Optionee's Continuous Status as an
Employee or Consultant as a result of any disability not constituting a total
and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee
may, but only within six (6) months from the date of termination of employment
(but in no event later than the date of expiration of the term of this Option as
set forth in Section 10 below), exercise this Option to the extent he was
entitled to exercise it at the date of such termination; provided, however, that
if this is an Incentive Stock Option and Optionee fails to exercise this
Incentive Stock Option within three (3) months from the date of termination of
employment, this Option will cease to qualify as an Incentive Stock Option (as
defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the exercise
price for the Shares and the fair market value of the Shares on the date of
exercise. 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 (which
he was entitled to exercise) within the time specified herein, the Option shall
terminate.
8. Death of Optionee. In the event of the death of 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 date of expiration of the term of this Option as set
forth in
<PAGE>
Section 10 below), by 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.
9. 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.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
10. 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 Option.
11. No Additional Employment Rights. Optionee understands and agrees that
-------------------------------
the vesting of Shares pursuant to the Vesting Schedule is earned only by
continuing as an Employee or Consultant at the will of the Company (not through
the act of being hired, being granted this Option or acquiring Shares under this
Agreement). Optionee further acknowledges and agrees that nothing in this
Agreement, nor in the Plan which is incorporated in this Agreement by reference,
shall confer upon Optionee any right with respect to continuation as an Employee
or Consultant with the Company, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
12. Tax Consequences. Optionee acknowledges that he or she has read the
----------------
brief summary set forth below of certain federal tax consequences of exercise of
this Option and disposition of the Shares under the law in effect as of the date
of grant. OPTIONEE UNDERSTANDS THAT 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) Exercise of Incentive Stock Option. If this Option is an
----------------------------------
Incentive Stock Option, there will be no regular federal income tax liability
upon the exercise of the Option, although the excess, if any, of the fair market
value of the Shares on the date of exercise over the Exercise Price will be
treated as an item of alternative minimum taxable income for federal tax
purposes and may subject Optionee to the alternative minimum tax in the year of
exercise.
(b) Exercise of Nonstatutory Stock Option. If this Option does not
-------------------------------------
qualify as an Incentive Stock Option, Optionee may incur regular federal income
tax liability upon the exercise of the Option. 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 Shares on the date of
exercise over the Exercise Price. In addition, if Optionee is an employee of
the Company, the Company will be required to withhold from Optionee's
compensation or
<PAGE>
collect from Optionee and pay to the applicable taxing authorities an amount
equal to a percentage of this compensation income at the time of exercise.
(c) Disposition of Shares. If this Option is an Incentive Stock
---------------------
Option and if Shares transferred pursuant to the Option are held for more than
one year after exercise and more than two years after the Date of Grant, any
gain realized on disposition of the Shares will be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an Incentive
Stock Option are disposed of before the end of either of such two holding
periods, then any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
excess, if any, of the lesser of (i) the fair market value of the Shares on the
date of exercise, or (ii) the sales proceeds, over the Exercise Price. If this
Option is a Nonstatutory Stock Option, then gain realized on the disposition of
Shares will be treated as long-term or short-term capital gain depending on
whether or not the disposition occurs more than one year after the exercise
date. In the case of either an Incentive Stock Option or a Nonstatutory Stock
Option, the long-term capital gain will be taxed for federal income tax and
alternative minimum tax purposes at a maximum rate of 20%.
(d) Notice of Disqualifying Disposition. If the Option granted to
-----------------------------------
Optionee in this Agreement is an Incentive Stock Option, and if Optionee sells
or otherwise disposes of any of the Shares acquired pursuant to the Incentive
Stock Option on or before the later of (i) the date two years after the Date of
Grant, or (ii) the date one year after transfer of such Shares to Optionee upon
exercise of the Incentive Stock Option, Optionee shall notify the Company in
writing within thirty (30) days after the date of any such disposition.
Optionee agrees that Optionee may be subject to income tax withholding by the
Company on the compensation income recognized by Optionee from the early
disposition by payment in cash or out of the current earnings paid to Optionee.
13. Signature. This Stock Option Agreement shall be deemed executed by
---------
the Company and Optionee upon execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.
[Remainder of page left intentionally blank]
<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 1995 Stock
Plan and the 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: __________________________________
<PAGE>
EXHIBIT 10.8
ORATEC INTERVENTIONS, INC.
1995 STOCK PLAN
(As amended through January 2000)
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) "Cause" means (a) willful misconduct or gross negligence in
-----
performance of an Optionee's duties with the Company; (b) refusal to comply in
any material respect with the legal directives of the Company so long as such
directives are not inconsistent with an Optionee's position and duties, which is
not remedied (if remediable) within twenty (20) working days after written
notice from the Company, which written notice shall state that failure to remedy
such conduct may result in termination for Cause; (c) a deliberate attempt to do
an injury to the Company; (d) engaging in any conduct, that materially
discredits the Company or is materially detrimental to the reputation of the
Company; (e) commission of any act of theft or fraud with respect to the
Company; (f) conviction of a felony or a crime involving moral turpitude; or (g)
material breach of any element of the Company's Proprietary Information and
Inventions Assignment Agreement or any nondisclosure agreement between an
Optionee and the
<PAGE>
Company, including without limitation, the theft or other misappropriation of
the Company's proprietary information, in each case as determined in good faith
by the Company's Chief Executive Officer.
(f) "Change of Control" means the occurrence of any of the following
-----------------
events: (a) an acquisition of the Company by another entity by means of any
transaction or series of related transactions (including, without limitation,
any reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company), or (b) a
sale of all or substantially all of the assets of the Company (collectively, a
"Merger"), so long as in either case (i) the Company's shareholders of record
immediately prior to such Merger will, immediately after such Merger, hold less
than fifty percent (50%) of the voting power of the surviving or acquiring
entity, or (ii) the Company's shareholders of record immediately prior to such
Merger will, immediately after such Merger, hold less than sixty percent (60%)
of the voting power of the surviving or acquiring entity and a majority of the
members of the Board of Directors of the surviving or acquiring entity
immediately after such Merger were not members of the Board of Directors of the
Company immediately prior to such Merger.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
----
(h) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan.
(i) "Common Stock" means the Common Stock of the Company.
------------
(j) "Company" means Oratec Interventions, Inc., a Delaware
-------
corporation.
(k) "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.
(l) "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.
(m) "Director" means a member of the Board.
--------
-2-
<PAGE>
(n) "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.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(p) "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.
(q) "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.
(r) "Involuntary Termination" means the occurrence of any of the
-----------------------
following events: (a) any termination by the Company other than for Cause, (b) a
material reduction or change in an Optionee's job duties, responsibilities and
requirements inconsistent with the Optionee's position with the Company and
Optionee's prior duties, responsibilities and requirements, or (c) any reduction
greater than 20% of an Optionee's base compensation (other than in connection
with a general decrease in base salaries for employees of the Company).
(s) "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.
-3-
<PAGE>
(t) "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.
(u) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(v) "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.
(w) "Option" means a stock option granted pursuant to the Plan.
------
(x) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(y) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(z) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(aa) "Plan" means this 1995 Stock Plan.
----
(bb) "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.
(cc) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(dd) "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.
(ee) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ff) "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.
(gg) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(hh) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
-4-
<PAGE>
(ii) "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 4,990,000 shares of Common Stock 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) 1,250,000 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(p) of the Plan;
(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;
-5-
<PAGE>
(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.
(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
-6-
<PAGE>
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.
(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:
-7-
<PAGE>
(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.
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;
-8-
<PAGE>
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 13 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 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
-9-
<PAGE>
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 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
-10-
<PAGE>
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 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
-11-
<PAGE>
(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 minimum statutory withholdings for federal and state tax purposes,
including payroll taxes, applicable to the exercise. 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").
--------
(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
-12-
<PAGE>
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 minimum statutory withholdings for federal and
state tax purposes, including payroll taxes, applicable to the exercise.
(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; Change of Control.
-------------------------------------------------------------
(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(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 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) Change of Control. In the event of a Change of Control, each
-----------------
outstanding Option or Stock Purchase Right shall be assumed or an equivalent
option or right shall be
-13-
<PAGE>
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 rights
of repurchase with respect to Restricted Stock shall lapse upon the consummation
of the Change of Control.
If an Optionee is an Employee of the Company and the Optionee's
employment with the Company or a successor corporation terminates as a result of
Involuntary Termination other than for Cause at any time within two years
following a Change of Control, and as part of the Change of Control the
successor corporation agrees to assume outstanding Options or Stock Purchase
Rights or to substitute an equivalent option or right or to accept assignment of
the conditions and restrictions with respect to Restricted Stock, then, (i) in
the case of an Option with a vesting commencement date that is more than two
years prior to the termination date, the unvested shares under such Option shall
automatically be accelerated such that 100% of the total number of unvested
shares as of the effective date of such Involuntary Termination shall
automatically become vested, (ii) in the case of an Option with a vesting
commencement date that is within one year prior to the termination date and in
the event that such Option has not vested 1/48 for each month immediately
following the grant of such Option, the unvested shares under such Option shall
automatically be accelerated such that 1/48 of the total number of unvested
shares as of the effective date of such Involuntary Termination shall
automatically become vested for each month of Optionee's employment with the
Company following the vesting commencement date of such Option, (iii) in the
case of Restricted Stock with a vesting commencement date that is more than two
years prior to the termination date, any rights of repurchase with respect to
such Restricted Stock shall automatically terminate with respect to 100% of the
total number of unvested shares as of the effective date of such Involuntary
Termination; and (iv) in the case of Restricted Stock with a vesting
commencement date that is within one year prior to the termination date and in
the event that repurchase rights have not already terminated with regard to 1/48
of such Restricted Stock for each month immediately following the grant of such
Restricted Stock, any rights of repurchase with respect to such Restricted Stock
shall automatically terminate with respect to 1/48 of the total number of
unvested shares as of the effective date of the Involuntary Termination for each
month of the Optionee's employment with the Company following the vested
commencement date of such Restricted Stock.
In the event that, following a Change of Control, 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, then the vesting
acceleration benefits in the paragraph above shall apply on the date immediately
prior to the effective date of the Change of Control transaction.
If Optionee is a Consultant to the Company, in the event of a Change
of Control, 100% of the total number of unvested shares held by such Consultant
shall automatically become vested immediately prior to the effective date of the
Change of Control transaction.
-14-
<PAGE>
In the event that the Company commences substantive discussions with a
potential acquiror prior to April 12, 2000 and such substantive discussions
result in a Change of Control transaction, the provisions set forth in this
Section 13(c) would not apply.
(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 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,
-15-
<PAGE>
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.
-16-
<PAGE>
Exhibit 10.9
ORATEC INTERVENTIONS, INC.
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1999 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 Delaware
-------
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.
(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;
<PAGE>
(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.
(p) "Involuntary Termination" means the occurrence of any of the
-----------------------
following events: (a) any termination by the Company other than for Cause, (b) a
material reduction or change in an Optionee's job duties, responsibilities and
requirements inconsistent with the
-2-
<PAGE>
Optionee's position with the Company and
Optionee's prior duties, responsibilities and requirements, or (c) any reduction
greater than 20% of an Optionee's base compensation (other than in connection
with a general decrease in base salaries for employees of the Company).
(q) "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.
(r) "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.
(s) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(t) "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.
(u) "Option" means a stock option granted pursuant to the Plan.
------
(v) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(w) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(x) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(y) "Plan" means this 1999 Stock Plan.
----
(z) "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.
(aa) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(bb) "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.
(cc) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
-3-
<PAGE>
(dd) "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.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(ff) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(gg) "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 1,149,000 shares of Common Stock 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) 1,250,000 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:
-4-
<PAGE>
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(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(g) 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
-5-
<PAGE>
Purchase Right
may, if he or she is otherwise eligible, be granted additional Options or Stock
Purchase Rights.
(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 1,000,000 Shares.
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:
-6-
<PAGE>
(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 .
(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, prior to the date, if any, on which the Common
Stock becomes a Listed Security to any other eligible person, 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.
(C) granted on or after the date, if any, on which the
Common Stock becomes a Listed Security to any eligible person, the per share
Exercise Price shall be such price as determined by the Administrator; provided,
however, that if such eligible person is, at the time of the grant of such
Option, a Named Executive of the Company, 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.
(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
-7-
<PAGE>
(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.
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 9(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 13 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.
-8-
<PAGE>
(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 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
-9-
<PAGE>
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 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
-10-
<PAGE>
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 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 12
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 a 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 minimum statutory withholding amount for federal and state tax
purposes, including payroll taxes,
-11-
<PAGE>
applicable to the exercise. 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").
--------
(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 or
less than the minimum statutory withholding amount for federal and state tax
purposes, including payroll taxes, applicable to the exercise.
(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 Sections 3(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.
-12-
<PAGE>
(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 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 rights of repurchase 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
-13-
<PAGE>
theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to 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>
ORATEC INTERVENTIONS, INC.
1999 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
{Optionee}
{Optionee Address1}
{Optionee Address2}
You have been granted an option to purchase Common Stock of ORATEC
Interventions, Inc., (the "Company") as follows:
Board Approval Date:
---------------------------------
Date of Grant (Later of Board
Approval Date or
Commencement of
Employment/Consulting): {Grant Date}
Exercise Price Per Share: {Exercise Price}
Total Number of Shares Granted: {Shares Granted}
Total Price of Shares Granted: {Total Exercise Price}
Type of Option: {No Shares ISO} Shares Incentive Stock
Option
{No Shares NSO} Shares Nonstatutory Stock
Option
Term/Expiration Date: {Term}{Expir Date}
Vesting Commencement Date: {Vesting Start Date}
Vesting Schedule: {Vesting Schedule}
Termination Period: Option may be exercised for a period of 60
days after termination of employment or
consulting relationship except as set out in
<PAGE>
Sections 7 and 8 of the Stock Option
Agreement (but in no event later than the
Expiration Date).
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 ORATEC Interventions, Inc. 1999 Stock Plan and the
Stock Option Agreement, all of which are attached and made a part of this
document.
OPTIONEE: ORATEC INTERVENTIONS, INC.
By:
____________________________ _______________________________
Signature
Title:
____________________________ ____________________________
Print Name
<PAGE>
ORATEC INTERVENTIONS, INC.
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. ORATEC Interventions, Inc., a Delaware corporation
---------------
(the "Company"), hereby grants to the Optionee named in the Notice of Stock
-------
Option Grant attached to this Agreement ("Optionee"), an option (the "Option")
-------- ------
to purchase the total number of shares of Common Stock (the "Shares") 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,
--------------
definitions and provisions of the 1999 Stock Plan (the "Plan") adopted by the
----
Company, which is incorporated in this Agreement by reference. In the event of
a conflict between the terms of the Plan and the terms of this Agreement, the
terms of the Plan shall govern. Unless otherwise defined in this Agreement, the
terms used in this Agreement shall have the meanings defined in the Plan.
To the extent designated an Incentive Stock Option in the Notice of
Stock Option Grant, this Option is intended to qualify as an Incentive Stock
Option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and, to the extent not so designated, this Option is
----
intended to be a Nonstatutory Stock Option.
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant and with the provisions of Sections 9 and 10 of the Plan as follows:
(a) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below, subject to the limitations contained in paragraphs
(iii) and (iv) below.
(iii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Stock Option
Grant.
(iv) If designated an Incentive Stock Option in the Notice of
Stock Option Grant, in the event that the Shares subject to this Option (and all
other Incentive Stock Options granted to Optionee by the Company or any Parent
or Subsidiary) that vest in any calendar year have an aggregate fair market
value (determined for each Share as of the Date of Grant of the option covering
such Share) in excess of $100,000, the Shares in excess of $100,000 shall be
treated as subject to a Nonstatutory Stock Option, in accordance with Section 5
of the Plan.
<PAGE>
(b) Method of Exercise.
------------------
(i) This Option shall be exercisable by delivering to the
Company a written notice of exercise (in the form attached as Exhibit A) which
---------
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such Shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the Exercise Price. This Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
(ii) As a condition to the exercise of this Option, Optionee
agrees to make adequate provision for federal, state or other tax withholding
obligations, if any, which arise upon the exercise of the Option or disposition
of Shares, whether by withholding, direct payment to the Company, or otherwise.
(iii) No Shares will be issued pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes the
Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
--------------
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; or (d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
------------
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the
<PAGE>
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Termination of Relationship. In the event of termination of Optionee's
---------------------------
Continuous Status as an Employee or Consultant, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period set out in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant, the
Option shall terminate.
7. Disability of Optionee.
----------------------
(i) Notwithstanding the provisions of Section 6 above, in the event of
termination of Optionee's Continuous Status as an Employee or Consultant as a
result of total and permanent disability (as defined in Section 22(e)(3) of the
Code), Optionee may, but only within twelve (12) months from the date of
termination of employment (but in no event later than the date of expiration of
the term of this Option as set forth in Section 10 below), exercise the Option
to the extent otherwise so entitled 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
otherwise so entitled) within the time specified in this Agreement, the Option
shall terminate.
(ii) In the event of termination of Optionee's Continuous Status as an
Employee or Consultant as a result of any disability not constituting a total
and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee
may, but only within six (6) months from the date of termination of employment
(but in no event later than the date of expiration of the term of this Option as
set forth in Section 10 below), exercise this Option to the extent he was
entitled to exercise it at the date of such termination; provided, however, that
if this is an Incentive Stock Option and Optionee fails to exercise this
Incentive Stock Option within three (3) months from the date of termination of
employment, this Option will cease to qualify as an Incentive Stock Option (as
defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the exercise
price for the Shares and the fair market value of the Shares on the date of
exercise. 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 (which
he was entitled to exercise) within the time specified herein, the Option shall
terminate.
8. Death of Optionee. In the event of the death of 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 date of expiration of the term of this Option as set
forth in
<PAGE>
Section 10 below), by 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.
9. 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.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
10. 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 Option.
11. No Additional Employment Rights. Optionee understands and agrees that
-------------------------------
the vesting of Shares pursuant to the Vesting Schedule is earned only by
continuing as an Employee or Consultant at the will of the Company (not through
the act of being hired, being granted this Option or acquiring Shares under this
Agreement). Optionee further acknowledges and agrees that nothing in this
Agreement, nor in the Plan which is incorporated in this Agreement by reference,
shall confer upon Optionee any right with respect to continuation as an Employee
or Consultant with the Company, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
12. Tax Consequences. Optionee acknowledges that he or she has read the
----------------
brief summary set forth below of certain federal tax consequences of exercise of
this Option and disposition of the Shares under the law in effect as of the date
of grant. OPTIONEE UNDERSTANDS THAT 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) Exercise of Incentive Stock Option. If this Option is an
----------------------------------
Incentive Stock Option, there will be no regular federal income tax liability
upon the exercise of the Option, although the excess, if any, of the fair market
value of the Shares on the date of exercise over the Exercise Price will be
treated as an item of alternative minimum taxable income for federal tax
purposes and may subject Optionee to the alternative minimum tax in the year of
exercise.
(b) Exercise of Nonstatutory Stock Option. If this Option does not
-------------------------------------
qualify as an Incentive Stock Option, Optionee may incur regular federal income
tax liability upon the exercise of the Option. 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 Shares on the date of
exercise over the Exercise Price. In addition, if Optionee is an employee of
the Company, the Company will be required to withhold from Optionee's
compensation or
<PAGE>
collect from Optionee and pay to the applicable taxing authorities an amount
equal to a percentage of this compensation income at the time of exercise.
(c) Disposition of Shares. If this Option is an Incentive Stock
---------------------
Option and if Shares transferred pursuant to the Option are held for more than
one year after exercise and more than two years after the Date of Grant, any
gain realized on disposition of the Shares will be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an Incentive
Stock Option are disposed of before the end of either of such two holding
periods, then any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
excess, if any, of the lesser of (i) the fair market value of the Shares on the
date of exercise, or (ii) the sales proceeds, over the Exercise Price. If this
Option is a Nonstatutory Stock Option, then gain realized on the disposition of
Shares will be treated as long-term or short-term capital gain depending on
whether or not the disposition occurs more than one year after the exercise
date. In the case of either an Incentive Stock Option or a Nonstatutory Stock
Option, the long-term capital gain will be taxed for federal income tax and
alternative minimum tax purposes at a maximum rate of 20%.
(d) Notice of Disqualifying Disposition. If the Option granted to
-----------------------------------
Optionee in this Agreement is an Incentive Stock Option, and if Optionee sells
or otherwise disposes of any of the Shares acquired pursuant to the Incentive
Stock Option on or before the later of (i) the date two years after the Date of
Grant, or (ii) the date one year after transfer of such Shares to Optionee upon
exercise of the Incentive Stock Option, Optionee shall notify the Company in
writing within thirty (30) days after the date of any such disposition.
Optionee agrees that Optionee may be subject to income tax withholding by the
Company on the compensation income recognized by Optionee from the early
disposition by payment in cash or out of the current earnings paid to Optionee.
13. Signature. This Stock Option Agreement shall be deemed executed by
---------
the Company and Optionee upon execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.
[Remainder of page left intentionally blank]
<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 Stock
Plan and the 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: _________________________________
<PAGE>
EXHIBIT 10.10
ORATEC INTERVENTIONS, INC.
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1999 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) "Cause" means (a) willful misconduct or gross negligence in
-----
performance of an Optionee's duties with the Company; (b) refusal to comply in
any material respect with the legal directives of the Company so long as such
directives are not inconsistent with an Optionee's position and duties, which is
not remedied (if remediable) within twenty (20) working days after written
notice from the Company, which written notice shall state that failure to remedy
such conduct may result in termination for Cause; (c) a deliberate attempt to do
an injury to the Company; (d) engaging in any conduct, that materially
discredits the Company or is materially detrimental to the reputation of the
Company; (e) commission of any act of theft or fraud with respect to the
Company; (f) conviction of a felony or a crime involving moral turpitude; or (g)
material breach of any element of the Company's Proprietary Information and
Inventions Assignment Agreement or any nondisclosure agreement between an
Optionee and the Company, including without limitation, the theft or other
misappropriation of the Company's proprietary information, in each case as
determined in good faith by the Company's Chief Executive Officer.
<PAGE>
(f) "Change of Control" means the occurrence of any of the following
-----------------
events: (a) an acquisition of the Company by another entity by means of any
transaction or series of related transactions (including, without limitation,
any reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company), or (b) a
sale of all or substantially all of the assets of the Company (collectively, a
"Merger"), so long as in either case (i) the Company's shareholders of record
immediately prior to such Merger will, immediately after such Merger, hold less
than fifty percent (50%) of the voting power of the surviving or acquiring
entity, or (ii) the Company's shareholders of record immediately prior to such
Merger will, immediately after such Merger, hold less than sixty percent (60%)
of the voting power of the surviving or acquiring entity and a majority of the
members of the Board of Directors of the surviving or acquiring entity
immediately after such Merger were not members of the Board of Directors of the
Company immediately prior to such Merger.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
----
(h) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan.
(i) "Common Stock" means the Common Stock of the Company.
------------
(j) "Company" means Oratec Interventions, Inc., a Delaware
-------
corporation.
(k) "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.
(l) "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.
(m) "Director" means a member of the Board.
--------
(n) "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
-2-
<PAGE>
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.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(p) "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.
(q) "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.
(r) "Involuntary Termination" means the occurrence of any of the
-----------------------
following events: (a) any termination by the Company other than for Cause, (b) a
material reduction or change in an Optionee's job duties, responsibilities and
requirements inconsistent with the Optionee's position with the Company and
Optionee's prior duties, responsibilities and requirements, or (c) any reduction
greater than 20% of an Optionee's base compensation (other than in connection
with a general decrease in base salaries for employees of the Company).
(s) "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.
(t) "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.
-3-
<PAGE>
(u) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(v) "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.
(w) "Option" means a stock option granted pursuant to the Plan.
------
(x) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(y) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(z) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(aa) "Plan" means this 1999 Stock Plan.
----
(bb) "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.
(cc) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(dd) "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.
(ee) "Share" means a share of the Common Stock or Preferred Stock, as
-----
adjusted in accordance with Section 13 of the Plan.
(ff) "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.
(gg) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(hh) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(ii) "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.
-4-
<PAGE>
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 1,149,000 shares of Common Stock 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) 1,250,000 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(p) of the Plan;
(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;
-5-
<PAGE>
(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(g) 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.
(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.
-6-
<PAGE>
(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 1,000,000 Shares.
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.
(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.
-7-
<PAGE>
(B) granted, prior to the date, if any, on which the Common
Stock becomes a Listed Security to any other eligible person, 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.
(C) granted on or after the date, if any, on which the Common
Stock becomes a Listed Security to any eligible person, the per share Exercise
Price shall be such price as determined by the Administrator; provided, however,
that if such eligible person is, at the time of the grant of such Option, a
Named Executive of the Company, 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.
(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.
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
-8-
<PAGE>
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 9(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 13 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 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 9(b)
shall not apply if (i) the Optionee is a
-9-
<PAGE>
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 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
-10-
<PAGE>
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 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.
-11-
<PAGE>
(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 12
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 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 a 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 minimum statutory withholding taxes for federal and state tax
purposes, including payroll taxes, applicable to the exercise. 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").
--------
(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 or
-12-
<PAGE>
less than the minimum statutory withholding taxes for federal and state tax
purposes, including payroll taxes, applicable to the exercise.
(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; Change of Control.
-------------------------------------------------------------
(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 Sections 3 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 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) Change of Control. In the event of a Change of Control, 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
-13-
<PAGE>
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 rights of repurchase with respect to Restricted
Stock shall lapse upon the consummation of the Change of Control.
If an Optionee is an Employee of the Company and the Optionee's
employment with the Company or a successor corporation terminates as a result of
Involuntary Termination other than for Cause at any time within two years
following a Change of Control, and as part of the Change of Control the
successor corporation agrees to assume outstanding Options or Stock Purchase
Rights or to substitute an equivalent option or right or to accept assignment of
the conditions and restrictions with respect to Restricted Stock, then, (i) in
the case of an Option with a vesting commencement date that is more than two
years prior to the termination date, the unvested shares under such Option shall
automatically be accelerated such that 100% of the total number of unvested
shares as of the effective date of such Involuntary Termination shall
automatically become vested, (ii) in the case of an Option with a vesting
commencement date that is within one year prior to the termination date and in
the event that such Option has not vested 1/48 for each month immediately
following the grant of such Option, the unvested shares under such Option shall
automatically be accelerated such that 1/48 of the total number of unvested
shares as of the effective date of such Involuntary Termination shall
automatically become vested for each month of Optionee's employment with the
Company following the vesting commencement date of such Option, (iii) in the
case of Restricted Stock with a vesting commencement date that is more than two
years prior to the termination date, any rights of repurchase with respect to
such Restricted Stock shall automatically terminate with respect to 100% of the
total number of unvested shares as of the effective date of such Involuntary
Termination; and (iv) in the case of Restricted Stock with a vesting
commencement date that is within one year prior to the termination date and in
the event that repurchase rights have not already terminated with regard to 1/48
of such Restricted Stock for each month immediately following the grant of such
Restricted Stock, any rights of repurchase with respect to such Restricted Stock
shall automatically terminate with respect to 1/48 of the total number of
unvested shares as of the effective date of the Involuntary Termination for each
month of the Optionee's employment with the Company following the vested
commencement date of such Restricted Stock.
In the event that, following a Change of Control, 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, then the vesting
acceleration benefits in the paragraph above shall apply on the date immediately
prior to the effective date of the Change of Control transaction.
If Optionee is a Consultant to the Company, in the event of a Change
of Control, 100% of the total number of unvested shares held by such Consultant
shall automatically become vested immediately prior to the effective date of the
Change of Control transaction.
-14-
<PAGE>
In the event that the Company commences substantive discussions with a
potential acquiror prior to April 12, 2000 and such substantive discussions
result in a Change of Control transaction, the provisions set forth in this
Section 13(c) would not apply.
(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 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,
-15-
<PAGE>
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.
-16-
<PAGE>
ORATEC INTERVENTIONS, INC.
1999 Stock Plan
NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
"Optionee"
"OptioneeAddress1"
"OptioneeAddress2"
You have been granted an option to purchase Common Stock of Oratec
Interventions, Inc., (the "Company") as follows:
Board Approval Date:
Date of Grant (Later of Board
Approval Date or
Commencement of
Employment/Consulting): "GrantDate"
Exercise Price Per Share: "ExercisePrice"
Total Number of Shares Granted: "SharesGranted"
Total Price of Shares Granted: "TotalExercisePrice"
Type of Option: "NoSharesISO" Shares Incentive Stock
Option
"NoSharesNSO" Shares Nonstatutory Stock
Option
Term/Expiration Date: "Term"/"ExpirDate"
Vesting Commencement Date: "VestingStartDate"
Vesting Schedule: "VestingSchedule"
Termination Period: This Option may be exercised for a
period of 60 days after termination of
employment or consulting relationship
except as set out in Sections 7 and 8 of
the Stock Option Agreement (but in no
event later than the Expiration Date).
<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 Oratec Interventions, Inc. 1999 Stock Plan and the
Stock Option Agreement, all of which are attached and made a part of this
document.
OPTIONEE: ORATEC INTERVENTIONS, INC.
_________________________ By:_______________________
Signature
_________________________ Title:____________________
Print Name
<PAGE>
ORATEC INTERVENTIONS, INC.
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. Oratec Interventions, Inc., a Delaware corporation
---------------
(the "Company"), hereby grants to the Optionee named in the Notice of Stock
-------
Option Grant attached to this Agreement ("Optionee"), an option (the "Option")
-------- ------
to purchase the total number of shares of Common Stock (the "Shares") 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,
--------------
definitions and provisions of the 1999 Stock Plan (the "Plan") adopted by the
----
Company, which is incorporated in this Agreement by reference. In the event of
a conflict between the terms of the Plan and the terms of this Agreement, the
terms of the Plan shall govern. Unless otherwise defined in this Agreement, the
terms used in this Agreement shall have the meanings defined in the Plan.
To the extent designated an Incentive Stock Option in the Notice of
Stock Option Grant, this Option is intended to qualify as an Incentive Stock
Option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and, to the extent not so designated, this Option is
----
intended to be a Nonstatutory Stock Option.
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant and with the provisions of Sections 9 and 10 of the Plan as follows:
(a) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other termination
of employment, the exercisability of the Option is governed by Sections 6, 7 and
8 below, subject to the limitations contained in paragraphs (iii) and (iv)
below.
(iii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Stock Option
Grant.
(iv) If designated an Incentive Stock Option in the Notice of Stock
Option Grant, in the event that the Shares subject to this Option (and all other
Incentive Stock Options granted to Optionee by the Company or any Parent or
Subsidiary) that vest in any calendar year have an aggregate fair market value
(determined for each Share as of the Date of Grant of the option covering such
Share) in excess of $100,000, the Shares in excess of $100,000 shall be treated
as subject to a Nonstatutory Stock Option, in accordance with Section 5 of the
Plan.
(b) Method of Exercise.
------------------
(i) This Option shall be exercisable by delivering to the Company a
written notice of exercise (in the form attached as Exhibit A or other form
---------
provided by the
<PAGE>
Company) which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such Shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the Exercise
Price. This Option shall be deemed to be exercised upon receipt by the Company
of such written notice accompanied by the Exercise Price.
(ii) As a condition to the exercise of this Option, Optionee agrees to
make adequate provision for federal, state or other tax withholding obligations,
if any, which arise upon the exercise of the Option or disposition of Shares,
whether by withholding, direct payment to the Company, or otherwise.
(iii) No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of law and the requirements of any stock exchange upon which the Shares may then
be listed. Assuming such compliance, for income tax purposes the Shares shall
be considered transferred to Optionee on the date on which the Option is
exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
--------------
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; or (d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
------------
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
-2-
<PAGE>
6. Termination of Relationship. In the event of termination of Optionee's
---------------------------
Continuous Status as an Employee or Consultant, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period set out in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant, the
Option shall terminate.
7. Disability of Optionee.
----------------------
(i) Notwithstanding the provisions of Section 6 above, in the event of
termination of Optionee's Continuous Status as an Employee or Consultant as a
result of total and permanent disability (as defined in Section 22(e)(3) of the
Code), Optionee may, but only within twelve (12) months from the date of
termination of employment (but in no event later than the date of expiration of
the term of this Option as set forth in Section 10 below), exercise the Option
to the extent otherwise so entitled 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
otherwise so entitled) within the time specified in this Agreement, the Option
shall terminate.
(ii) In the event of termination of Optionee's Continuous Status as an
Employee or Consultant as a result of any disability not constituting a total
and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee
may, but only within six (6) months from the date of termination of employment
(but in no event later than the date of expiration of the term of this Option as
set forth in Section 10 below), exercise this Option to the extent he was
entitled to exercise it at the date of such termination; provided, however, that
if this is an Incentive Stock Option and Optionee fails to exercise this
Incentive Stock Option within three (3) months from the date of termination of
employment, this Option will cease to qualify as an Incentive Stock Option (as
defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the exercise
price for the Shares and the fair market value of the Shares on the date of
exercise. 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 (which
he was entitled to exercise) within the time specified herein, the Option shall
terminate.
8. Death of Optionee. In the event of the death of 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 date of expiration of the term of this Option as set
forth in Section 10 below), by 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.
-3-
<PAGE>
9. 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.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
10. 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 Option.
11. No Additional Employment Rights. Optionee understands and agrees that
-------------------------------
the vesting of Shares pursuant to the Vesting Schedule is earned only by
continuing as an Employee or Consultant at the will of the Company (not through
the act of being hired, being granted this Option or acquiring Shares under this
Agreement). Optionee further acknowledges and agrees that nothing in this
Agreement, nor in the Plan which is incorporated in this Agreement by reference,
shall confer upon Optionee any right with respect to continuation as an Employee
or Consultant with the Company, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
12. Tax Consequences. Optionee acknowledges that he or she has read the
----------------
brief summary set forth below of certain federal tax consequences of exercise of
this Option and disposition of the Shares under the law in effect as of the date
of grant. OPTIONEE UNDERSTANDS THAT 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) Exercise of Incentive Stock Option. If this Option is an
----------------------------------
Incentive Stock Option, there will be no regular federal income tax liability
upon the exercise of the Option, although the excess, if any, of the fair market
value of the Shares on the date of exercise over the Exercise Price will be
treated as an item of alternative minimum taxable income for federal tax
purposes and may subject Optionee to the alternative minimum tax in the year of
exercise.
(b) Exercise of Nonstatutory Stock Option. If this Option does not
-------------------------------------
qualify as an Incentive Stock Option, Optionee may incur regular federal income
tax liability upon the exercise of the Option. 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 Shares on the date of
exercise over the Exercise Price. In addition, if Optionee is an employee of
the Company, the Company will be required to withhold from Optionee's
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
-4-
<PAGE>
(c) Disposition of Shares. If this Option is an Incentive Stock
---------------------
Option and if Shares transferred pursuant to the Option are held for more than
one year after exercise and more than two years after the Date of Grant, any
gain realized on disposition of the Shares will be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an Incentive
Stock Option are disposed of before the end of either of such two holding
periods, then any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
excess, if any, of the lesser of (i) the fair market value of the Shares on the
date of exercise, or (ii) the sales proceeds, over the Exercise Price. If this
Option is a Nonstatutory Stock Option, then gain realized on the disposition of
Shares will be treated as long-term or short-term capital gain depending on
whether or not the disposition occurs more than one year after the exercise
date.
(d) Notice of Disqualifying Disposition. If the Option granted to
-----------------------------------
Optionee in this Agreement is an Incentive Stock Option, and if Optionee sells
or otherwise disposes of any of the Shares acquired pursuant to the Incentive
Stock Option on or before the later of (i) the date two years after the Date of
Grant, or (ii) the date one year after transfer of such Shares to Optionee upon
exercise of the Incentive Stock Option, Optionee shall notify the Company in
writing within thirty (30) days after the date of any such disposition.
Optionee agrees that Optionee may be subject to income tax withholding by the
Company on the compensation income recognized by Optionee from the early
disposition by payment in cash or out of the current earnings paid to Optionee.
13. Acknowledgment. Optionee acknowledges receipt of a copy of the Plan
--------------
and represents that he or she is familiar with the terms and provisions thereof,
and hereby accepts this Option subject to all of the terms and provisions
thereof. Optionee has reviewed the Plan and this Option in their entirety, has
had an opportunity to obtain the advice of counsel prior to executing this Stock
Option Agreement and fully understands all provisions of the Option. Optionee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under the Plan
or this Option.
13. Signature. This Stock Option Agreement shall be deemed executed by
---------
the Company and Optionee upon execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.
[Remainder of page left intentionally blank]
-5-
<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 Stock
Plan and the 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: ________________________________
<PAGE>
EXHIBIT 10.11
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 Delaware
-------
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.
<PAGE>
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(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 250,000 Shares of Common Stock (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 (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 (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 First Option shall vest at the rate of 1/36th of the
total shares on the monthly anniversary of the grant date. Each Subsequent
Option shall vest at the rate of 1/12th of the total shares on the monthly
anniversary grant date.
(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 relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the
-3-
<PAGE>
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}
{Optionee Address1}
{Optionee Address2}
You have been granted an option to purchase Common Stock of ORATEC
Interventions, Inc. (the "Company") as follows:
-------
Date of Grant {Grant Date}
Vesting Commencement Date {Vesting Start Date}
Exercise Price per Share {Exercise Price}
Total Number of Shares Granted {Shares Granted}
Total Exercise Price {Total Exercise price}
Expiration Date {Expir Date}
Vesting Schedule: This Option may be exercised, in whole or
---------------- in part, in accordance with the following
schedule: [Each First Option vests at
the rate of 1/36th of the total shares
on each monthly anniversary of the grant
date.][Each Subsequent Option vests at
the rate 1/12th of the total shares on
each monthly anniversary of the grant
date.]
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 10.12
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 Delaware
-------
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
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
2
<PAGE>
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 20 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 October 31, 2000. The Plan shall continue until
- ----
terminated in accordance with Section 20 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.
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
3
<PAGE>
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. In
addition, a participant's payroll deductions may be decreased by the Company to
0% at any time during an Offering Period in order to avoid unnecessary payroll
contributions as a result of application of the maximum share limit set forth in
Section 7(a), in which case payroll deductions shall re-commence at the rate
provided in such participant's subscription agreement at the beginning of the
next Offering Period, 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
4
<PAGE>
that the maximum number of Shares an Employee may purchase during each Offering
Period shall be 3,000 shares (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, the
5
<PAGE>
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. Automatic Withdrawal. Participants shall automatically be withdrawn
--------------------
as of October 31, 2000 from the Offering Period beginning on the IPO Date and
re-enrolled in the Offering Period beginning on November 1, 2000 if the Fair
Market Value of the Shares on the IPO Date is greater than the Fair Market Value
of the Shares on October 31, 2000, unless a participant notifies the
Administrator prior to October 31, 2000 that he or she does not wish to be
withdrawn and re-enrolled.
12. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment as provided in Section 19, the maximum
number of Shares which shall be made available for sale under the Plan shall be
425,000 Shares, 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) 425,000
Shares, (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 20 below. The Company may make pro rata allocation of the
Shares available on the
6
<PAGE>
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.
(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.
14. 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.
15. 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.
16. 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 15) 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.
17. 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.
7
<PAGE>
18. 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.
19. 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 13(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 19, 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
8
<PAGE>
time (after giving effect to any adjustments in the number of Shares covered by
the option as provided for in this Section 19); 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 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.
20. Amendment or Termination.
------------------------
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 19, 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.
21. 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
9
<PAGE>
the form specified by the Company at the location, or by the person, designated
by the Company for the receipt thereof.
22. 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.
23. 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 20.
24. 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. In connection with the initial public offering of the Company's
securities and upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, I agree not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company, however or whenever acquired, without the
prior written consent of the Company or such underwriters, as the case may be,
for such period of time (not to exceed 180 days) from the effective date of such
registration as may be requested by the Company or such managing underwriters
and to execute an agreement reflecting the foregoing as may be requested by the
underwriters at the time of the public offering; provided however, that I need
-------- -------
not so agree unless a majority of the Company's officers and directors and a
majority of the holders of at least 5% of the Company's outstanding securities
also agree to be similarly bound.
7. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
_____________________________________
_____________________________________
8. 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)
_____________________________________
9. 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.
-2-
<PAGE>
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.
10. 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 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.
11. 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)
-3-
<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 10.13
LEASE
THIS LEASE is made on the 7th day of May, 1998, by and between White Properties
Joint Venture (hereinafter called "Lessor") and Oratec Interventions
(hereinafter called "Lessee").
IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS
FOLLOWS:
1. Premises. Lessor leases to Lessee, and Lessee leases from Lessor, upon the
--------
terms and conditions herein set forth, those certain Premises ("Premises")
situated in the City of Redwood City, County of San Mateo, California, as
outlined in Exhibit "A" attached hereto and described as follows: +/-9,993
square feet of a larger building, commonly known as 3696-A Haven Avenue,
Redwood City, California. Lessee's pro-rata share of the building is +/-
43.37%.
2. Term. The term of this Lease shall be for five (5) years, commencing on
----
July 1, 1998, or on the later date on which Lessor delivers the Premises
with all tenant improvements to be installed by Lessor complete, and final
city approvals or approval necessary for lawful occupancy of the Premises
having been received, and ending five years thereafter, unless sooner
terminated pursuant to any provision hereof.
3. Rent. Lessee shall pay to Lessor rent for the Premises of Eight thousand
-----
month in lawful money of the United States of America, subject to
adjustment as provided in Section A of this Paragraph. Rent shall be paid
without deduction or offset, prior notice, or demand, at such place as may
be designated from time to time by Lessor as follows: $8,744.00 shall be
paid upon execution of the Lease by both Lessor and Lessee, which sum
represents the amount of the first month's rent. A deposit of $17,488.00 as
a Security Deposit shall be made by Lessee and held by Lessor pursuant to
Paragraph 5 of this Lease, and shall be paid upon execution of the Lease by
both Lessor and Lessee. If Lessee is not in default of any provision of
this Lease, this sum, without interest thereon, shall be applied toward the
rent due for the last month of the term of this Lease or the extended term,
pursuant to any extension of the initial term in accordance with the
provisions of this Lease. Monthly rent shall be paid in advance on the
first (1st) day of each calendar month as follows:
<TABLE>
<CAPTION>
Months Monthly Rent/NNN
----------------
<S> <C>
01-06 $ 8,744.00
07-12 $18,698.00
13-24 $19,397.00
25-36 $20,124.00
37-48 $20,881.00
49-60 $21,668.00
</TABLE>
Rent for any period during the term hereof which is for less than one (1)
full month shall be a pro-rata portion of the monthly rent payment. Lessee
acknowledges that late payment by Lessee to Lessor of rent or any other
payment due Lessor will cause Lessor to incur costs not contemplated by
this Lease, the exact amount of such costs being extremely difficult and
impracticable to fix. Such costs include, without limitation, processing
and accounting charges, and late charges that may be imposed on Lessor by
the terms of any encumbrance and note secured by any encumbrance covering
the Premises. Therefore, if any installment of rent or other payment due
from Lessee is not received by Lessor within ten (10) days following the
date it is due and payable, Lessee shall pay to Lessor an additional sum of
ten percent (10%) of the overdue amount as a late charge. The parties agree
that this late charge represents a fair and reasonable estimate of the
costs that Lessor will
1
<PAGE>
incur by reason of late payment by Lessee. Acceptance of any late charge
shall not constitute a waiver of Lessee's default with respect to the
overdue amount, nor prevent Lessor from exercising any of the other rights
and remedies available to Lessor.
If, for any reason whatsoever, Lessor cannot deliver possession of the
Premises on the commencement date set forth in Paragraph 2 above, this
Lease shall not be void or voidable, nor shall Lessor be liable to Lessee
for any loss or damage resulting therefrom; but in such event, Lessee shall
not be obligated to pay rent until possession of the Premises is tendered
to Lessee and the commencement and termination dates of this Lease shall be
revised to conform to the date of Lessor's delivery of possession. In the
event that Lessor shall permit Lessee to occupy the Premises prior to the
commencement date of the term, such occupancy shall be subject to all of
the provisions of this Lease, including the obligation to pay rent at the
same monthly rate as that prescribed for the first month of the Lease term.
Lessee shall have the right to enter the Premises prior to commencement
date to install fixtures and equipment, provided Lessee shall not
unreasonably interfere with construction of improvements by Lessor's
contractors.
A. Cost-of-Living Increase. Not applicable.
-----------------------
B. All taxes, insurance premiums, Outside Area Charges, late charges,
costs and expenses which Lessee is required to pay hereunder, together
with all interest and penalties that may accrue thereon in the event
of Lessee's failure to pay such amounts, and all reasonable damages,
costs, and attorney's fees and expenses which Lessor may incur by
reason of any default of Lessee or failure on Lessee's part to comply
with the terms of this Lease, shall be deemed to be additional rent
(hereinafter, "Additional Rent"), and, in the event of non-payment by
Lessee, Lessor shall have all of the rights and remedies with respect
thereto as Lessor has for the non-payment of monthly installment of
rent.
4. Option to Extend Term.
---------------------
A. Lessee shall have the option to extend the term on all the provisions
contained in this Lease for one (1) three (3)-year periods ("extended
term(s)") at an adjusted rental calculated as provided in Subparagraph
B below on the condition that:
(i) Lessee has given to Lessor written notice of exercise of that
option ("option notice") at least six (6) months before
expiration of the initial term or extended term(s), as the case
may be.
(ii) Lessee is not in default in the performance of any of the terms
and conditions of the Lease on the date of giving the option
notice, and Lessee is not in default on the date that the
extended term is to commence, in each case beyond the grace
period provided herein.
B. Monthly rent for the extended term shall be the then prevailing market
rent for similar buildings in the area as agreed upon by the parties
within no more than thirty (30) days after exercise by Lessee of the
option described herein. If the parties are unable to agree on such
amount within that time period, Lessee may rescind its option exercise
or, by written notice to Lessor, request that the rent be determined
by an appraisal conducted in a manner reasonably acceptable and
binding to both parties.
C. In no event shall the monthly rent for any extended term be less than
the monthly rent paid immediately prior to such extended term.
2
<PAGE>
5. Security Deposit. Lessor acknowledges that Lessee has deposited with
----------------
Lessor a Security Deposit in the sum of $17,488.00 to secure the full and
faithful performance by Lessee of each term, covenant, and condition of
this Lease. If Lessee shall at any time fail to make any payment or fail to
keep or perform any term, covenant, or condition on its part to be made or
performed or kept under this Lease, Lessor may, but shall not be obligated
to and without waiving or releasing Lessee from any obligation under this
Lease, use, apply, or retain the whole or any part of said Security Deposit
(a) to the extent of any sum due to Lessor; or (b) to compensate Lessor for
any loss, damage, attorneys' fees or expense sustained by Lessor due to
Lessee's default. In such event, Lessee shall, within five (5) days of
written demand by Lessor, remit to Lessor sufficient funds to restore the
Security Deposit to its original sum. No interest shall accrue on the
Security Deposit. Should Lessee comply with all the terms, covenants, and
conditions of this Lease and, at the end of the term of this Lease, leave
the Premises in the condition required by this Lease, then said Security
Deposit or any balance thereof, less any sums owing to Lessor, shall be
returned to Lessee within fifteen (15) days after the termination of this
Lease and vacancy of the Premises by Lessee. Lessor can maintain the
Security Deposit separate and apart from Lessor's general funds, or can co-
mingle the Security Deposit with the Lessor's general and other funds.
6. Use of the Premises. The Premises shall be used exclusively for the purpose
-------------------
of research and development, storage, distribution, offices and marketing
of medical devices.
Lessee shall not use or permit the Premises, or any part thereof, to
be used for any purpose or purposes other than the purpose for which the
Premises are hereby leased; and no use shall be made or permitted to be
made of the Premises, nor acts done, which will increase the existing rate
of insurance upon the building in which the Premises are located, or cause
a cancellation of any insurance policy covering said building, or any part
thereof, nor shall Lessee sell or permit to be kept, used, or sold, in or
about the Premises, any article which may be prohibited by the standard
form of fire insurance policies. Lessee shall not commit or suffer to be
committed any waste upon the Premises or any public or private nuisance or
other act or thing which may disturb the quiet enjoyment of any other
tenant in the building in which the premises are located; nor, without
limiting the generality of the foregoing, shall Lessee allow the Premises
to be used for any improper, immoral, unlawful, or objectionable purpose.
Lessee shall not place any harmful liquids in the drainage system of
the Premises or of the building of which the Premises form a part. No waste
materials or refuse shall be dumped upon or permitted to remain upon any
part of the Premises outside of the building proper except in trash
containers placed inside exterior enclosures designated for that purpose by
Lessor, or inside the building proper where designated by Lessor. No
materials, supplies, equipment, finished or semi-finished products, raw
materials, or articles of any nature shall be stored upon or permitted to
remain on any portion of the Premises outside of the building proper.
Lessor represents and warrants to Lessee that to the best of knowledge
there are no Toxic or Hazardous materials present on, at or under the
Premises, which shall be deemed to include underlying land and groundwater,
at the time of Lessee's occupancy. Lessor shall indemnify, defend and hold
harmless Lessee, its partners, directors, officers, employees, lenders, and
successors against all claims, obligations, liabilities, demands, damages,
judgements, and costs, including reasonable attorneys' fees arising from or
in connection with any prior Toxic or Hazardous materials that existed
prior to Lessee's occupancy of the Premises. Lessee in turn represents to
Lessor that it does not now and will not in the future permit the use or
storage on the Premises of Toxic or Hazardous materials, excluding, however
basic janitorial, maintenance and office supplies, and materials commonly
used in connection with Lessee's business as described in paragraph 6
hereof. For purposes of this paragraph 6 "Toxic or Hazardous Materials"
shall mean any product, substance, chemical, material or waste whose
presence, nature, quality and/or intensity or existence, use, manufacture,
disposal, transportation, spill, release or effect, either by itself or in
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combination with other materials expected to be on the leased premises, is
either (i) potentially injurious to the public health, safety or welfare,
the environment, or the leased premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessee
and Lessor to any governmental agency or third party under any applicable
statute or common law theory. "Toxic or Hazardous Materials" shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any
products or by-products thereof.
Lessee hereunder shall be responsible for and indemnify, and hold
Lessor and its partners, directors, officers, employees, lenders,
successors and assigns harmless from all claims, obligations, liabilities,
demands, damages, judgments and costs, including reasonable attorneys' fees
arising at any time during or in connection with Lessee's causing or
permitting any materials referred to under any governmental provisions or
regulatory scheme as "hazardous" or "toxic" or which contain petroleum,
gasoline, or other petroleum product, to be brought upon, stored,
manufactured, generated, handled, disposed, or used on, under or about the
Premises. Lessee's and Lessor's obligations hereunder shall survive the
termination of this Lease.
If, at any time during the term of this Lease, Lessor suspects that
toxic waste, spillage, or other contaminants may be present on the
Premises, Lessor may order a soils report, or its equivalent. If Lessee has
breached the terms of this Section 6, Lessee shall pay the expense of
preparing the referenced report, and Lessee shall pay such costs within
fifteen (15) days from the date of the invoice by Lessor. If any such toxic
waste, spillage, or other contaminants are found upon the Premises, Lessee
shall deposit with Lessor, within fifteen (15) days of notice from Lessor
to Lessee to do so, the amount necessary to remove the substances and
remedy the problem.
Lessee shall abide by all laws, ordinances, and statutes, as they now
exist or may hereafter be enacted by legislative bodies having jurisdiction
thereof, relating to its use and occupancy of the Premises, provided
nothing herein will require Lessee to pay for or perform any of the
following: removal, remediation, investigation or clean up of any Hazardous
Substances the presence on, in or under the Premises of which is not
attributable to Lessee, its agents, employees or contractors.
7. Improvements: Lessor, at Lessor's sole cost and expense shall install
------------
tenant improvements as specified on Exhibit B. Possession of the premises,
pursuant to Paragraph 13 of this lease, shall be deemed tendered upon
receipt of final city approvals.
8. Taxes and Assessments.
----------------------
A. Lessee shall pay before delinquency any and all taxes, assessments,
license fees, and public charges levied, assessed, or imposed upon or
against Lessee's fixtures, equipment, furnishings, furniture, appliances,
and personal property installed or located on or within the Premises.
Lessee shall cause said fixtures, equipment, furnishings, furniture,
appliances, and personal property to be assessed and billed separately from
the real property of Lessor. If any of Lessee's said personal property
shall be assessed with Lessor's real property, Lessee shall pay to Lessor
the taxes attributable to Lessee within thirty (30) days before delinquency
and following timely receipt of a written statement from Lessor setting
forth the taxes applicable to Lessee's property.
B. All property taxes or assessments levied or assessed by or hereafter
levied or assessed by any governmental authority against the Premises or
any portion of such taxes or assessments which becomes due or accrued
during the term of this Lease shall be paid by Lessor. Lessee shall pay to
Lessor Lessee's proportionate share of such taxes or assessments within
thirty (30) days before delinquency and following timely receipt of
Lessor's invoice demanding such payment. Lessee's liability hereunder shall
be prorated to reflect the commencement and termination dates of this
Lease.
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9. Insurance.
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A. Indemnity. Lessee agrees to indemnify and defend Lessor against and
---------
hold Lessor harmless from any and all demands, claims, causes of action,
judgments, obligations, or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable
attorneys' fees) on account of, or arising out of, the use, or occupancy of
the Premises. This Lease is made on the express condition that Lessor shall
not be liable for, or suffer loss by reason of, injury to person or
property, from whatever cause, in any way connected with the condition,
use, or occupancy of the Premises, specifically including, without
limitation, any liability for injury to the person or property of Lessee,
its agents, officers, employees, licensees, and invitees occurring for any
reason other than gross negligence or willful misconduct of Lessor its
agents, employees or contractors, or a breach of the obligations of Lessor
hereunder.
B. Liability Insurance. Lessee shall obtain, and at all times during the
-------------------
term hereof, keep in force, at its own cost and expense, Commercial General
Liability insurance with limits of $1,000,000 combined single limit for
Bodily Injury and Property Damage per occurrence and in the aggregate.
Tenant's insurance shall name Lessor as additional insured as respects the
use and occupancy of the leased Premises and shall provide that Lessee's
insurance company shall endeavor to furnish Lessor with 30 days advance
notice of cancellation of Lessee's insurance policy. Lessee shall furnish
Lessor with a certificate of insurance to this effect.
C. Property Insurance. Lessor shall obtain and keep in force during the
------------------
term of this Lease a policy or policies of insurance covering loss or
damage to the Premises in "all risk" extended coverage form (which may
include earthquake and/or flood insurance), in the amount of the full
replacement value thereof. Lessee shall pay to Lessor its pro-rata share of
the cost of said insurance within ten (10) days of Lessee's receipt of
Lessor's invoice demanding such payment. Lessee acknowledges that such
insurance procured by Lessor shall contain a deductible which reduces
Lessee's cost for such insurance, and , in the event of loss or damage,
Lessee shall be required to pay to Lessor the amount of such deductible,
which payment shall not exceed Five Thousand Dollars ($5,000) for any one
occurrence.
D. Lessee and Lessor hereby release each other and their respective
partners, officers, agents, employees, and servants, from any and all
claims, demands, loss, expense, or injury to the Premises or to the
furnishings, fixtures, equipment, inventory, or other property of the
releasing party in, about, or upon the Premises, which is caused by or
results from perils, events, or happenings which are the subject of
insurance in force at the time of such loss, however, that such waiver
shall be effective only to the extent permitted by the insurance covering
such loss..
10. Reimbursable Expenses and Utilities. Lessee shall pay its pro-rata share of
all water, gas, light, heat, power, electricity, telephone, trash removal,
landscaping, sewer charges, and all other services, including normal and
customary property management fees (not to exceed three percent (3%) of the
base rent payable hereunder), supplied to or consumed on the Premises. In
the event that any utility to the Premises is separately metered, Lessee
shall pay the cost of any such utility. In the event that any such services
are billed directly to Lessor, then Lessee shall pay Lessor for such
expenses within ten (10) days of Lessee's receipt of Lessor's invoice
demanding payment.
In no event shall Lessee have any obligation to perform, to pay
directly, or to reimburse Lessor for, all or any portion of the following
repairs, maintenance, improvements, replacements, premiums, claims, losses,
fees, commissions, charges, disbursements, attorneys' fees, experts' fees,
costs and expenses (collectively, "Costs"): (i) Costs for which Lessor has
received reimbursement from others; (ii) Costs associated with utilities
and services of a type not provided to Lessee; (iii) costs incurred in
connection with negotiations or disputes between Lessor and other
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occupants of the Building, provided that Lessee is not the cause of such
dispute or negotiation; (iv) Costs arising from the violation of Lessor or
any occupant of the Building (other than Lessee) of the terms and
conditions of any lease or other agreement (provided that Lessee is not the
cause of such violation); or (v) depreciation or other expense reserves
unless required by Lessor's lender.
11. Repairs and Maintenance.
-----------------------
A. Subject to provisions of paragraph 15, Lessor shall keep and maintain
in good order, condition and repair the structural elements of the
Premises including the roof, roof membrane, paving, floor slab,
foundation, exterior walls, landscaping, irrigation and elevators.
Lessor shall make such repairs, replacements, alterations or
improvements as Lessor deems reasonably necessary with respect to such
structural elements and Lessee shall pay to Lessor, within ten (10)
business days of Lessor's invoice to Lessee therefor, Lessee's pro-
rata share of such repairs, replacements, alterations or improvements;
provided, however, that replacement and improvement costs in excess of
$5,000 per occurrence shall be amortized over the useful life of such
replacements or improvements, and Lessee shall be obligated to pay, as
additional rent, only the amount which coincides with the remaining
term of the Lease. Notwithstanding the foregoing, if the reason for
any repair, replacement, alteration or improvement is caused by Lessee
or arises because of a breach of Lessee's obligations under this
Lease, then Lessee shall pay 100% of the costs or expense to remedy
the same.
B. Except as expressly provided in Subparagraph A above, Lessee shall, at
its sole cost, keep and maintain the entire Premises and every part
thereof, including, without limitation, the windows, window frames,
plate glass, glazing, truck doors, doors, all door hardware, interior
of the Premises, interior walls and partitions, and electrical,
plumbing, lighting, heating, and air conditioning systems in good and
sanitary order, condition, and repair subject to the limitations set
forth in Section 11A above. Lessee shall, at all times during the
Lease term and at his expense, have in effect a service contract for
the maintenance of the heating, ventilating, and air-conditioning
(HVAC) equipment with an HVAC repair and maintenance contractor
approved by Lessor which provides for periodic inspection and
servicing at least once every three (3) months during the term hereof.
Lessee shall further provide Lessor with a copy of such contract and
all periodic service reports. Should Lessee fail to maintain the
Premises or make repairs required of Lessee hereunder forthwith upon
notice from Lessor, Lessor, in addition to all other remedies
available hereunder or by law, and without waiving any alternative
remedies, may make the same, and in that event, Lessee shall reimburse
Lessor as additional rent for the cost of such maintenance or repairs
on the next date upon which rent becomes due.
Lessee hereby expressly waives the provision of Subsection 1 of
Section 1932, and Sections 1941 and 1942 of the Civil Code of
California and all rights to make repairs at the expense of Lessor, as
provided in Section 942 of said Civil Code.
12. Alterations and Additions. Lessee shall not make, or suffer to be made,
--------------------------
alterations, improvements, or additions in, on, or about, or to the
Premises or any part thereof, without prior written consent of Lessor,
which shall not be unreasonably withheld or delayed, and without a valid
building permit issued by the appropriate governmental authority. Lessor
retains, at his sole option, the right to retain a General Contractor of
his own choosing to perform all repairs, alterations, improvements, or
additions in, on, about, or to said Premises or any part thereof. As a
condition to giving such consent, Lessor may require that Lessee agree to
remove any such alterations, improvements, or additions at the termination
of this Lease, and to restore the Premises to their prior condition. Upon
Lessee's written request, Lessor shall designate, at the time that Lessor
consents
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to the installation of any such alteration, improvement or addition,
whether removal of any such alteration, improvement or addition will be
required. Any alteration, addition, or improvement to the Premises, shall
become the property of Lessor upon the expiration or earlier termination of
the Lease term (except with respect to those items which have been
installed at the sole expense of Lessee, which Lessee may remove, provided
that Lessee repairs any damage attributable to such removal), and shall
remain upon and be surrendered with the Premises at the termination of this
Lease. Alterations and additions which are not to be deemed as trade
fixtures include heating, lighting, electrical systems, air conditioning,
partitioning, electrical signs, carpeting, or any other installation which
has become an integral part of the Premises. In the event that Lessor
consents to Lessee's making any alterations, improvements, or additions,
Lessee shall be responsible for preparing and providing Lessor with a
notice of non-responsibility which Lessor shall sign and return to Lessee
for posting , which shall remain posted until completion of the
alterations, additions, or improvements. Lessee's failure to post notices
of non-responsibility as required hereunder shall be a breach of this
Lease.
Notwithstanding anything to the contrary herein, if, during the term
hereof, any alteration, addition, or change of any sort through all or any
portion of the Premises or of the building of which the Premises form a
part, is required by law, regulation, ordinance, or order of any public
agency, including without limitation Americans with Disabilities Act (ADA)
, then if such legal requirement is not imposed because of Lessee's
specific use of the Premises and is not "triggered" by Lessee's alterations
or Lessee's application for a building permit or any other governmental
approval (in which instance Lessee shall be responsible for 100% of the
cost of such improvement), Lessor shall be responsible for constructing
such improvement and Lessee shall be responsible for its proportional share
of the cost for said improvement, amortized over the useful life of such
improvement that coincides with the remaining Lease term including any
extensions.
13. Acceptance of the Premises and Covenant to Surrender. By entry and taking
----------------------------------------------------
possession of the Premises pursuant to this Lease, Lessee accepts the
Premises as being in good and sanitary order, condition, and repair, and
accepts the Premises in their condition existing as of date of such entry,
and Lessee further accepts any tenant improvements to be constructed by
Lessor, if any, as being completed in accordance with the plans and
specifications for such improvements, subject to items identified by Lessee
in one final punch list submitted to Lessor within thirty (30) days of
occupancy, which items Lessor shall promptly correct.
Lessee agrees on the last day of the term hereof, or on sooner
termination of this Lease, to surrender the Premises, together with all
alterations, additions, and improvements which may have been made in, to,
or on the Premises by Lessor or Lessee, unto Lessor in good and sanitary
order, condition, and repair, excepting for such wear and tear as would be
normal for the period of the Lessee's occupancy. Lessee, on or before the
end of the term or sooner termination of this Lease, shall remove all its
personal property and trade fixtures from the Premises, and all property
not so removed shall be deemed abandoned by Lessee. Lessee further agrees
that at the end of the term or sooner termination of this Lease, Lessee, at
its sole expense, shall have the carpets steam cleaned, the walls and
columns painted, the flooring waxed, any damaged ceiling tile replaced, the
windows cleaned, the drapes cleaned, and any damaged doors replaced, if
necessary to restore the Premises to its original condition, normal wear
and tear excepted.
If the Premises are not surrendered at the end of the term or sooner
termination of this Lease, Lessee shall indemnify Lessor against loss or
liability resulting from delay by Lessee in so surrendering the Premises,
including, without limitation, any claims made by any succeeding tenant
founded on such delay.
14. Default. In the event of any breach of this Lease by the Lessee, or an
-------
abandonment of the Premises by the Lessee, which is not cured within ten
(10) days after written notice thereof in the case of any monetary
obligation and which is not cured within thirty (30) days after written
notice thereof in the
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case of any non-monetary obligation, the Lessor has the option of (1.)
removing all persons and property from the Premises and repossessing the
Premises, in which case any of the Lessee's property which the Lessor
removes from the Premises may be stored in a public warehouse or elsewhere
at the cost of, and for the account of, Lessee; or (2.) allowing the Lessee
to remain in full possession and control of the Premises. If the Lessor
chooses to repossess the Premises, the Lease will automatically terminate
in accordance with the provisions of the California Civil Code, Section
1951.2. In the event of such termination of the Lease, the Lessor may
recover from the Lessee: (1.) the worth at the time of award of the unpaid
rent which had been earned at the time of termination, including interest
at the maximum rate an individual is permitted by law to charge; (2.) the
worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds
the amount of such rental loss that the Lessee proves could have been
reasonably avoided, including interest at the maximum rate an individual is
permitted by law to charge; (3.) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time
of award exceeds the amount of such rental loss that the Lessee proves
could be reasonably avoided; and (4.) any other amount necessary to
compensate the Lessor for all the detriment proximately caused by the
Lessee's failure to perform his obligations under the Lease or which, in
the ordinary course of things, would be likely to result therefrom. "The
worth at the time of award," as used in (1.) and (2.) of this Paragraph, is
to be computed by allowing interest at the maximum rate an individual is
permitted by law to charge. "The worth at the time of award," as used in
(3.) of this Paragraph, is to be computed by discounting the amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of
award, plus one percent (1%).
If the Lessor chooses not to repossess the Premises, but allows the
Lessee to remain in full possession and control of the Premises, then, in
accordance with provisions of the California Civil Code, Section 1951.4,
the Lessor may treat the Lease as being in full force and effect, and may
collect from the Lessee all rents as they become due through the
termination date of the Lease, as specified in the Lease. For the purpose
of this paragraph, the following do not constitute a termination of
Lessee's right to possession: (1.) acts of maintenance or preservation, or
efforts to relet the property; (2.) the appointment of a receiver on the
initiative of the Lessor to protect his interest under this Lease.
Lessee shall be liable immediately to Lessor for all costs Lessor
incurs in reletting the Premises, including, without limitation, brokers'
commissions, reasonable expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer
than the remaining term of this Lease. Lessee shall pay to Lessor the rent
due under this Lease on the dates the rent is due, less the rent Lessor
receives from any reletting. No act by Lessor allowed by this Section shall
terminate this Lease unless Lessor notifies Lessee that Lessor elects to
terminate this Lease. After Lessee's default and for as long as Lessor does
not terminate Lessee's right to possession of the Premises, if Lessee
obtains Lessor's consent, Lessee shall have the right to assign or sublet
its interest in this Lease, but Lessee shall not be released from
liability. Lessor's consent to a proposed assignment or subletting shall
not be unreasonably withheld.
If Lessor elects to relet the Premises as provided in this Paragraph,
rent that Lessor receives from reletting shall be applied to the payment
of: (1.) any indebtedness from Lessee to Lessor other than rent due from
Lessee; (2.) all costs, including for maintenance, incurred by Lessor in
reletting; (3.) rent due and unpaid under this Lease. After deducting the
payments referred to in this Paragraph, any sum remaining from the rent
Lessor receives from reletting shall be held by Lessor and applied in
payment of future rent as rent becomes due under this Lease. In no event
shall Lessee by entitled to any excess rent received by Lessor. If, on the
date rent is due under this Lease, the rent received from reletting is less
than the rent due on that date, Lessee shall pay to Lessor, in addition to
the remaining rent due, all costs, including for maintenance, Lessor
incurred in reletting that remain after applying the rent received from the
reletting, as provided in this Paragraph.
Lessor, at any time after Lessee commits a default, can cure the
default at Lessee's cost. If
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Lessor, at any time after Lessee commits a default, can cure the default at
Lessee's cost. If Lessor at any time, by reason of Lessee's default, pays any
sum or does any act that requires the payment of any sum, the sum paid by
Lessor shall be due immediately from Lessee to Lessor at the time the sum is
paid, and if paid at a later date shall bear interest at the maximum rate an
individual is permitted by law to charge from the date the sum is paid by
Lessor until Lessor is reimbursed by Lessee. The sum, together with interest
on it, shall be additional rent.
Rent not paid when due shall bear interest at the maximum rate an
individual is permitted by law to charge from the date due until paid.
15. Destruction. In the event the Premises are destroyed in whole or in part
-----------
from any cause, Lessor may, at its option, (1.) rebuild or restore the
Premises to their condition prior to the damage or destruction or (2.)
terminate the Lease.
If Lessor does not give Lessee notice in writing within thirty (30)
days from the destruction of the Premises of its election either to rebuild
and restore the Premises, or to terminate this Lease, Lessor shall be
deemed to have elected to rebuild or restore them, in which event Lessor
agrees, at its expense, promptly to rebuild or restore the Premises to its
condition prior to the damage or destruction. If Lessor does not complete
the rebuilding or restoration within one hundred eighty (180) days
following the date of destruction (such period of time to be extended for
delays caused by the fault or neglect of Lessee or because of acts of God,
acts of public agencies, labor disputes, strikes, fires, freight embargoes,
rainy or stormy weather, inability to obtain materials, supplies or fuels,
acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond control of
Lessor), then Lessee shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Lessor. Lessor's obligation to
rebuild or restore shall not include restoration of Lessee's trade
fixtures, equipment, merchandise, or any improvements, alterations, or
additions made by Lessee to the Premises. If Lessor reasonably estimates
that the restoration referenced herein will require 180 days or more, which
estimate shall be delivered to Lessee within nor more than thirty (30) days
after the occurrence of the casualty, Lessee shall be entitled to terminate
this Lease effective upon written notice of such election to Lessor,
provided Lessee is not the cause of said damage or destruction.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect. Lessee hereby expressly
waives the provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than fifty (50%) of the
replacement cost thereof, Lessor may elect to terminate this Lease, whether
the Premises be injured or not.
16. Condemnation. If any part of the Premises shall be taken for any public
-------------
or quasi-public use, under any statute or by right of eminent domain, or
private purchase in lieu thereof, and a part thereof remains, which is
susceptible of occupation hereunder, this Lease shall, as to the part so
taken, terminate as of the date title shall vest in the condemnor or
purchaser, and the rent payable hereunder shall be adjusted so that the
Lessee shall be required to pay for the remainder of the term only such
portion of such rent as the value of the part remaining after taking such
bears to the value of the entire Premises prior to such taking. Lessor
shall have the option to terminate this Lease in the event that such
taking causes a reduction in rent payable hereunder by fifty percent (50%)
or more. If all of the Premises or such part thereof be taken so that
there does not remain a portion susceptible for occupation hereunder, as
reasonably necessary for Lessee's conduct of its business as contemplated
in this Lease, this Lease shall thereupon terminate. If a part of all of
the Premises be taken, all compensation awarded upon such taking shall go
to the Lessor, and the Lessee shall have no claim thereto, and the Lessee
hereby irrevocably assigns and transfers to the Lessor any right to
compensation or damages to which the Lessee may become entitled during the
term hereof by reason of the purchase or condemnation of all or a part of
the Premises, except that Lessee shall have the right to recover its share
of any award or consideration for (1.) moving expenses; (2)
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relocation costs; (3) unamortized costs of improvements installed by Lessee
(4.) loss or damage to Lessee's trade fixtures, furnishings, equipment, and
other personal property; and (5.) business goodwill. Each party waives the
provisions of the Code of Civil Procedure, Section 1265.130, allowing
either party to petition the Superior Court to terminate this Lease in the
event of a partial taking of the Premises.
17. Free from Liens. Lessee shall (1.) pay for all labor and services
----------------
performed for materials used by or furnished to Lessee, or any contractor
employed by Lessee with respect to the Premises, and (2.) indemnify,
defend, and hold Lessor and the Premises harmless and free from any liens,
claims, demands, encumbrances, or judgments created or suffered by reason
of any labor or services performed for materials used by or furnished to
Lessee or any contractor employed by Lessee with respect to the Premises,
and (3.) give notice to Lessor in writing five (5) days prior to employing
any laborer or contractor to perform services related, or receiving
materials for use upon the Premises, and (4.) Lessee shall be responsible
for preparing and providing Lessor with a notice of non-responsibility
which Lessor shall sign and return to Lessee for posting , which shall
remain posted until completion of the alterations, additions, or
improvements. In the event an improvements bond with a public agency in
connection with the above is required to be posted, Lessee agrees to
include Lessor as an additional obligee.
18. Compliance with Laws. Lessee shall, at its own cost, comply with and
--------------------
observe all requirements of all municipal, county, state, and federal
authority now in force, or which may hereafter be in force, pertaining to
the use and occupancy of the Premises. Notwithstanding anything contained
in Paragraphs 11, 12 and 18 of Lease, if it becomes necessary to make
capital improvements required by laws enacted or legal requirements imposed
by governmental agency(ies), then if such legal requirement is not imposed
because of Lessee's specific use of the Premises and is not "triggered" by
Lessee's alterations or Lessee's application for a building permit or any
other governmental approval (in which instance Lessee shall be responsible
for 100% of the cost of such improvement), Lessor shall be responsible for
constructing such improvement and Lessee shall be responsible for its
proportional share of the cost for said improvement, amortized over the
useful life of such improvement that coincides with the remaining Lease
term and any extensions thereof.
19. Subordination. Lessee agrees that this Lease shall, at the option of
--------------
Lessor, be subjected and subordinated to any mortgage, deed of trust, or
other instrument of security, which has been or shall be placed on the land
and building, or land or building of which the Premises form a part, and
this subordination is hereby made effective without any further act of
Lessee or Lessor. The Lessee shall, within five (5) business days after
receipt of request, execute any instruments, releases, or other documents
that may be required by any mortgagee, mortgagor, trustor, or beneficiary
under any deed of trust, for the purpose of subjecting or subordinating
this Lease to the lien of any such mortgage, deed of trust, or other
instrument of security. Lessee's failure to execute and deliver any such
documents or instruments shall be deemed a breach of Lease.
20. Abandonment. Lessee shall not vacate or abandon the Premises at any time
-----------
during the term; and if Lessee shall abandon, vacate, or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor, except such property as may be
mortgaged to Lessor; provided, however, that Lessee shall not be deemed to
have abandoned or vacated the Premises so long as Lessee continues to pay
all rents as and when due, and otherwise performs pursuant to the terms and
conditions of this Lease.
21. Assignment and Subletting.
--------------------------
10
<PAGE>
A. Definitions. For purposes of this Paragraph 21, the following terms
-----------
shall be defined as follows:
(i) Sublet. The term "Sublet" shall mean any transfer, sublet, assignment,
------
license or concession agreement, change of ownership, mortgage, or
hypothecation of this Lease or the Lessee's interest in the Lease or in
and to all or a portion of the Premises.
(ii) Subrent. The term "Subrent" shall mean any consideration of any kind
-------
received, or to be received, by Lessee from a Sublessee if such sums are
related to Lessee's interest in this Lease or in the Premises,
including, but not limited to, bonus money and payments (in excess of
fair market value) for Lessee's assets including its trade fixtures,
equipment and other personal property remaining in the Premises but
excluding, without limitation, goodwill, general intangibles, and any
capital stock or other equity ownership of Lessee.
(iii) Sublessee. The term "Sublessee" shall mean the person or entity with
---------
whom a Sublet agreement is proposed to be or is made.
B. Lessor's Consent. Lessee shall not enter into a Sublet without
-----------------
Lessor's prior written consent, which consent shall not be unreasonably
withheld or delayed. Any attempted or purported Sublet without Lessor's prior
written consent shall be void and confer no rights upon any third person and,
at Lessor's election, shall terminate this Lease. In determining whether or
not to consent to a proposed Sublet, Lessor may consider the following
factors, among others, all of which shall be deemed reasonable; (i) whether
the proposed Sublessee has a net worth equal to or greater than the net worth
of Lessee at the time Lessee executed this Lease; (ii) whether the proposed
use of the Premises by the proposed Sublessee is consistent with the permitted
use for the Premises set forth in Paragraph 6 of this Lease; (iii) whether the
experience and business reputation of the proposed Sublessee is equal to or
greater than that of Lessee; (iv) whether the rent payable by the Sublessee
under the proposed Sublet reflects the current fair market rent for the
subleased Premises as reasonably determined by Lessee; and (v) whether
Lessor's consent will result in a breach of any other lease or agreement to
which Lessor is a party affecting the Building. Each Sublessee shall agree in
writing, for the benefit of Lessor, to assume, to be bound by, and to perform
the terms and conditions and covenants of this Lease to be performed by
Lessee. Notwithstanding anything contained herein, Lessee shall not be
released from liability for the performance of each term, condition and
covenant of this Lease by reason of Lessor's consent to a Sublet unless Lessor
specifically grants such release in writing. Consent by Lessor to any Sublet
unless Lessor specifically grants such release in writing. Consent by Lessor
to any Sublet shall not be deemed a consent to any subsequent Sublet. Lessee
shall reimburse Lessor for all reasonable and customary costs and attorneys'
fees incurred by Lessor in connection with the evaluation, processing and/or
documentation of any requested Sublet, whether or not Lessor's consent is
granted.
C. Information to be Furnished. If Lessee desires at any time to Sublet
the Premises or any portion thereof, it shall first notify Lessor of its
desire to do so and shall submit in writing to Lessor: (i) the name and
legal composition of the proposed Sublessee, (ii) the nature of the
proposed Sublessee's business to be carried on in the Premises; (iii) the
terms and provisions of the proposed Sublet and a copy of the proposed
Sublet form containing a description of the subject premises; (iv) a
statement of all consideration to be paid by the Sublessee in connection
with the Sublet; (v) a current financial statement of Lessee; and (vi) such
financial information, including financial statements, as Lessor may
reasonably request concerning the proposed Sublessee.
D. Lessor's Alternatives. At any time within fifteen (15) days after the
----------------------
Lessor's receipt of the information specified in Paragraph 21.C., Lessor may,
by written notice to Lessee, elect: (i) to
11
<PAGE>
consent to the Sublet by Lessee; (ii) to refuse its consent to the Sublet, or
(iii) elect to terminate this Lease, or in the case of a partial Sublet,
terminate this Lease as to the portion of the Premises proposed to be Sublet.
If Lessor consents to the Sublet, Lessee may thereafter enter into a valid
Sublet of the Premises or portion thereof, upon the terms and conditions and
with the proposed Sublessee set forth in the information furnished by Lessee
to Lessor pursuant to Paragraph 21.B., subject, however, at Lessor's election,
to the condition that seventy-five percent (75%) of any excess of the Subrent
over the Rent required to be paid by less this Lease, after Lessee has
deducted therefrom its reasonable and customary costs to effect the Sublet,
including with limitation, brokerage commissions, legal fees, and tenant
improvement costs not to exceed $4.00 per square foot, shall be paid to
Lessor.
E. Proration. If a portion of the Premises is Sublet, the pro rata share
---------
of the Rent attributable to such partial area of the Premises shall be
determined by Lessor by dividing the Rent payable by Lessee hereunder by the
total square footage of the Premises and multiplying the resulting quotient
(the per square foot rent) by the number of square foot rent of the Premises
which are Sublet.
F. Exempt Sublets. Notwithstanding the above, Lessor's prior written
--------------
consent shall not be required for an assignment of this Lease or the sublet
of the Premises to an entity which controls, is controlled by or under
common control with, Lessee, or a corporation into which Lessee merges or
consolidates, provided that (i) Lessee gives Lessor prior written notice of
the name any such assignee, (ii) at the time of such assignment, the assignee
has net worth that is equal to or greater than the net worth of Lessee
immediately prior to such assignment; and (iii) the assignee assumes, in
writing, for the benefit of Lessor, all of Lessee's obligations under the
Lease. An assignment or other transfer of this Lease to a purchaser of all or
substantially all of the assets of Lessee shall be deemed a Sublet requiring
Lessor's prior written consent. Lessor's right to excess subrent shall not
apply to a sublet described in this Section F. In addition, the sale of
Lessee's shares over a public exchange shall not be deemed a sublet requiring
Lessor's consent.
22. Parking Charges. Lessee agrees to pay upon demand, based on its percent of
occupancy of the entire Premises, its pro-rata share of any parking charges,
surcharges, or any other cost hereafter levied or assessed by local, state, or
federal governmental agencies in connection with the use of the parking
facilities serving the Premises, including, without limitation, parking
surcharge imposed by or under the authority of the Federal Environmental
Protection Agency.
23. Insolvency or Bankruptcy. Either (1.) the appointment of a receiver to take
possession of all or substantially all of the assets of Lessee, or (2.) a
general assignment by Lessee for the benefit of creditors, or (3.) any action
taken or suffered by Lessee under any insolvency or bankruptcy act shall
constitute a breach of this Lease by Lessee. Upon the happening of any such
event, this Lease shall terminate ten (10) days after written notice of
termination from Lessor to Lessee. This section is to be applied consistent
with the applicable state and federal law in effect at the time such event
occurs.
24. Lessor Loan or Sale. Lessee agrees promptly following request by Lessor
-------------------
to (1.) execute and deliver to Lessor any documents, including estoppel
certificates presented to Lessee by Lessor, (a.) certifying that this Lease is
unmodified and in full force and effect, or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in
full force and effect and the date to which the rent and other charges are
paid in advance, if any, and (b.) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, and
(c.) evidencing the status of the Lease as may be required either by a lender
making a loan to Lessor, to be secured by deed of trust or mortgage covering
the Premises, or a purchaser of the Premises from Lessor, and (2.) to deliver
to Lessor the current financial statements of Lessee with an opinion of a
12
<PAGE>
certified public accountant, including a balance sheet and profit and loss
statement, for the current fiscal year and the two immediately prior fiscal
years, all prepared in accordance with Generally Accepted Accounting
Principles consistently applied, or if Lessee does not prepare financial
statements in the manner specified above, Lessee shall provide Lessor with the
financial statements which most accurately reflect the financial condition of
Lessee. Lessee's failure to deliver an estoppel certificate within five (5)
business days following such request shall constitute a default under this
Lease and shall be conclusive upon Lessee that this Lease is in full force and
effect and has not been modified except as may be represented by Lessor.
Lessee's failure to deliver estoppel certificates within the five (5) business
days shall be deemed a breach of Lease.
25. Surrender of Lease. The voluntary or other surrender of this Lease by
------------------
Lessee, or a mutual cancellation thereof, shall not work a merger nor relieve
Lessee of any of Lessee's obligations under this Lease, and shall, at the
option of Lessor, terminate all or any existing Subleases or Subtenancies, or
may, at the option of Lessor, operate as an assignment to him of any or all
such Subleases or Subtenancies.
26. Attorneys' Fees. If, for any reason, any suit be initiated to enforce any
---------------
provision of this Lease, the prevailing party shall be entitled to legal
costs, expert witness expenses, and reasonable attorneys' fees, as fixed by
the court.
27. Notices. All notices to be given to Lessee may be given in writing,
-------
personally, or by depositing the same in the United States mail, postage
prepaid, and addressed to Lessee at the said Premises, whether or not Lessee
has departed from, abandoned, or vacated the Premises. Any notice or document
required or permitted by this Lease to be given Lessor shall be addressed to
Lessor at the address set forth below, or at such other address as it may have
theretofore specified by notice delivered in accordance herewith:
LESSOR: White Properties Joint Venture
900 Welch Road, Suite 10
Palo Alto, California 94304
LESSEE: Oratec Interventions, Inc.
3700 Haven Court
Menlo Park, CA 94025
28. Transfer of Security. If any security be given by Lessee to secure the
--------------------
faithful performance of all or any of the covenants of this Lease on the part
of Lessee, Lessor may transfer and/or deliver the security, as such, to the
purchaser of the reversion, in the event that the reversion be sold, and
thereupon Lessor shall be discharged from any further liability in reference
thereto, upon the assumption by such transferee of Lessor's obligations under
this Lease.
29. Waiver. The waiver by Lessor or Lessee of any breach of any term, covenant,
------
or condition, herein contained shall not be deemed to be a waiver of such
term, covenant, or condition, or any subsequent breach of the same or any
other term, covenant, or condition herein contained. The subsequent acceptance
of rent hereunder by Lessor shall not be deemed to be a waiver of any
preceding breach by Lessee of any term, covenant, or condition of this Lease,
other than the failure of Lessee to pay the particular rental so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
30. Holding Over. Any holding over after the expiration of the term or any
extension thereof, with the consent of Lessor, shall be construed to be a
tenancy from month-to-month, at a rental of one and
13
<PAGE>
one-half (1 1/2) times the previous month's rental rate per month, and shall
otherwise be on the terms and conditions herein specified, so far as
applicable.
31. Covenants, Conditions, and Restrictions. Not applicable.
---------------------------------------
32. Limitation on Lessor's Liability. If Lessor is in default of this Lease,
--------------------------------
and, as a consequence, Lessee recovers a money judgment against Lessor, the
judgment shall be satisfied only out of the proceeds of sale received on
execution of the judgment and levy against the right, title, and interest
of Lessor in the Premises, or in the building, other improvements, and land
of which the Premises are part, and out of rent or other income from such
real property receivable by Lessor or out of the consideration received by
Lessor from the sale or other disposition of all or any part of Lessor's
right, title, and interest in the Premises or in the building, other
improvements, and land of which the Premises are part. Neither Lessor nor
any of the partners comprising the partnership designated as Lessor shall
be personally liable for any deficiency.
33. Miscellaneous.
-------------
A. Time is of the essence of this Lease, and of each and all of its
provisions.
B. The term "building" shall mean the building in which the Premises are
situated.
C. If the building is leased to more than one tenant, then each such tenant,
its agents, officers, employees, and invitees, shall have the non-exclusive
right (in conjunction with the use of the part of the building leased to
such Tenant) to make reasonable use of any driveways, sidewalks, and parking
areas located on the parcel of land on which the building is situated,
except such parking areas as may from time to time be leased for exclusive
use by other Tenant(s).
D. Lessee's reasonable use of parking areas shall not exceed that percent
of the total parking areas which is equal to the ratio which floor space of
the Premises bears to floor space of the building.
E. The term "assign" shall include the term "transfer."
F. The invalidity or unenforceability of any provision of this Lease
shall not affect the validity or enforceability of the remainder of
this Lease.
G. All parties hereto have equally participated in the preparation of
this Lease.
H. The headings and titles to the Paragraphs of this Lease are not a part
of this Lease and shall have no effect upon the construction or
interpretation of any part thereof.
I. Lessor has made no representation(s) whatsoever to Lessee (express or
implied) except as may be expressly stated in writing in this Lease
instrument.
J. This instrument contains all of the agreements and conditions made
between the parties hereto, and may not be modified orally or in any
other manner than by agreement in writing, signed by all of the
parties hereto or their respective successors in interest.
K. It is understood and agreed that the remedies herein given to Lessor
shall be cumulative,
14
<PAGE>
and the exercise of any one remedy by Lessor shall not be to the exclusion
of any other remedy.
L. The covenants and conditions herein contained shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors,
executors, and administrators, and assigns of all the parties hereto; and
all of the parties hereto shall jointly and severally be liable hereunder.
M. This Lease has been negotiated by the parties hereto and the language
hereof shall not be construed for or against either party.
N. All exhibits to which reference is made are deemed incorporated into
this Lease, whether covenants or conditions, on the part of Lessee shall be
deemed to be both covenants and conditions.
O. Where receipt of notice, demand or invoice is not specified, Lessee's
time for response or remittance commences three (3) business days from the
date of such notice, demand or invoice.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date first
above-written.
LESSOR: LESSEE:
BY: /s/ Howard White BY: /s/ Hugh Sharkey
---------------------- ----------------------
ITS: General Partner ITS:
--------------------- ---------------------
DATE: 8/13/96 DATE:
-------------------- --------------------
15
<PAGE>
ADDENDUM I
TO THAT CERTAIN LEASE DATED MAY 7, 1998, BY AND BETWEEN WHITE PROPERTIES JOINT
VENTURE, LESSOR AND ORATEC INTERVENTIONS, 3696-A HAVEN AVENUE, LESSEE.
To that certain Lease the following wording is added:
1. EXPANSION
---------
Effective December 15, 1999, Lessor and Lessee hereby agree to expand the
Premises to include approximately 5,770 square feet known as 3698-B Haven Avenue
(as shown on Exhibit A attached hereto). Lessee's Premises shall therefore
consist of:
<TABLE>
<CAPTION>
Unit Square Feet Pro-Rata Share
- ---- ----------- --------------
<S> <C> <C>
3696-A (plus or minus) 9,993 square feet (plus or minus) 43.37% of 3696 Haven Avenue
3698-B (plus or minus) 5,770 square feet (plus or minus) 25.00% of 3698 Haven Avenue
</TABLE>
Rent for the expanded Premises shall be as follows:
Period Monthly Rent/NNN
- ------ ----------------
12/15/99 - 12/14/00 $10,675.00
12/15/00 - 12/14/01 $11,102.00
12/15/01 - 12/14/02 $11,546.00
12/15/02 - 07/12/03 $12,008.00
Lessor shall provide a Tenant Improvement Allowance of $28,850.00 for mutually
agreed upon Tenant Improvements.
All other terms and conditions of the base Lease remain in full force and
effect.
AGREED AND ACCEPTED:
LESSOR LESSEE
WHITE PROPERTIES JOINT VENTURE ORATEC INTERVENTIONS
/S/ HOWARD J. WHITE, III /S/ NANCY V. WESTCOTT
- ---------------------------- --------------------------------
Howard J. White, III Authorized Representative
General Partner
Date: 5/10/99 Date: 5/4/99
---------------------- --------------------------
<PAGE>
EXHIBIT 10.14
LEASE
THIS LEASE is made on the 2nd day of August, 1996, by and between Huettig &
Schromm/Heaton & Keyser (hereinafter called "Lessor") and Oratec Interventions
(hereinafter called "Lessee").
IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS
FOLLOWS:
1. Premises. Lessor leases to Lessee, and Lessee leases from Lessor, upon the
--------
terms and conditions herein set forth, those certain Premises ("Premises")
situated in the City of Menlo Park, County of San Mateo, California, as
outlined in Exhibit "A" attached hereto and described as follows: +/-15,440
square foot building commonly known as 3700 Haven Court, Menlo Park,
California. Lessee's pro-rata share of the building is 100%.
2. Term. The term of this Lease shall be for four (4) years, commencing on
----
October 1, 1996, or on the later date on which Lessor delivers the Premises
with all tenant improvements to be installed by Lessor complete, and final
city approvals or approval necessary for lawful occupancy of the Premises
having been received, and ending on September 30, 2000, unless sooner
terminated pursuant to any provision hereof.
3. Rent. Lessee shall pay to Lessor rent for the Premises of Eighteen Thousand
----
Five Hundred Twenty-Eight Dollars ($18,528.00) per month in lawful money of
the United States of America, subject to adjustment as provided in Section
A of this Paragraph. Rent shall be paid without deduction or offset, prior
notice, or demand, at such place as may be designated from time to time by
Lessor as follows: $18,528.00 shall be paid upon execution of the Lease by
both Lessor and Lessee, which sum represents the amount of the first
month's rent. A deposit of $18,528.00 as a Security Deposit shall be made
by Lessee and held by Lessor pursuant to Paragraph 5 of this Lease, and
shall be paid upon execution of the Lease by both Lessor and Lessee. If
Lessee is not in default of any provision of this Lease, this sum, without
interest thereon, shall be applied toward the rent due for the last month
of the term of this Lease or the extended term, pursuant to any extension
of the initial term in accordance with the provisions of this Lease.
Monthly rent shall be paid in advance on the first (1st) day of each
calendar month as follows:
<TABLE>
<CAPTION>
Months Monthly Rent/NNN
------ ----------------
<S> <C>
01-12 $18,528.00
13-24 $19,300.00
25-36 $20,072.00
37-48 $20,844.00
</TABLE>
Rent for any period during the term hereof which is for less than one (1)
full month shall be a pro-rata portion of the monthly rent payment. Lessee
acknowledges that late payment by Lessee to Lessor of rent or any other
payment due Lessor will cause Lessor to incur costs not contemplated by
this Lease, the exact amount of such costs being extremely difficult and
impracticable to fix. Such costs include, without limitation, processing
and accounting charges, and late charges that may be imposed on Lessor by
the terms of any encumbrance and note secured by any encumbrance covering
the Premises. Therefore, if any installment of rent or other payment due
from Lessee is not received by Lessor within ten (10) days following the
date it is due and payable, Lessee shall pay to Lessor an additional sum of
ten percent (10%) of the overdue amount as a late charge. The parties agree
that this late charge represents a fair and reasonable estimate of the
costs that Lessor will incur by reason of late payment by Lessee.
Acceptance of any late charge shall not constitute a waiver of Lessee's
default with respect to the overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies available to Lessor.
1
<PAGE>
If, for any reason whatsoever, Lessor cannot deliver possession of the
Premises on the commencement date set forth in Paragraph 2 above, this Lease
shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss
or damage resulting therefrom; but in such event, Lessee shall not be obligated
to pay rent until possession of the Premises is tendered to Lessee and the
commencement and termination dates of this Lease shall be revised to conform to
the date of Lessor's delivery of possession. In the event that Lessor shall
permit Lessee to occupy the Premises prior to the commencement date of the term,
such occupancy shall be subject to all of the provisions of this Lease,
including the obligation to pay rent at the same monthly rate as that prescribed
for the first month of the Lease term. Lessee shall have the right to enter the
Premises prior to commencement date to install fixtures and equipment, provided
Lessee shall not unreasonably interfere with construction of improvements by
Lessor's contractors.
A. Cost-of-Living Increase. Not applicable.
----------------------- --------------
B. All taxes, insurance premiums, Outside Area Charges, late charges,
costs and expenses which Lessee is required to pay hereunder, together
with all interest and penalties that may accrue thereon in the event
of Lessee's failure to pay such amounts, and all reasonable damages,
costs, and attorney's fees and expenses which Lessor may incur by
reason of any default of Lessee or failure on Lessee's part to comply
with the terms of this Lease, shall be deemed to be additional rent
(hereinafter, "Additional Rent"), and, in the event of non-payment by
Lessee, Lessor shall have all of the rights and remedies with respect
thereto as Lessor has for the non-payment of monthly installment of
rent.
4. Option to Extend Term.
---------------------
A. Lessee shall have the option to extend the term on all the provisions
contained in this Lease for one (1) three (3)-year periods ("extended
term(s)") at an adjusted rental calculated as provided in Subparagraph
B below on the condition that:
(i) Lessee has given to Lessor written notice of exercise of that
option ("option notice") at least six (6) months before
expiration of the initial term or extended term(s), as the case
may be.
(ii) Lessee is not in default in the performance of any of the terms
and conditions of the Lease on the date of giving the option
notice, and Lessee is not in default on the date that the
extended term is to commence, in each case beyond the grace
period provided herein.
B. Monthly rent for the extended term shall be the then prevailing market
rent for similar buildings in the area as agreed upon by the parties
within no more than thirty (30) days after exercise by Lessee of the
option described herein. If the parties are unable to agree on such
amount within that time period, Lessee may rescind its option exercise
or, by written notice to Lessor, request that the rent be determined
by an appraisal conducted in a manner reasonably acceptable to both
parties.
C. In no event shall the monthly rent for any extended term be less than
the monthly rent paid immediately prior to such extended term.
5. Security Deposit. Lessor acknowledges that Lessee has deposited with
----------------
Lessor a Security Deposit in the sum of $18,528.00 to secure the full and
faithful performance by Lessee of each term, covenant, and condition of
this Lease. If Lessee shall at any time fail to make any payment or fail to
2
<PAGE>
keep or perform any term, covenant, or condition on its part to be made or
performed or kept under this Lease, Lessor may, but shall not be obligated
to and without waiving or releasing Lessee from any obligation under this
Lease, use, apply, or retain the whole or any part of said Security Deposit
(a) to the extent of any sum due to Lessor; or (b) to compensate Lessor for
any loss, damage, attorneys' fees or expense sustained by Lessor due to
Lessee's default. In such event, Lessee shall, within five (5) days of
written demand by Lessor, remit to Lessor sufficient funds to restore the
Security Deposit to its original sum. No interest shall accrue on the
Security Deposit. Should Lessee comply with all the terms, covenants, and
conditions of this Lease and, at the end of the term of this Lease, leave
the Premises in the condition required by this Lease, then said Security
Deposit or any balance thereof, less any sums owing to Lessor, shall be
returned to Lessee within fifteen (15) days after the termination of this
Lease and vacancy of the Premises by Lessee. Lessor can maintain the
Security Deposit separate and apart from Lessor's general funds, or can co-
mingle the Security Deposit with the Lessor's general and other funds.
6. Use of the Premises. The Premises shall be used exclusively for the purpose
-------------------
of research and development, storage, distribution, offices and marketing
of medical devices.
Lessee shall not use or permit the Premises, or any part thereof, to
be used for any purpose or purposes other than the purpose for which the
Premises are hereby leased; and no use shall be made or permitted to be
made of the Premises, nor acts done, which will increase the existing rate
of insurance upon the building in which the Premises are located, or cause
a cancellation of any insurance policy covering said building, or any part
thereof, nor shall Lessee sell or permit to be kept, used, or sold, in or
about the Premises, any article which may be prohibited by the standard
form of fire insurance policies. Lessee shall not commit or suffer to be
committed any waste upon the Premises or any public or private nuisance or
other act or thing which may disturb the quiet enjoyment of any other
tenant in the building in which the premises are located; nor, without
limiting the generality of the foregoing, shall Lessee allow the Premises
to be used for any improper, immoral, unlawful, or objectionable purpose.
Lessee shall not place any harmful liquids in the drainage system of
the Premises or of the building of which the Premises form a part. No waste
materials or refuse shall be dumped upon or permitted to remain upon any
part of the Premises outside of the building proper except in trash
containers placed inside exterior enclosures designated for that purpose by
Lessor, or inside the building proper where designated by Lessor. No
materials, supplies, equipment, finished or semi-finished products, raw
materials, or articles of any nature shall be stored upon or permitted to
remain on any portion of the Premises outside of the building proper.
Lessee shall comply with all the covenants, conditions, and/or restrictions
("C.C. & R.'s") affecting the Premises
Lessor represents and warrants to Lessee that an underground storage
tank has been removed from the property. Remedial action has been completed
and site closure has been received. Lessor represents and warrants to
Lessee that to the best of its knowledge there are no Toxic or Hazardous
materials present on, at or under the Premises, which shall be deemed to
include underlying land and groundwater, at the time of Lessee's occupancy.
Lessor shall indemnify, defend and hold harmless Lessee, its partners,
directors, officers, employees, lenders, and successors against all claims,
obligations, liabilities, demands, damages, judgements, and costs,
including reasonable attorneys' fees arising from or in connection with any
prior Toxic or Hazardous materials that existed prior to Lessee's occupancy
of the Premises. Lessee in turn represents to Lessor that it does not now
and will not in the future permit the use or storage on the Premises of
Toxic or Hazardous materials, excluding, however basic janitorial,
maintenance and office supplies, and materials commonly used in connection
with Lessee's business as described in paragraph 6 hereof. For purposes of
this paragraph 6 "Toxic or Hazardous Materials" shall mean any product,
substance, chemical, material or waste whose presence, nature, quality
and/or intensity or existence, use, manufacture, disposal, transportation,
spill, release or effect, either by itself or in combination with other
materials expected to be on the leased premises, is either (i) potentially
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injurious to the public health, safety or welfare, the environment, or the
leased premises; (ii) regulated or monitored by any governmental authority;
or (iii) a basis for potential liability of Lessee and Lessor to any
governmental agency or third party under any applicable statute or common
law theory. "Toxic or Hazardous Materials" shall include, but not be
limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or
by-products thereof. Lessee hereunder shall be responsible for and
indemnify, and hold Lessor and its partners, directors, officers,
employees, lenders, successors and assigns harmless from all claims,
obligations, liabilities, demands, damages, judgments and costs, including
reasonable attorneys' fees arising at any time during or in connection with
Lessee's causing or permitting any materials referred to under any
governmental provisions or regulatory scheme as "hazardous" or "toxic" or
which contain petroleum, gasoline, or other petroleum product, to be
brought upon, stored, manufactured, generated, handled, disposed, or used
on, under or about the Premises. Lessee's and Lessor's obligations
hereunder shall survive the termination of this Lease.
If, at any time during the term of this Lease, Lessor suspects that
toxic waste, spillage, or other contaminants may be present on the
Premises, Lessor may order a soils report, or its equivalent. If Lessee has
breached the terms of this Section 6, Lessee shall pay the expense of
preparing the referenced report, and Lessee shall pay such costs within
fifteen (15) days from the date of the invoice by Lessor. If any such toxic
waste, spillage, or other contaminants are found upon the Premises, Lessee
shall deposit with Lessor, within fifteen (15) days of notice from Lessor
to Lessee to do so, the amount necessary to remove the substances and
remedy the problem.
Lessee shall abide by all laws, ordinances, and statutes, as they now
exist or may hereafter be enacted by legislative bodies having jurisdiction
thereof, relating to its use and occupancy of the Premises, provided
nothing herein will require Lessee to pay for or perform any of the
following: removal, remediation, investigation or clean up of any Hazardous
Substances the presence of which is not attributable to Lessee, its agents,
employees or contractors.
7. Improvements: Lessor will provide an allowance of $112,000 for improvements
------------
to the Premises as specified in Exhibit "B". Any costs in excess of said
allowance shall be the sole responsibility of Lessee. Lessee may either pay
such excess costs at the time of occupancy or may choose to have the excess
costs amortized as additional rent over a period of three years at a rate
of Bank of America's Prime Rate plus 3%. Lessor will make reasonable
efforts to complete such improvements prior to October 1, 1996. Possession
of the premises, pursuant to Paragraph 13 of this lease, shall be deemed
tendered upon receipt of final city approvals.
8. Taxes and Assessments.
---------------------
A. Lessee shall pay before delinquency any and all taxes, assessments,
license fees, and public charges levied, assessed, or imposed upon or
against Lessee's fixtures, equipment, furnishings, furniture, appliances,
and personal property installed or located on or within the Premises.
Lessee shall cause said fixtures, equipment, furnishings, furniture,
appliances, and personal property to be assessed and billed separately from
the real property of Lessor. If any of Lessee's said personal property
shall be assessed with Lessor's real property, Lessee shall pay to Lessor
the taxes attributable to Lessee within thirty (30) days before delinquency
and following timely receipt of a written statement from Lessor setting
forth the taxes applicable to Lessee's property.
B. All property taxes or assessments levied or assessed by or hereafter
levied or assessed by any governmental authority against the Premises or
any portion of such taxes or assessments which becomes due or accrued
during the term of this Lease shall be paid by Lessor. Lessee shall pay to
Lessor Lessee's proportionate share of such taxes or assessments within
thirty (30) days before delinquency and following timely receipt of
Lessor's invoice demanding such payment. Lessee's
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liability hereunder shall be prorated to reflect the commencement and
termination dates of this Lease.
9. Insurance.
---------
A. Indemnity. Lessee agrees to indemnify and defend Lessor against and
---------
hold Lessor harmless from any and all demands, claims, causes of action,
judgments, obligations, or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable
attorneys' fees) on account of, or arising out of, the use, or occupancy of
the Premises. This Lease is made on the express condition that Lessor shall
not be liable for, or suffer loss by reason of, injury to person or
property, from whatever cause, in any way connected with the condition,
use, or occupancy of the Premises, specifically including, without
limitation, any liability for injury to the person or property of Lessee,
its agents, officers, employees, licensees, and invitees occurring for any
reason other than gross negligence or willful misconduct of Lessor its
agents, employees or contractors, or a breach of the obligations of Lessor
hereunder.
B. Liability Insurance. Lessee shall obtain, and at all times during the
-------------------
term hereof, keep in force, at its own cost and expense, Commercial General
Liability insurance with limits of $1,000,000 combined single limit for
Bodily Injury and Property Damage per occurrence and in the aggregate.
Tenant's insurance shall name Lessor as additional insured as respects the
use and occupancy of the leased Premises and shall provide that Lessee's
insurance company shall endeavor to furnish Lessor with 30 days advance
notice of cancellation of Lessee's insurance policy. Lessee shall furnish
Lessor with a certificate of insurance to this effect.
C. Property Insurance. Lessor shall obtain and keep in force during the
------------------
term of this Lease a policy or policies of insurance covering loss or
damage to the Premises in "all risk" extended coverage form, in the amount
of the full replacement value thereof. Lessee shall pay to Lessor its pro-
rata share of the cost of said insurance within ten (10) days of Lessee's
receipt of Lessor's invoice demanding such payment. Lessee acknowledges
that such insurance procured by Lessor shall contain a deductible which
reduces Lessee's cost for such insurance, and, in the event of loss or
damage, Lessee shall be required to pay to Lessor the amount of such
deductible, which payment shall not exceed Five Thousand Dollars ($5,000)
for any one occurrence.
Lessor does not currently carry earthquake insurance. However, Lessor
reserves the right to do so (and Lessee shall reimburse Lessor for said
cost) should it become available at commercially reasonable rates.
D. Lessee and Lessor hereby release each other and their respective
partners, officers, agents, employees, and servants, from any and all
claims, demands, loss, expense, or injury to the Premises or to the
furnishings, fixtures, equipment, inventory, or other property of the
releasing party in, about, or upon the Premises, which is caused by or
results from perils, events, or happenings which are the subject of
insurance in force at the time of such loss, however, that such waiver
shall be effective only to the extent permitted by the insurance covering
such loss..
10. Reimbursable Expenses and Utilities. Lessee shall pay for all water, gas,
-----------------------------------
light, heat, power, electricity, telephone, trash removal, landscaping,
sewer charges, and all other services, including normal and customary
property management fees (not to exceed three percent (3%) of the base rent
payable hereunder), supplied to or consumed on the Premises. In the event
that any such services are billed directly to Lessor, then Lessee shall pay
Lessor for such expenses within ten (10) days of Lessee's receipt of
Lessor's invoice demanding payment.
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11. Repairs and Maintenance.
-----------------------
A. Subject to provisions of paragraph 15, Lessor shall keep and maintain
in good order, condition and repair the structural elements of the Premises
including the roof, roof membrane, paving, floor slab, foundation, exterior
walls, landscaping, irrigation and elevators. Lessor shall make such
repairs, replacements, alterations or improvements as Lessor deems
reasonably necessary with respect to such structural elements and Lessee
shall pay to Lessor, within ten (10) business days of Lessor's invoice to
Lessee therefor, Lessee's pro-rata share of such repairs, replacements,
alterations or improvements; provided, however, that replacement and
improvement costs in excess of $5,000 per occurrence shall be amortized
over the useful life of such replacements or improvements, and Lessee shall
be obligated to pay, as additional rent, only the amount which coincides
with the remaining term of the Lease. Notwithstanding the foregoing, if the
reason for any repair, replacement, alteration or improvement is caused by
Lessee or arises because of a breach of Lessee's obligations under this
Lease, then Lessee shall pay 100% of the costs or expense to remedy the
same.
B. Except as expressly provided in Subparagraph A above, Lessee shall, at
its sole cost, keep and maintain the entire Premises and every part
thereof, including, without limitation, the windows, window frames, plate
glass, glazing, truck doors, doors, all door hardware, interior of the
Premises, interior walls and partitions, and electrical, plumbing,
lighting, heating, and air conditioning systems in good and sanitary order,
condition, and repair subject to the limitations set forth in Section 11A
above. Lessee shall, at all times during the Lease term and at his expense,
have in effect a service contract for the maintenance of the heating,
ventilating, and air-conditioning (HVAC) equipment with an HVAC repair and
maintenance contractor approved by Lessor which provides for periodic
inspection and servicing at least once every three (3) months during the
term hereof. Lessee shall further provide Lessor with a copy of such
contract and all periodic service reports.
Should Lessee fail to maintain the Premises or make repairs required
of Lessee hereunder forthwith upon notice from Lessor, Lessor, in addition
to all other remedies available hereunder or by law, and without waiving
any alternative remedies, may make the same, and in that event, Lessee
shall reimburse Lessor as additional rent for the cost of such maintenance
or repairs on the next date upon which rent becomes due.
Lessee hereby expressly waives the provision of Subsection 1 of
Section 1932, and Sections 1941 and 1942 of the Civil Code of California
and all rights to make repairs at the expense of Lessor, as provided in
Section 942 of said Civil Code.
12. Alterations and Additions. Lessee shall not make, or suffer to be made,
---------------------------
any alterations, improvements, or additions in, on, or about, or to the
Premises or any part thereof, without prior written consent of Lessor,
which shall not be unreasonably withheld or delayed, and without a valid
building permit issued by the appropriate governmental authority. Lessor
retains, at his sole option, the right to retain a General Contractor of
his own choosing to perform all repairs, alterations, improvements, or
additions in, on, about, or to said Premises or any part thereof. As a
condition to giving such consent, Lessor may require that Lessee agree to
remove any such alterations, improvements, or additions at the termination
of this Lease, and to restore the Premises to their prior condition. Upon
Lessee's written request, Lessor shall designate, at the time that Lessor
consents to the installation of any such alteration, improvement or
addition, whether removal of any such alteration, improvement or addition
will be required. Any alteration, addition, or improvement to the Premises,
shall become the property of Lessor upon the expiration or earlier
termination of the Lease term (except with respect to those items which
have been installed at the sole expense of Lessee, which Lessee may remove,
provided that Lessee repairs any damage attributable to such
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removal), and shall remain upon and be surrendered with the Premises at the
termination of this Lease. Alterations and additions which are not to be
deemed as trade fixtures include heating, lighting, electrical systems, air
conditioning, partitioning, electrical signs, carpeting, or any other
installation which has become an integral part of the Premises. In the
event that Lessor consents to Lessee's making any alterations,
improvements, or additions, Lessee shall be responsible for the timely
posting of notices of non-responsibility on Lessor's behalf, which shall
remain posted until completion of the alterations, additions, or
improvements. Lessee's failure to post notices of non-responsibility as
required hereunder shall be a breach of this Lease.
Notwithstanding anything to the contrary herein, if, during the term
hereof, any alteration, addition, or change of any sort through all or any
portion of the Premises or of the building of which the Premises form a
part, is required by law, regulation, ordinance, or order of any public
agency, then if such legal requirement is not imposed because of Lessee's
specific use of the Premises and is not "triggered" by Lessee's alterations
or Lessee's application for a building permit or any other governmental
approval (in which instance Lessee shall be responsible for 100% of the
cost of such improvement), Lessor shall be responsible for constructing
such improvement and Lessee shall be responsible for its proportional share
of the cost for said improvement, amortized over the useful life of such
improvement that coincides with the remaining Lease term including any
extensions.
13. Acceptance of the Premises and Covenant to Surrender. By entry and taking
----------------------------------------------------
possession of the Premises pursuant to this Lease, Lessee accepts the
Premises as being in good and sanitary order, condition, and repair, and
accepts the Premises in their condition existing as of date of such entry,
and Lessee further accepts any tenant improvements to be constructed by
Lessor, if any, as being completed in accordance with the plans and
specifications for such improvements, subject to items identified by Lessee
in one final punch list submitted to Lessor within thirty (30) days of
occupancy, which items Lessor shall promptly correct.
Lessee agrees on the last day of the term hereof, or on sooner
termination of this Lease, to surrender the Premises, together with all
alterations, additions, and improvements which may have been made in, to,
or on the Premises by Lessor or Lessee, unto Lessor in good and sanitary
order, condition, and repair, excepting for such wear and tear as would be
normal for the period of the Lessee's occupancy. Lessee, on or before the
end of the term or sooner termination of this Lease, shall remove all its
personal property and trade fixtures from the Premises, and all property
not so removed shall be deemed abandoned by Lessee. Lessee further agrees
that at the end of the term or sooner termination of this Lease, Lessee, at
its sole expense, shall have the carpets steam cleaned, the walls and
columns painted, the flooring waxed, any damaged ceiling tile replaced, the
windows cleaned, the drapes cleaned, and any damaged doors replaced, if
necessary to restore the Premises to its original condition, normal wear
and tear excepted.
If the Premises are not surrendered at the end of the term or sooner
termination of this Lease, Lessee shall indemnify Lessor against loss or
liability resulting from delay by Lessee in so surrendering the Premises,
including, without limitation, any claims made by any succeeding tenant
founded on such delay.
14. Default. In the event of any breach of this Lease by the Lessee, or an
--------
abandonment of the Premises by the Lessee, which is not cured within ten
(10) days after written notice thereof in the case of any monetary
obligation and which is not cured within ten (10) days after written notice
thereof in the case of any non-monetary obligation, the Lessor has the
option of (1.) removing all persons and property from the Premises and
repossessing the Premises, in which case any of the Lessee's property which
the Lessor removes from the Premises may be stored in a public warehouse or
elsewhere at the cost of, and for the account of, Lessee; or (2.) allowing
the Lessee to remain in full possession and control of the Premises. If the
Lessor chooses to repossess the Premises, the Lease will automatically
terminate in accordance with the provisions of the California Civil Code,
Section 1951.2. In the event of such termination of the Lease, the Lessor
may recover from the
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Lessee: (1.) the worth at the time of award of the unpaid rent which had
been earned at the time of termination, including interest at the maximum
rate an individual is permitted by law to charge; (2.) the worth at the
time of award of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of such
rental loss that the Lessee proves could have been reasonably avoided,
including interest at the maximum rate an individual is permitted by law to
charge; (3.) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that the Lessee proves could be reasonably
avoided; and (4.) any other amount necessary to compensate the Lessor for
all the detriment proximately caused by the Lessee's failure to perform his
obligations under the Lease or which, in the ordinary course of things,
would be likely to result therefrom. "The worth at the time of award," as
used in (1.) and (2.) of this Paragraph, is to be computed by allowing
interest at the maximum rate an individual is permitted by law to charge.
"The worth at the time of award," as used in (3.) of this Paragraph, is to
be computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award, plus one percent (1%).
If the Lessor chooses not to repossess the Premises, but allows the
Lessee to remain in full possession and control of the Premises, then, in
accordance with provisions of the California Civil Code, Section 1951.4,
the Lessor may treat the Lease as being in full force and effect, and may
collect from the Lessee all rents as they become due through the
termination date of the Lease, as specified in the Lease. For the purpose
of this paragraph, the following do not constitute a termination of
Lessee's right to possession: (1.) acts of maintenance or preservation, or
efforts to relet the property; (2.) the appointment of a receiver on the
initiative of the Lessor to protect his interest under this Lease.
Lessee shall be liable immediately to Lessor for all costs Lessor
incurs in reletting the Premises, including, without limitation, brokers'
commissions, reasonable expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer
than the remaining term of this Lease. Lessee shall pay to Lessor the rent
due under this Lease on the dates the rent is due, less the rent Lessor
receives from any reletting. No act by Lessor allowed by this Section shall
terminate this Lease unless Lessor notifies Lessee that Lessor elects to
terminate this Lease. After Lessee's default and for as long as Lessor does
not terminate Lessee's right to possession of the Premises, if Lessee
obtains Lessor's consent, Lessee shall have the right to assign or sublet
its interest in this Lease, but Lessee shall not be released from
liability. Lessor's consent to a proposed assignment or subletting shall
not be unreasonably withheld.
If Lessor elects to relet the Premises as provided in this Paragraph,
rent that Lessor receives from reletting shall be applied to the payment
of: (1.) any indebtedness from Lessee to Lessor other than rent due from
Lessee; (2.) all costs, including for maintenance, incurred by Lessor in
reletting; (3.) rent due and unpaid under this Lease. After deducting the
payments referred to in this Paragraph, any sum remaining from the rent
Lessor receives from reletting shall be held by Lessor and applied in
payment of future rent as rent becomes due under this Lease. In no event
shall Lessee by entitled to any excess rent received by Lessor. If, on the
date rent is due under this Lease, the rent received from reletting is less
than the rent due on that date, Lessee shall pay to Lessor, in addition to
the remaining rent due, all costs, including for maintenance, Lessor
incurred in reletting that remain after applying the rent received from the
reletting, as provided in this Paragraph.
Lessor, at any time after Lessee commits a default, can cure the
default at Lessee's cost. If Lessor at any time, by reason of Lessee's
default, pays any sum or does any act that requires the payment of any sum,
the sum paid by Lessor shall be due immediately from Lessee to Lessor at
the time the sum is paid, and if paid at a later date shall bear interest
at the maximum rate an individual is permitted by law to charge from the
date the sum is paid by Lessor until Lessor is reimbursed by Lessee. The
sum, together with interest on it, shall be additional rent.
Rent not paid when due shall bear interest at the maximum rate an
individual is permitted by law to charge from the date due until paid.
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15. Destruction. In the event the Premises are destroyed in whole or in part
-----------
from any cause, Lessor may, at its option, (1.) rebuild or restore the
Premises to their condition prior to the damage or destruction or (2.)
terminate the Lease.
If Lessor does not give Lessee notice in writing within thirty (30)
days from the destruction of the Premises of its election either to rebuild
and restore the Premises, or to terminate this Lease, Lessor shall be
deemed to have elected to rebuild or restore them, in which event Lessor
agrees, at its expense, promptly to rebuild or restore the Premises to its
condition prior to the damage or destruction. If Lessor does not complete
the rebuilding or restoration within one hundred eighty (180) days
following the date of destruction (such period of time to be extended for
delays caused by the fault or neglect of Lessee of because of acts of God,
acts of public agencies, labor disputes, strikes, fires, freight embargoes,
rainy or stormy weather, inability to obtain materials, supplies or fuels,
acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond control of
Lessor), then Lessee shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Lessor. Lessor's obligation to
rebuild or restore shall not include restoration of Lessee's trade
fixtures, equipment, merchandise, or any improvements, alterations, or
additions made by Lessee to the Premises. If Lessor reasonably estimates
that the restoration referenced herein will require 180 days or more, which
estimate shall be delivered to Lessee within nor more than thirty (30) days
after the occurrence of the casualty, Lessee shall be entitled to terminate
this Lease effective upon written notice of such election to Lessor,
provided Lessee is not the cause of said damage or destruction.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect. Lessee hereby expressly
waives the provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than fifty (50%) of the
replacement cost thereof, Lessor may elect to terminate this Lease, whether
the Premises be injured or not.
16. Condemnation. If any part of the Premises shall be taken for any public
------------
or quasi-public use, under any statute of by right of eminent domain, or
private purchase in lieu thereof, and a part thereof remains, which is
susceptible of occupation hereunder, this Lease shall, as to the part so
taken, terminate as of the date title shall vest in the condemnor or
purchaser, and the rent payable hereunder shall be adjusted so that the
Lessee shall be required to pay for the remainder of the term only such
portion of such rent as the value of the part remaining after taking such
bears to the value of the entire Premises prior to such taking. Lessor
shall have the option to terminate this Lease in the event that such taking
causes a reduction in rent payable hereunder by fifty percent (50%) or
more. If all of the Premises or such part thereof be taken so that there
does not remain a portion susceptible for occupation hereunder, as
reasonably necessary for Lessee's conduct of its business as contemplated
in this Lease, this Lease shall thereupon terminate. If a part of all of
the Premises be taken, all compensation awarded upon such taking shall go
to the Lessor, and the Lessee shall have no claim thereto, and the Lessee
hereby irrevocably assigns and transfers to the Lessor any right to
compensation or damages to which the Lessee may become entitled during the
term hereof by reason of the purchase or condemnation of all or a part of
the Premises, except that Lessee shall have the right to recover its share
of any award or consideration for (1.) moving expenses; (2.) loss or damage
to Lessee's trade fixtures, furnishings, equipment, and other personal
property; and (3.) business goodwill. Each party waives the provisions of
the Code of Civil Procedure, Section 1265.130, allowing either party to
petition the Superior Court to terminate this Lease in the event of a
partial taking of the Premises.
17. Free from Liens. Lessee shall (1.) pay for all labor and services
---------------
performed for materials used by or
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furnished to Lessee, or any contractor employed by Lessee with respect to
the Premises, and (2.) indemnify, defend, and hold Lessor and the Premises
harmless and free from any liens, claims, demands, encumbrances, or
judgments created or suffered by reason of any labor or services performed
for materials used by or furnished to Lessee or any contractor employed by
Lessee with respect to the Premises, and (3.) give notice to Lessor in
writing five (5) days prior to employing any laborer or contractor to
perform services related, or receiving materials for use upon the Premises,
and (4.) shall post, on behalf of Lessor, a notice of non-responsibility in
accordance with the statutory requirements of the California Civil Code,
Section 3904, or any amendment thereof. In the event an improvement bond
with a public agency in connection with the above is required to be posted,
Lessee agrees to include Lessor as an additional obligee.
18. Compliance with Laws. Lessee shall, at its own cost, comply with and
--------------------
observe all requirements of all municipal, county, state, and federal
authority now in force, or which may hereafter be in force, pertaining to
the use and occupancy of the Premises. Notwithstanding anything contained
in Paragraphs 11, 12 and 18 of Lease, if it becomes necessary to make
capital improvements required by laws enacted or legal requirements imposed
by governmental agency(ies), then if such legal requirement is not imposed
because of Lessee's specific use of the Premises and is not "triggered" by
Lessee's alterations or Lessee's application for a building permit or any
other governmental approval (in which instance Lessee shall be responsible
for 100% of the cost of such improvement), Lessor shall be responsible for
constructing such improvement and Lessee shall be responsible for its
proportional share of the cost for said improvement, amortized over the
useful life of such improvement that coincides with the remaining Lease
term and any extensions thereof.
19. Subordination. Lessee agrees that this Lease shall, at the option of
-------------
Lessor, be subjected and subordinated to any mortgage, deed of trust, or
other instrument of security, which has been or shall be placed on the land
and building, or land or building of which the Premises form a part, and
this subordination is hereby made effective without any further act of
Lessee or Lessor. The Lessee shall, at any time hereinafter, on demand,
execute any instruments, releases, or other documents that may be required
by any mortgagee, mortgagor, trustor, or beneficiary under any deed of
trust, for the purpose of subjecting or subordinating this Lease to the
lien of any such mortgage, deed of trust, or other instrument of security.
If Lessee fails to execute and deliver any such documents or instruments,
Lessee irrevocably constitutes and appoints Lessor as Lessee's special
attorney-in-fact to execute and deliver any such documents or instruments.
20. Abandonment. Lessee shall not vacate or abandon the Premises at any time
-----------
during the term; and if Lessee shall abandon, vacate, or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor, except such property as may be
mortgaged to Lessor; provided, however, that Lessee shall not be deemed to
have abandoned or vacated the Premises so long as Lessee continues to pay
all rents as and when due, and otherwise performs pursuant to the terms and
conditions of this Lease.
21. Assignment and Subletting. Lessee's interest in this Lease is not
-------------------------
assignable, by operation of law or otherwise, nor shall Lessee have the
right to sublet the Premises, transfer any interest of Lessee's therein, or
permit any use of the Premises by another party, without the prior written
consent of Lessor to such assignment, subletting, or transfer of use, which
consent shall not be unreasonably withheld or delayed.
If Lessee is a partnership, a withdrawal or change, voluntary,
involuntary, or by operation of law, of any partner (s) owning fifty
percent (50%) or more of the partnership, of the dissolution of the
partnership, shall be deemed as a voluntary assignment.
If Lessee consists of more than one person, a purported assignment,
voluntary, involuntary,
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or by operation of law, from one person to the other or from a majority of
persons to the others, shall be deemed a voluntary assignment.
If Lessee is a corporation, any dissolution, merger, consolidation, or
other reorganization of Lessee, or the sale or other transfer of a
controlling percentage of the capital stock of Lessee, or sale of at least
fifty-one percent (51%) of the value of the assets of Lessee, shall be
deemed a voluntary assignment. The phrase "controlling percentage" means
the ownership of, and the right to vote, stock possessing at least fifty-
one percent (51%) of the total combined voting power of all classes of
Lessee's capital stock issued, outstanding, and entitled to vote for the
election of directors. This Paragraph shall not apply to corporations the
stock of which is traded through an exchange or over the counter.
In the event of any subletting or transfer which is consented to, or
not consented to, by Lessor, a subtenant or transferee agrees to pay monies
or other consideration, whether by increased rent or otherwise, in excess
of or in addition to those provided for herein, then all of such excess or
additional monies or other consideration (after first deducting Lessee's
reasonable costs associated with said subletting or transfer) shall be paid
solely to Lessor, and this shall be one of the conditions to obtaining
Lessor's consent.
Lessee immediately and irrevocably assigns to Lessor, as security for
Lessee's obligations under this Lease, all rent from any subletting of all
or a part of the Premises as permitted by this Lease, and Lessor, as
assignee and as attorney-in-fact for Lessee, or a receiver for Lessee
appointed on Lessor's application, may collect such rent and apply it
toward Lessee's obligations under this Lease; except that, until the
occurrence of an act of default by the Lessee, Lessee shall have the right
to collect such rent.
A consent to one assignment, subletting, occupation, or use by another
party shall not be deemed to be a consent to any subsequent assignment,
subletting, occupation, or use by another party. Any assignment or
subletting without such consent shall be void and shall, at the option of
the Lessor, terminate this Lease. Lessor's waiver or consent to any
assignment or subletting hereunder shall not relieve Lessee from any
obligation under this Lease unless the consent shall so provide. If Lessee
requests Lessor to consent to a proposed assignment or subletting, Lessee
shall pay to Lessor, whether or not consent is ultimately given, Lessor's
reasonable attorneys' fees incurred in conjunction with each such request.
22. Parking Charges. Lessee agrees to pay upon demand, based on its percent of
---------------
occupancy of the entire Premises, its pro-rata share of any parking
charges, surcharges, or any other cost hereafter levied or assessed by
local, state, or federal governmental agencies in connection with the use
of the parking facilities serving the Premises, including, without
limitation, parking surcharge imposed by or under the authority of the
Federal Environmental Protection Agency.
23. Insolvency or Bankruptcy. Either (1.) the appointment of a receiver to take
------------------------
possession of all or substantially all of the assets of Lessee, or (2.) a
general assignment by Lessee for the benefit of creditors, or (3.) any
action taken or suffered by Lessee under any insolvency or bankruptcy act
shall constitute a breach of this Lease by Lessee. Upon the happening of
any such event, this Lease shall terminate ten (10) days after written
notice of termination from Lessor to Lessee. This section is to be applied
consistent with the applicable state and federal law in effect at the time
such event occurs.
24. Lessor Loan or Sale. Lessee agrees promptly following request by Lessor
-------------------
to (1.) execute and deliver to Lessor any documents, including estoppel
certificates presented to Lessee by Lessor, (a.) certifying that this Lease
is unmodified and in full force and effect, or, if modified, stating the
nature of such modification and certifying that this Lease, as so modified,
is in full force and effect and the date to which the rent and other
charges are paid in advance, if any, and (b.) acknowledging that there are
not, to Lessee's knowledge, any uncured defaults on the part of Lessor
hereunder, and (c.)
11
<PAGE>
evidencing the status of the Lease as may be required either by a lender
making a loan to Lessor, to be secured by deed of trust or mortgage
covering the Premises, or a purchaser of the Premises from Lessor, and (2.)
to deliver to Lessor the current financial statements of Lessee with an
opinion of a certified public accountant, including a balance sheet and
profit and loss statement, for the current fiscal year and the two
immediately prior fiscal years, all prepared in accordance with Generally
Accepted Accounting Principles consistently applied, or if Lessee does not
prepare financial statements in the manner specified above, Lessee shall
provide Lessor with the financial statements which most accurately reflect
the financial condition of Lessee. Lessee's failure to deliver an estoppel
certificate within three (3) days following such request shall constitute a
default under this Lease and shall be conclusive upon Lessee that this
Lease is in full force and effect and has not been modified except as may
be represented by Lessor. If Lessee fails to deliver the estoppel
certificates within the three (3) days, Lessee irrevocably constitutes and
appoints Lessor as its special attorney-in-fact to execute and deliver the
certificate to any third party.
25. Surrender of Lease. The voluntary or other surrender of this Lease by
------------------
Lessee, or a mutual cancellation thereof, shall not work a merger nor
relieve Lessee of any of Lessee's obligations under this Lease, and shall,
at the option of Lessor, terminate all or any existing Subleases or
Subtenancies, or may, at the option of Lessor, operate as an assignment to
him of any or all such Subleases or Subtenancies.
26. Attorneys' Fees. If, for any reason, any suit be initiated to enforce any
---------------
provision of this Lease, the prevailing party shall be entitled to legal
costs, expert witness expenses, and reasonable attorneys' fees, as fixed by
the court.
27. Notices. All notices to be given to Lessee may be given in writing,
-------
personally, or by depositing the same in the United States mail, postage
prepaid, and addressed to Lessee at the said Premises, whether or not
Lessee has departed from, abandoned, or vacated the Premises. Any notice or
document required or permitted by this Lease to be given Lessor shall be
addressed to Lessor at the address set forth below, or at such other
address as it may have theretofore specified by notice delivered in
accordance herewith:
LESSOR: Huettig & Schromm/Heaton & Keyser
900 Welch Road, Suite 10
Palo Alto, California 94304
LESSEE: Oratec Interventions
3700 Haven Court
Menlo Park, CA 94025
28. Transfer of Security. If any security be given by Lessee to secure the
--------------------
faithful performance of all or any of the covenants of this Lease on the
part of Lessee, Lessor may transfer and/or deliver the security, as such,
to the purchaser of the reversion, in the event that the reversion be sold,
and thereupon Lessor shall be discharged from any further liability in
reference thereto, upon the assumption by such transferee of lessor's
obligations under this Lease.
29. Waiver. The waiver by Lessor or Lessee of any breach of any term, covenant,
------
or condition, herein contained shall not be deemed to be a waiver of such
term, covenant, or condition, or any subsequent breach of the same or any
other term, covenant, or condition herein contained. The subsequent
acceptance of rent hereunder by lessor shall not be deemed to be a waiver
of any preceding breach by Lessee of any term, covenant, or condition of
this Lease, other than the failure of Lessee to pay the particular rental
so accepted, regardless of Lessor's knowledge of such
12
<PAGE>
preceding breach at the time of acceptance of such rent.
30. Holding Over. Any holding over after the expiration of the term or any
------------
extension thereof, with the consent of lessor, shall be construed to be a
tenancy from month-to-month, at a rental of one and one-half (1 1/2) times
the previous month's rental rate per month, and shall otherwise be on the
terms and conditions herein specified, so far as applicable.
31. Covenants, Conditions, and Restrictions. Not applicable.
---------------------------------------
32. Limitation on Lessor's Liability. If Lessor is in default of this Lease,
---------------------------------
and, as a consequence, Lessee recovers a money judgment against Lessor, the
judgment shall be satisfied only out of the proceeds of sale received on
execution of the judgment and levy against the right, title, and interest
of Lessor in the Premises, or in the building, other improvements, and land
of which the Premises are part, and out of rent or other income from such
real property receivable by Lessor or out of the consideration received by
Lessor from the sale or other disposition of all or any part of Lessor's
right, title, and interest in the Premises or in the building, other
improvements, and land of which the Premises are part. Neither Lessor nor
any of the partners comprising the partnership designated as Lessor shall
be personally liable for any deficiency.
33. Letter of Credit. Upon commencement of the Lease, Lessee shall provide
Lessor with an irrevocable Letter of Credit in the amount of the total
tenant improvement costs (which the parties estimate will be approximately
$147,000) less the amount of the security deposit. This Letter of Credit
can be drawn on by Lessor if Lessee defaults on any material obligation
under the terms of this Lease. However, if there is no material default on
the part of Lessee, the Letter of Credit shall be reduced on an annual
basis as follows:
<TABLE>
<S> <C>
Month 13 Reduced by 33.33%
Month 25 Reduced by 33.33%
Month 37 Released in its entirety
</TABLE>
34. Miscellaneous.
A. Time is of the essence of this Lease, and of each and all of its
provisions.
B. The term "building" shall mean the building in which the Premises are
situated.
C. If the building is leased to more than one tenant, then each such
tenant, its agents, officers, employees, and invitees, shall have the
non-exclusive right (in conjunction with the use of the part of the
building leased to such Tenant) to make reasonable use of any
driveways, sidewalks, and parking areas located on the parcel of land
on which the building is situated, except such parking areas as may
from time to time be leased for exclusive use by other Tenant(s).
D. Lessee's such reasonable use of parking areas shall not exceed that
percent of the total parking areas which is equal to the ratio which
floor space of the Premises bears to floor space of the building.
E. The term "assign" shall include the term "transfer."
F. The invalidity or unenforceability of any provision of this Lease
shall not affect the validity or enforceability of the remainder of
this Lease.
13
<PAGE>
G. All parties hereto have equally participated in the preparation of
this Lease.
H. The headings and titles to the Paragraphs of this Lease are not a part
of this Lease and shall have no effect upon the construction or
interpretation of any part thereof.
I. Lessor has made no representation(s) whatsoever to Lessee (express or
implied) except as may be expressly stated in writing in this Lease
instrument.
J. This instrument contains all of the agreements and conditions made
between the parties hereto, and may not be modified orally or in any
other manner than by agreement in writing, signed by all of the
parties hereto or their respective successors in interest.
K. It is understood and agreed that the remedies herein given to Lessor
shall be cumulative, and the exercise of any one remedy by Lessor
shall not be to the exclusion of any other remedy.
L. The covenants and conditions herein contained shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors,
executors, and administrators, and assigns of all the parties hereto;
and all of the parties hereto shall jointly and severally be liable
hereunder.
M. This Lease has been negotiated by the parties hereto and the language
hereof shall not be construed for or against either party.
N. All exhibits to which reference is made are deemed incorporated into
this Lease, whether covenants or conditions, on the part of Lessee
shall be deemed to be both covenants and conditions.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date first
above-written.
LESSOR: LESSEE:
BY: /s/ Howard J. White BY: /s/ Nancy Westcott
--------------------- ----------------------
ITS: General Partner ITS:_____________________
--------------------
DATE: 6/4/98 DATE: 6/1/98
------------------- --------------------
14
<PAGE>
EXHIBIT 10.16
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of ___________,
---------
by and between ORATEC Interventions, Inc., a Delaware corporation (the
"Company"), and ((IndemniteeName)) (the "Indemnitee").
------- ----------
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, or, with respect to any criminal action or proceeding, that Indemnitee
had reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in
-2-
<PAGE>
writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company and
shall be given in accordance with the provisions of Section 12(d) below. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
-3-
<PAGE>
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise.
-4-
<PAGE>
For example, the Company and Indemnitee acknowledge that the Securities and
Exchange Commission (the "SEC") has taken the position that indemnification is
---
not permissible for liabilities arising under certain federal securities laws,
and federal legislation prohibits indemnification for certain ERISA violations.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
-5-
<PAGE>
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
---
opposed to the best interests of the Company" as referred to in this Agreement.
- --------------------------------------------
11. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee
-6-
<PAGE>
with respect to such action, unless as a part of such action, the court of
competent jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
12. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of
-7-
<PAGE>
Indemnitee, who shall execute all documents required and shall do all acts that
may be necessary to secure such rights and to enable the Company to effectively
bring suit to enforce such rights.
[Signature Page Follows]
-8-
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
ORATEC INTERVENTIONS, INC.
By: _______________________________
Title: _______________________________
Address: 3700 Haven Court
Menlo Park, CA 94025
AGREED TO AND ACCEPTED:
((IndemniteeName))
_______________________________
(Signature)
Address: ((IndemniteeAddress1))
((IndemniteeAddress2))
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<PAGE>
Exhibit 10.17
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.
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<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.
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<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,
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<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.
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<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
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<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
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<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
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<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
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<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
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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 January 17, 2000, in the Registration Statement
(Form S-1) and related Prospectus of ORATEC Interventions, Inc. for the
registration of 4,600,000 shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
January 31, 2000
<PAGE>
Exhibit 23.3
CONSENT OF WILSON SONSINI GOODRICH & ROSATI
A PROFESSIONAL CORPORATION
We consent to the use of our name in the second paragraph under the caption
"Experts" in the prospectus, which constitutes part of the Registration
Statement for the Common Stock of ORATEC Interventions, Inc. on Form S-1. We
further consent to the aforementioned use of our name in any amendments to the
aforementioned Registration Statement.
WILSON SONSINI GOODRICH & ROSATI
A PROFESSIONAL CORPORATION
/s/ WILSON SONSINI GOODRICH & ROSATI
Palo Alto, California
January 28, 2000
-1-
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<PAGE>
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,943
<SECURITIES> 2,931
<RECEIVABLES> 6,834
<ALLOWANCES> (528)
<INVENTORY> 3,248
<CURRENT-ASSETS> 19,432
<PP&E> 10,319
<DEPRECIATION> (5,910)
<TOTAL-ASSETS> 23,841
<CURRENT-LIABILITIES> 13,062
<BONDS> 0
0
35,816
<COMMON> 4
<OTHER-SE> 1,296
<TOTAL-LIABILITY-AND-EQUITY> 23,841
<SALES> 31,365
<TOTAL-REVENUES> 31,365
<CGS> 13,030
<TOTAL-COSTS> 27,293
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<INTEREST-EXPENSE> 711
<INCOME-PRETAX> (9,669)
<INCOME-TAX> 0
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