<PAGE>
As filed with the Securities and Exchange Commission on May 25, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CURON MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 3845 77-0470324
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
735 Palomar Ave.
Sunnyvale, California 94086
(408) 733-9910
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
JOHN W. MORGAN
Chief Executive Officer
CURON MEDICAL, INC.
735 Palomar Ave.
Sunnyvale, California 94086
(408) 733-9910
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
J. Casey McGlynn, Esq. Donald J. Murray, Esq.
David J. Saul, Esq. Dewey Ballantine LLP
Wilson Sonsini Goodrich & Rosati 1301 Avenue of the Americas
Professional Corporation New York, New York 10019
650 Page Mill Road (212) 259-8000
Palo Alto, California 94304
(650) 493-9300
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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.
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 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 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 number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum
Aggregate Amount of
Title of Each Class of Securities Offering Price Registration
to be Registered (1) Fee
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<S> <C> <C>
Common Stock, $0.001 par value..................... $60,000,000 $15,840
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
----------------
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 the 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<TABLE>
<S> <C> <C>
PRELIMINARY PROSPECTUS Subject to completion May 25, 2000
</TABLE>
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Shares
[CURON MEDICAL LOGO]
Common Stock
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This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock.
We have applied to have our common stock approved on the Nasdaq National Market
for quotation under the symbol "CURN."
Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk factors" beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to us $ $
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</TABLE>
The underwriters may also purchase up to shares of common stock from us at
the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. The underwriters may exercise
this option only to cover over-allotments, if any. If the underwriters exercise
the option in full, the total underwriting discounts and commissions will be
$ , and our total proceeds, before expenses, will be $ .
The underwriters are offering the common stock as set forth as set forth under
"Underwriting." Delivery of the shares will be made on or about , 2000.
UBS Warburg LLC
CIBC World Markets
SG Cowen
<PAGE>
[Stretta Logo]
The Stretta Procedure
The Stretta procedure, developed by Curon Medical, provides an alternative to
medication or surgery for patients with gastroesophageal reflux disease.
Gastroesophageal reflux disease is caused by a malfunctioning lower esophageal
sphincter, the muscle responsible for preventing the backward flow, or reflux,
of stomach contents into the esophagus. The Stretta procedure is designed to
correct the function of the lower esophageal sphincter to reduce reflux events
and eliminate or reduce patients' ongoing need for prescription medications.
[Three step-by-step Images of the Stretta Procedure]
<TABLE>
<S> <C> <C>
With the patient sedated The physician repeats this Over the next several weeks,
but awake, the Stretta sequence multiple times to the lesions are reabsorbed
Catheter is inserted create an array of thermal and the tissue contracts,
through the mouth into lesions along the length of improving the function of
the lower esophageal the lower esophageal the lower esophageal
sphincter. The balloon sphincter. sphincter.
is inflated, electrodes
are deployed into the
tissue, and
radiofrequency energy is
delivered to create
well-defined thermal
lesions in the tissue.
</TABLE>
The Stretta System
<TABLE>
<S> <C>
[Image of Curon Control Module] The Curon Control Module is a four-channel
generator that delivers controlled
radiofrequency energy to achieve precise
treatment temperatures during the Stretta
procedure.
The Stretta Catheter is a flexible handheld [Image of the Stretta Catheter]
disposable device that is used in
conjunction with the Curon Control Module
to deliver radiofrequency energy to the
lower esophageal sphincter.
</TABLE>
[Curon Logo]
<PAGE>
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Through and including , 2000 (the 25th day after commencement of this
offering), federal securities law may require all dealers selling shares of our
common stock, whether or not participating in this offering, to deliver a
prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary................... 3
The offering......................... 6
Summary financial and operating
data............................... 7
Risk factors......................... 8
Forward-looking information.......... 17
Use of proceeds...................... 18
Dividend policy...................... 18
Capitalization....................... 19
Dilution............................. 20
Selected financial data.............. 22
Management's discussion and analysis
of financial condition and results
of operations...................... 23
</TABLE>
<TABLE>
<S> <C>
Business......................... 29
Scientific Advisory Board........ 46
Management....................... 47
Certain transactions............. 58
Principal stockholders........... 60
Description of capital stock..... 62
Shares eligible for future sale.. 66
Underwriting..................... 68
Legal matters.................... 70
Experts.......................... 70
Where you can find more
information.................... 70
Index to financial statements.... F-1
</TABLE>
Curon(TM), Stretta(TM) and Secca(TM) are our trademarks. This prospectus also
refers to trademarks and trade names of other organizations.
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Prospectus summary
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in the offering. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock which we discuss under "Risk factors." Except as otherwise indicated,
information in this prospectus assumes the conversion of each outstanding share
of convertible preferred stock into one share of common stock and assumes no
exercise of the underwriters' over-allotment option. Information contained in
this prospectus reflects a one-for- reverse stock split, which will occur
before the closing of this offering.
OUR BUSINESS
We develop, manufacture and market innovative proprietary products for the
treatment of gastrointestinal disorders. Our products consist of radiofrequency
generators and single-use disposable devices. Our first product, the Stretta
System, received United States Food and Drug Administration clearance in April
2000 for the treatment of gastroesophageal reflux disease, commonly referred to
as GERD, which affects approximately 14 million U.S. adults on a daily basis.
Unlike medication, which temporarily suppresses GERD symptoms, our Stretta
System is designed to apply radiofrequency energy to treat the causes of GERD.
In a multi-center clinical trial used to support our FDA clearance, 47 patients
who required daily anti-acid medications were treated with the Stretta System.
After six months, the need for all anti-acid medication was eliminated in 70%
of the 44 patients available for follow-up, and the need for the most potent
prescription GERD medication was eliminated in 87% of those patients that
required such medication before treatment. We commercially launched the Stretta
System in May 2000 at a major gastroenterology conference. Our second product,
the Secca System, is currently under development for the treatment of fecal
incontinence. In May 2000, the FDA gave us permission to begin a U.S. clinical
trial of the Secca System.
GERD: THE PROBLEM AND CONVENTIONAL TREATMENT OPTIONS
GERD is the frequent backward flow, or reflux, of stomach contents into the
esophagus. In the lower part of the esophagus there is an area of thickened
muscle known as the lower esophageal sphincter which, when functioning
properly, acts as a one-way valve that allows food to pass down from the
esophagus into the stomach but prevents reflux. In GERD patients, the lower
esophageal sphincter functions improperly and allows chronic reflux to occur.
Stomach acid, enzymes and bile irritate the esophagus and cause a wide range of
symptoms and complications, most commonly persistent, severe heartburn and
chest pain. In some GERD sufferers, the pain is acute enough to require an
emergency room visit. People with GERD often have difficulty sleeping due to
increased reflux and heartburn when they lie down. Also, damage to the
esophagus caused by reflux may result in more serious complications, such as
erosion or ulceration of the esophagus, build-up of scar tissue that can narrow
and obstruct the esophagus, and Barrett's epithelium, a condition that
increases the risk of esophageal cancer.
Prescription medication is the primary treatment option used by people with
GERD. There are many widely prescribed medications, including Prilosec, with
worldwide sales of approximately $6 billion in 1999, Prevacid, Tagamet, Pepcid
and Zantac. Although these medications temporarily ease heartburn symptoms by
reducing stomach acid, they do not prevent reflux or treat the underlying
causes of GERD. Side effects may include diarrhea, headaches, dizziness and
nausea. Taken regularly, these medications are expensive, costing an estimated
average of $2,300 per year based on retail prices for
3
<PAGE>
medication requirements of the patients in our clinical trial. Many GERD
patients do not want to be dependent on medications and have difficulty
complying with prescribed lifestyle modifications which require ongoing
fundamental changes in eating, drinking and sleeping behavior.
The most common corrective treatment for GERD is fundoplication surgery. This
inpatient surgical procedure costs an average of $10,000, involves a prolonged
recovery period, and exposes the patient to a significant risk of serious side
effects. Consequently, physicians are reluctant to refer otherwise healthy
patients for the surgery. Only 70,000 patients underwent fundoplication surgery
in the United States in 1999.
OUR SOLUTION: THE STRETTA SYSTEM
Our proprietary Stretta System provides physicians with the tools to perform a
minimally invasive, outpatient and cost-effective procedure for the treatment
of GERD. Unlike medication, the Stretta procedure is designed to treat GERD,
rather than simply manage symptoms. Unlike fundoplication surgery, the Stretta
procedure is an outpatient procedure with minimal side effects. The Stretta
procedure, which we believe will cost an average of $2,000, is designed to take
less than an hour utilizing endoscopy techniques commonly used by
gastroenterologists. Most treated patients have been able to return to normal
activities within one day of treatment and reduce or eliminate medication use
shortly thereafter. We believe that the Stretta procedure's effectiveness and
relatively low cost, combined with the absence of significant discomfort and
side effects, makes it a clinically and economically attractive GERD treatment
compared to either medication or fundoplication surgery.
The Stretta System consists of the Stretta Catheter, which is a disposable
flexible catheter with needle electrodes, and the Curon Control Module, which
is a radiofrequency energy generator. Using these devices, the physician
delivers precisely controlled radiofrequency energy to create thermal lesions
in the muscle of the lower esophageal sphincter. These lesions reabsorb over
several weeks and cause tissue contraction, which increases the ability of the
lower esophageal sphincter to act as a barrier to reflux.
THE SECCA SYSTEM: TREATMENT OF FECAL INCONTINENCE
We are applying our experience with the Stretta System to the development of
the Secca System, which is designed to treat fecal incontinence, a condition
that affects up to 16 million U.S. adults. Fecal incontinence is caused by
damage to the anal sphincter from childbirth or surgery, neurologic disease,
injury or age. It is a life-altering condition that, like GERD, lacks minimally
invasive corrective treatment alternatives. The most common treatment options
control, but do not correct, the condition, and include the use of protective
undergarments, diet modification and over-the-counter dietary supplements.
Current corrective treatment options include highly invasive surgery and are
rarely utilized.
The Secca System is designed to provide a minimally invasive, outpatient, and
cost-effective procedure for the treatment of fecal incontinence. The Secca
procedure utilizes the same technology and treatment concepts as the Stretta
System. Using our Curon Control Module and our handheld disposable device
called the Secca Handpiece, physicians deliver radiofrequency energy into the
muscle of the anal sphincter to improve its barrier function. We have received
permission from the FDA to begin a U.S. clinical trial of the Secca System and,
if successful, we intend to submit the results to the FDA in mid-2001.
4
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OUR STRATEGY
Our strategy is to become the leading provider of minimally-invasive and cost-
effective treatments for gastrointestinal disorders. The key elements of our
strategy are to:
.Provide innovative medical devices for the treatment of inadequately-addressed
gastrointestinal disorders;
.Increase awareness and market penetration of our products through education
and an aggressive sales effort;
.Generate a recurring revenue stream through proprietary disposable products;
.Provide reimbursement support to physicians and payors; and
.Acquire and license complementary technologies and products.
We were incorporated in Delaware in May 1997 as Conway-Stuart Medical, Inc. and
changed our name to Curon Medical, Inc. in March 2000. Our principal executive
offices are located at 735 Palomar Avenue, Sunnyvale, California 94086. Our
telephone number is (408) 733-9910. Our web site is
http://www.curonmedical.com. We do not intend information contained on our web
site to be a part of this prospectus.
5
<PAGE>
The offering
The following information assumes that the underwriters do not exercise their
over-allotment option to purchase additional shares in the offering.
<TABLE>
<C> <S>
Common stock we are offering............... shares
Common stock to be outstanding after the
offering................................. shares
Proposed Nasdaq National Market symbol..... CURN
Use of proceeds............................ For continued development,
manufacturing and
commercialization of existing and
future products, research and
development, support of clinical
trials, reimbursement efforts,
and for general corporate
purposes. See "Use of proceeds."
Risk factors............................... Investing in our common stock
involves significant risks. See
"Risk factors."
</TABLE>
Unless we indicate otherwise, when analyzing the information in this
prospectus, you should assume that all outstanding shares of our preferred
stock convert into 16,837,077 shares of our common stock upon the closing of
this offering.
At May 15, 2000, we were obligated to issue shares of common stock upon
exercise of options and warrants as follows:
.2,135,223 shares of common stock issuable upon exercise of options under our
1997 Stock Option Plan outstanding as of May 15, 2000 at a weighted average
exercise price of $0.215 per share; and
.267,000 shares of common stock issuable upon the exercise of warrants at a
weighted average exercise price of $0.63 per share.
On May 19, 2000, we raised $11.0 million through the issuance of notes
convertible, if not earlier repaid, into 3,696,666 shares of our common stock
beginning in May 2001 and warrants immediately exercisable for 998,100 shares
of our common stock at a price of $2.50 per share.
In addition, we have agreed to issue an additional shares if the
underwriters exercise their over-allotment option in full, which we describe in
"Underwriting." If the underwriters exercise this option in full, shares of
common stock will be outstanding after this offering.
We base our calculation of the number of shares of common stock outstanding
after the offering on shares outstanding as of , 2000. See
"Capitalization."
6
<PAGE>
Summary financial and operating data
The following table summarizes the financial data for our business, a company
in the development stage, during the periods indicated. See note 10 of the
notes to financial statements for an explanation of the determination of the
number of shares used in computing per share data. The pro forma net loss per
share and shares used in computing pro forma net loss per share are calculated
as if all of our convertible preferred stock was converted into shares of our
common stock on the date of their issuance. See "Use of proceeds" and
"Capitalization."
<TABLE>
<CAPTION>
Cumulative
Period from
May 1, 1997
(Date of Three Months
Inception) to Ended
Year Ended December 31, December 31, March 31,
1998 1999 1999 1999 2000
(Unaudited)
Statement of operations
data: (In thousands, except per share data)
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<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ -- $ -- $ 44
Cost of goods sold...... -- -- -- -- 21
----------- ------------ -------- ------- -------
Gross profit............ -- -- -- -- 23
Operating expenses:
Research and
development......... 1,581 8,961 10,570 990 1,756
Clinical and
regulatory.......... 335 2,012 2,347 369 410
Sales and marketing.... -- 940 940 105 339
General and
administrative...... 959 2,345 3,317 312 931
----------- ------------ -------- ------- -------
Operating loss.......... (2,875) (14,258) (17,174) (1,776) (3,413)
Interest income......... 8 258 266 38 117
Interest expense........ (86) (89) (175) (17) (13)
----------- ------------ -------- ------- -------
Net loss................ $(2,953) $(14,089) $(17,083) $(1,755) $(3,309)
=========== ============ ======== ======= =======
Net loss per share,
basic and diluted.... $ (1.28) $ (4.35) $(0.57) $(0.92)
=========== ============ ======= =======
Shares used in computing
net loss per share,
basic and diluted.... 2,306 3,237 3,089 3,590
Pro forma net loss per
share, basic and
diluted.............. $ (1.04) $ (0.16)
============ =======
Shares used in computing
pro forma net loss
per share, basic and
diluted.............. 13,519 20,427
</TABLE>
The following table sets forth balance sheet data as of March 31, 2000:
.On a pro forma basis to give effect to the automatic conversion of all
outstanding shares of preferred stock into 16,837,077 shares of common stock
upon closing of this offering and to give effect to $11.0 million of proceeds
related to the convertible note and warrant financing completed in May 2000.
The aggregate value of the warrants and the beneficial conversion feature on
the notes has been reflected as a discount on the notes reducing the book
value of the debt to $0 (See note 13 of the notes to the financial
statements); and
.On a pro forma as adjusted basis to reflect the net proceeds from the sale of
shares of our common stock in this offering at an assumed public offering
price of $ per share, after deducting the underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
As of March 31, 2000
Pro Forma
Actual Pro Forma As Adjusted
Balance sheet data: (In thousands)
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<S> <C> <C> <C>
Cash and cash equivalents...................... $ 6,879 $17,924
Working capital................................ 6,158 17,203
Total assets................................... 9,680 20,725
Long-term obligations.......................... 171 171
Convertible preferred stock and warrants....... 21,808 --
Stockholders' equity (deficit)................. (13,575) 19,278
</TABLE>
7
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Risk factors
If you purchase our common stock, your investment will be subject to risks
inherent in our business. You should carefully consider the risks described
below before participating in this offering. The risks and uncertainties
described below are, in our opinion, the material risks that are specific to
us, our industry and companies going public. If any of the following risks
actually occur, our business could be materially harmed. As a result, the
trading price of our common stock could decline and you could lose all or part
of your investment.
We may never achieve or maintain profitability.
We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. In
particular, we incurred net losses of $3.0 million in 1998 and $14.1 million in
1999. As of March 31, 2000, we had an accumulated deficit of approximately
$20.4 million. We have generated limited revenues from the sale of our
products, and it is possible that we will never generate significant revenues
from product sales in the future. Even if we do achieve significant revenues
from our product sales, we expect to incur significant net losses over the next
several years and these losses may increase. It is possible that we will never
achieve profitable operations.
The Stretta System is our only marketed product. If physicians do not adopt our
Stretta System, we will not achieve future sales growth.
We commercially introduced our Stretta System, which consists of a
radiofrequency generator and a disposable handheld device, in May 2000. We are
highly dependent on Stretta System sales because we anticipate that the Stretta
System will account for substantially all our revenue through at least 2001. To
achieve increasing sales, our product must gain recognition and adoption by
physicians who treat gastrointestinal disorders. The Stretta System represents
a significant departure from conventional GERD treatment methods. We believe
that physicians will not use our Stretta System unless they determine, based on
published peer-reviewed journal articles, long-term clinical data and their
professional experience, that the Stretta System provides an effective and
attractive alternative to conventional means of treatment for GERD. Currently,
there are only limited peer-reviewed clinical reports and short-term clinical
follow-up data on our Stretta System. Physicians are traditionally slow to
adopt new products and treatment practices, partly because of perceived
liability risks and uncertainty of third-party reimbursement. If physicians do
not adopt our Stretta System, we may never achieve significant revenues or
profitability.
If the effectiveness and safety of our products are not supported by long-term
data, our sales could decline and we could be subject to liability.
If we do not produce clinical data supported by the independent efforts of
clinicians, our products may never be accepted. We received clearance from the
FDA for the use of the Stretta System to treat GERD based upon the study of 47
patients. Our safety and efficacy data for the Stretta System is based on six
month follow-up studies on 44 of these patients. We may find that data from
longer-term patient follow-up studies is inconsistent with those indicated by
our relatively short-term data. If longer-term patient studies or clinical
experience indicate that treatment with the Stretta System does not provide
patients with sustained benefits or that treatment with our product is less
effective or less safe than our current data suggests, our sales could decline
and we could be subject to significant liability. Further, we may find that our
data is not substantiated in studies involving more patients.
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Risk factors
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Our clinical studies of the Secca System are in the early stages. The Secca
System has undergone a 10-patient pilot study and the FDA has conditionally
approved our application to conduct a U.S. multi-center clinical study, which
we intend to begin in the third quarter of 2000. You should not draw any
conclusion about the safety or efficacy of the Secca System based upon data
from the pilot study because this study involved only a small patient group. If
patient studies or clinical experience do not meet our expectations regarding
the benefits of the Secca System, we may not obtain regulatory clearance or
approval to sell the product and our expected revenues from this product may
never materialize.
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. Positive results using the Stretta System are highly
dependent upon proper physician technique. 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 a material adverse effect on our business.
If health care providers are not adequately reimbursed for the procedures which
use our products, or for the products themselves, we may never achieve
significant revenues.
Physicians, hospitals and other health care providers are unlikely to purchase
our products if they are not adequately reimbursed for the Stretta procedure or
the products. Until a sufficient amount of positive peer-reviewed clinical data
has been published, insurance companies and other payors may refuse to provide
reimbursement for the cost of the Stretta procedure or may reimburse at levels
that are not acceptable to providers. Some payors may refuse adequate
reimbursement even upon publication of peer-reviewed data. 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. If users of our products cannot obtain sufficient
reimbursement from health care payors for the Stretta procedure or the Stretta
System disposables, then it is unlikely that our product will ever achieve
significant market acceptance. See "Business--Reimbursement."
Reimbursement from third-party health care payors is uncertain due to factors
beyond our control.
Even if third-party payors provide adequate reimbursement for the Stretta
procedure, adverse changes in third-party payors' policies generally toward
reimbursement could harm our business. We are unable to predict what changes
will be made in the reimbursement methods used by third-party health care
payors.
For example, some health care payors are moving toward a managed care system in
which providers contract to provide comprehensive health care for a fixed cost
per person. We cannot assure you that in a prospective payment system, which is
used in many managed care systems, the cost of our products will be
incorporated into the overall payment for the procedure or that there will be
adequate reimbursement for our products separate from reimbursement for the
procedure.
Internationally, market acceptance of our products will be dependent upon the
availability of adequate reimbursement within prevailing health care payment
systems. Reimbursement and health care payment systems in international markets
vary significantly by country and include both government-sponsored health care
and private insurance. Although we intend to seek international reimbursement
approvals, we cannot assure you that any such approvals will be obtained in a
timely manner or at all.
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9
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Risk factors
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We face competition from more established treatments and from competitors with
greater resources, which will make it difficult for us to achieve significant
market penetration.
The market for the treatment of GERD is dominated by companies that have well-
established products, reputations and resources. We primarily compete with
large pharmaceutical companies such as AstraZeneca, Takeda Abbott
Pharmaceuticals and Merck, which collectively generate over $6 billion in
annual U.S. revenues from sales of medication for the treatment of GERD
symptoms. We also compete with large medical device companies such as Johnson &
Johnson/Ethicon, which makes instrumentation for fundoplication surgery, and
C.R. Bard, which has recently received FDA clearance for an endoscopic suturing
device for the treatment of GERD.
These larger companies enjoy several competitive advantages over us, including:
.existing widely-adopted medications and procedures for the treatment of GERD;
.established reputations within the medical community;
.established distribution networks that permit these companies to introduce new
products and have such products accepted by the medical community promptly;
.established relationships with health care providers and payors that can be
used to facilitate reimbursement for new treatments; and
.greater resources for product development and sales and marketing.
At any time, these competitors or other companies may develop new competitive
products that are more effective or less expensive than ours. For example,
AstraZeneca's patent for Prilosec, the leading prescription medication for the
treatment of GERD, expires in 2001, after which time companies may manufacture
less expensive generic versions of the drug. If we cannot compete effectively
in this highly competitive market, we may not be able to achieve our expected
sales and growth. See "Business--Competition."
We have limited sales and marketing experience, and our failure to build and
manage our sales force or to market and distribute our products effectively
will hurt our revenues and profits.
We have limited sales and marketing experience. Currently, we rely on five
direct sales employees to sell our Stretta System in the United States. We must
expand this sales team over the next 24 months to achieve our market share and
revenue growth goals. Since we have only recently launched the Stretta System,
our sales force has little experience marketing the product, and we cannot
predict how successful they will be in selling the product. There are
significant risks involved in building and managing our sales force and
marketing our products, including our:
.Inability to hire a sufficient number of qualified sales people with the
skills and understanding to sell the Stretta System effectively;
.Failure to adequately train our sales force in the use and benefits of our
products, making them less effective promoters; and
.Failure to accurately price our products as attractive alternatives to
conventional treatments.
- --------------------------------------------------------------------------------
10
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
Internationally, we intend to use third-party distributors to sell our
products, and we cannot assure you that these distributors will commit the
necessary resources to effectively market and sell our products or that they
will be successful in selling our products.
We have no experience manufacturing our products in commercial quantities,
which could adversely impact the rate at which we grow.
We may encounter difficulties manufacturing our products for the following
reasons:
.We do not have experience manufacturing our products in commercial quantities;
.We do not have extensive experience manufacturing our products in compliance
with the FDA's Quality System Regulation;
.To increase our manufacturing output significantly, we will have to attract
and retain qualified employees, who are in short supply, for the assembly and
testing operations; and
.Some of the components and materials necessary for manufacturing our products
are currently provided by a single supplier.
In addition, although we believe that our current manufacturing facility will
be adequate to support our commercial manufacturing activities for the
foreseeable future, we may be required to expand our manufacturing facilities
to begin large-scale manufacturing. If we are unable to provide customers with
high-quality products in a timely manner, we may not be able to gain acceptance
of our Stretta System. Our inability to successfully manufacture or
commercialize our devices could have a material adverse effect on our product
sales.
If we lose our relationship with any individual suppliers of key product
components, our manufacturing could be delayed and our business could suffer.
Third-party suppliers provide materials and components used in our products.
Some of our suppliers are not contractually obligated to continue to supply us.
For certain of these materials and components, relatively few alternative
sources of supply exist. If these suppliers become unwilling or unable to
supply us with our requirements, we would face supply disruptions. Moreover, it
might be difficult to establish additional or replacement suppliers in a timely
manner or at all. In either event, our product sales would be disrupted and our
revenues and profitability would suffer.
Replacement or alternative sources might not be readily obtainable due to
regulatory requirements and other factors applicable to our manufacturing
operations. Obtaining components from a new supplier may require a new or
supplemental filing with applicable regulatory authorities and clearance or
approval of the filing before we could resume product sales. This process may
take a substantial period of time, and we cannot assure you that we would be
able to obtain the necessary regulatory clearance or approval. This could
create supply disruptions that would materially adversely affect our product
sales and profitability. See "Business--Government Regulation."
- --------------------------------------------------------------------------------
11
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
If we or our suppliers fail to comply with applicable regulations,
manufacturing operations could be delayed and our business could be harmed.
We are required to demonstrate and maintain compliance with the FDA's Quality
System Regulation. The QSR relates to product design, testing and manufacturing
quality assurance, as well as the maintenance of accurate records and
documentation. The FDA enforces the QSR through periodic unannounced
inspections. We have never been through a QSR inspection, and we cannot assure
you that we would pass such an inspection. If we failed a QSR inspection, our
operations could be disrupted and our manufacturing delayed. Failure to take
corrective action in response to a QSR inspection could force a shut-down of
our manufacturing operations and a recall of our products, which would have a
material adverse effect on our business. Furthermore, we cannot assure you that
our key component suppliers are or will continue to be in compliance with
applicable regulatory requirements, will not encounter any manufacturing
difficulties, or will be able to maintain compliance with regulatory
requirements. The occurrence of any such events could have a material adverse
effect on our business.
Our failure to obtain or maintain necessary FDA clearances or approvals could
hurt our ability to commercially distribute and market our products in the
United States.
Unless an exemption applies, each medical device that we wish to market in the
United States must first receive either 510(k) clearance or premarket approval
from the FDA. This process can be lengthy and expensive. The FDA's 510(k)
clearance process usually takes from four to twelve months, but may take
longer. The premarket application, or PMA, approval process is much more
costly, lengthy and uncertain. It generally takes from one to three years or
even longer. Delays in obtaining regulatory clearance or approval will
adversely affect our revenues and profitability.
Although we have obtained 510(k) clearance for the Stretta System for use in
treating GERD, our clearance can be revoked if post-marketing data demonstrates
safety issues or lack of effectiveness. Moreover, we will need to obtain 510(k)
clearance or premarket approval to market the Secca System for fecal
incontinence and for any other new products we wish to market. If the FDA
concludes that the Secca System or other future products using our technology
do not meet the requirements to obtain 510(k) clearance, then we would have to
file a PMA. We cannot assure you that the FDA will not impose the more
burdensome PMA approval process upon this technology in the future. More
generally, we cannot assure you that the FDA will ever grant 510(k) clearance
or premarket approval for any product we propose to market.
If we market our products for uses that the FDA has not approved, we could be
subject to FDA enforcement action.
Our Stretta System is cleared by the FDA for the treatment of GERD. FDA
regulations prohibit us from promoting or advertising the Stretta System, or
any future cleared or approved devices, for uses not within the scope of our
clearances or approvals or making unsupported safety and effectiveness claims.
These determinations can be subjective, and the FDA may disagree with our
promotional claims. If the FDA requires us to revise our promotional claims or
takes enforcement action against us based upon our labeling and promotional
materials, our sales could be delayed and our business harmed.
- --------------------------------------------------------------------------------
12
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
Modifications to our marketed devices may require new 510(k) clearances or PMA
approvals or require us to cease marketing or recall the modified devices until
such clearances are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its
safety or effectiveness, or that would constitute a major change in its
intended use, requires a new 510(k) clearance or, possibly, PMA approval. The
FDA requires every manufacturer to make this determination in the first
instance, but the FDA can review any such decision. We have modified aspects of
our Stretta System, but we believe that new 510(k) clearances are not required.
We may modify future products after they have received clearance or approval,
and, in appropriate circumstances, we may determine that new clearance or
approval is unnecessary. We cannot assure you that the FDA would agree with any
of our decisions not to seek new clearance or approval. If the FDA requires us
to seek 510(k) clearance or PMA approval for any modification to a previously
cleared product, we also may be required to cease marketing or recall the
modified device until we obtain such clearance or approval.
Complying with FDA and other regulations is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.
Our products are medical devices that are subject to extensive regulation. FDA
regulations are wide-ranging and govern, among other things:
.product design, development, manufacture and testing;
.product labeling;
.product storage;
.premarket clearance or approval;
.advertising and promotion; and
.product sales and distribution.
Noncompliance with applicable regulatory requirements can result in enforcement
action. See "Business--Government Regulation."
We face risks related to our international operations, including the need to
obtain necessary foreign regulatory approvals.
To successfully market our products internationally, we must address many
issues with which we have little or no experience. We have obtained regulatory
clearance to market the Stretta System in the European Union and Australia, but
we have not obtained any other international regulatory approvals for other
markets or products. We cannot assure you that we will be able to obtain or
maintain such approvals. We will also need to address potential pricing
constraints, and we cannot assure you that we will be able to do so.
Furthermore, international sales may be made in currencies other than the U.S.
dollar. As a result, currency fluctuations may impact the demand for our
products in foreign countries where the U.S. dollar has increased compared to
the local currency. Engaging in international business involves the following
additional risks:
.export restrictions, tariff and trade regulations, and foreign tax laws;
- --------------------------------------------------------------------------------
13
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
.customs duties, export quotas or other trade restrictions;
.economic or political instability;
.shipping delays; and
.longer payment cycles.
In addition, contracts may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system, and the protection of
intellectual property in foreign countries may be more difficult to enforce.
Any of these factors could materially and adversely affect our international
sales.
Product liability suits against us could result in expensive and time-consuming
litigation, payment of substantial damages and an increase in our insurance
rates.
The development, manufacture and sale of medical products involve a significant
risk of product liability claims. The use of any of our products may expose us
to liability claims, which could divert management's attention from our core
business, be expensive to defend, and result in sizable damage awards against
us. We cannot assure you that our product liability insurance would protect us
from product liability claims. Any product liability claims brought against us,
with or without merit, could increase our product liability insurance rates or
prevent us from securing any coverage in the future. Even in the absence of a
claim, our insurance rates may rise in the future to a point where we decide
not to carry any insurance.
If our intellectual property rights do not provide meaningful commercial
protection for our products, third parties will be able to compete against us
more effectively.
We rely on patent, copyright, trade secret and trademark laws to protect our
products from being duplicated by competitors. However, these laws afford only
limited protection. Our patent applications and the notices of allowance we
have received may not issue as patents or, if issued, may not issue in a form
that will be advantageous to us. Patents we obtain may be challenged,
invalidated or legally circumvented by third parties. We may not be able to
prevent the unauthorized disclosure or use of our technical knowledge or other
trade secrets by consultants, vendors, former employees or current employees,
despite the existence of nondisclosure and confidentiality agreements and other
contractual restrictions. Furthermore, the laws of foreign countries may not
protect our intellectual property rights to the same extent as the laws of the
United States. If our intellectual property rights do not adequately protect
our commercial products, our competitors could develop new products or enhance
existing products to compete more directly and effectively with us and harm our
business.
We depend on our ability to operate without infringing or misappropriating the
proprietary rights of others.
There is a substantial amount of litigation over patent and other intellectual
property rights in the medical device industry generally. 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 patents held by them or invented by them before they
were invented by us. Although we may seek to obtain a license or other
agreement under a third party's intellectual property rights to bring an end to
certain claims or actions asserted against us, we may not be able to obtain
such an agreement on reasonable terms or at all. If we were not successful in
obtaining a license or redesigning our products, our business could suffer.
- --------------------------------------------------------------------------------
14
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
Also, one or more of our products may now be infringing inadvertently on
existing patents. As the number of competitors in our markets grows, the
possibility of a patent infringement claim against us increases. Whether a
product infringes a patent involves complex legal and factual issues, the
determination of which is often uncertain. 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 we lose
in this kind of litigation, a court could require us to pay substantial damages
or grant royalties, and prohibit us from using technologies essential to our
products. This kind of litigation is expensive to all parties and consumes
large amounts of management's time and attention. In addition, because patent
applications can take many years to issue, there may be applications now
pending of which we are unaware and which may later result in issued patents
that our products may infringe. See "Business--Patents and Proprietary
Technology."
If we are unable to attract and retain qualified personnel, we will be unable
to expand our business.
We believe our future success will depend upon our ability to successfully
manage our growth, including attracting and retaining engineers and other
highly skilled personnel. Our employees are at-will and, with the exception of
certain executive officers, are not subject to employment contracts. The loss
of services of one or more key employees could materially adversely affect our
growth. In addition, hiring qualified management and technical personnel will
be difficult due to the intense competition for qualified professionals within
the medical device industry. In the past, we have experienced difficulty in
recruiting qualified personnel. Failure to attract and retain personnel,
particularly management and technical personnel, would materially harm our
business.
Our directors, executive officers and principal stockholders have significant
voting power and may take actions that may not be in the best interests of our
other stockholders.
After this offering, our officers, directors and principal stockholders holding
more than 5% of our common stock together will control approximately % of our
outstanding common stock. As a result, these stockholders, if they act
together, will be able to control the management and affairs of our company and
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control and
might adversely affect the market price of our common stock. This concentration
of ownership may not be in the best interest of our other stockholders.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could discourage a takeover.
Our basic corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These provisions might discourage,
delay or prevent a change in the control of our company or a change in our
management. The existence of these provisions could adversely affect the voting
power of holders of common stock and limit the price that investors might be
willing to pay in the future for shares of our common stock. See "Description
of capital stock."
Our common stock has not been publicly traded, and we expect that the price of
our common stock will fluctuate substantially.
Before this offering, there has been no public market for shares of our common
stock. An active public trading market may not develop after completion of this
offering or, if developed, may not be
- --------------------------------------------------------------------------------
15
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
sustained. The price of the shares of common stock sold in this offering will
not necessarily reflect the market price of the common stock after this
offering. The market price for the common stock after this offering will be
affected by a number of factors, including:
.the announcement of new products or product enhancements by us or our
competitors;
.quarterly variations in our or our competitors' results of operations;
.changes in earnings estimates or recommendations by securities analysts, or
our failure to achieve analyst earnings estimates;
.developments in our industry; and
.general market conditions and other factors, including factors unrelated to
our operating performance or the operating performance of our competitors.
In addition, the stock prices of many companies in the medical device industry
have experienced wide fluctuations that have often been unrelated to the
operating performance of such companies. Such factors and fluctuations may
materially and adversely affect the market price of our common stock.
A sale of a substantial number of shares of our common stock may cause the
price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public
market after this offering, including shares issued upon the exercise of
outstanding options, the market price of our common stock could fall. Such
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem reasonable or
appropriate. See "Shares eligible for future sale."
New investors in our common stock will experience immediate and substantial
dilution after this offering.
If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution in pro forma net tangible book value. If the
holders of outstanding options exercise those options, you will incur further
dilution. See "Dilution."
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Forward-looking information
Some of the statements under "Prospectus summary," "Risk factors,"
"Management's discussion and analysis of financial condition and results of
operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. 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 such forward-looking statements. Such factors include, among other
things, those listed under "Risk factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms and other comparable terminology. 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. These statements are only predictions.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
Use of proceeds
We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $ million. If the underwriters fully
exercise the over-allotment option, the net proceeds will be approximately $
million. "Net proceeds" are what we expect to receive after we pay the
underwriting discount and other estimated expenses for this offering. For the
purpose of estimating net proceeds, we are assuming that the public offering
price will be $ per share.
We expect to use the net proceeds that we will receive from the offering for
continued development, manufacturing and commercialization of existing and
future products, research and development, support of clinical trials,
reimbursement efforts, and for general corporate purposes, which may include
the purchase of equipment, the expansion of facilities and the further
expansion of our sales and marketing efforts in support of our initial
commercial product launch. We also may use a portion of the net proceeds to
acquire or invest in businesses, technologies, products or services that are
complementary to our business. We also may use a portion of the net proceeds to
repay all or a portion of our debt, including the May 2000 borrowing of $11.1
million (see note 13 of the notes to the financial statements). From time to
time, we have discussed potential strategic acquisitions and investments with
third parties. Currently, we have no agreements or commitments to complete any
such transactions. Pending our uses of the proceeds, we intend to invest the
net proceeds of this offering primarily in short-term, interest-bearing
instruments.
The timing and amount of our actual expenditures will be based on many factors,
including cash flows from operations and the growth of our business.
Dividend policy
We have never declared or paid any dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to
finance the growth and development of our business. Therefore, we do not expect
to pay cash dividends in the foreseeable future. Any future determination
relating to our dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including future earnings,
capital requirements, financial conditions, future prospects and other factors
that the board of directors may deem relevant.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Capitalization
The following table sets forth our actual capitalization as of March 31, 2000.
It also sets forth our capitalization on a pro forma basis giving effect to:
.the automatic conversion upon completion of this offering of all outstanding
shares of our preferred stock into 16,837,077 shares of common stock;
.the $11.0 million of proceeds related to the convertible note and warrant
financing completed in May 2000, which included the issuance of warrants to
purchase 998,100 shares of preferred stock at a price of $2.50 per share. The
aggregate value of the warrants and the beneficial conversion feature on the
notes has been reflected as a discount on the notes reducing the book value of
the debt to $0 (See note 13 of the notes to the financial statements);
and our capitalization on a pro forma as adjusted basis giving effect to:
.the sale of shares of common stock at an assumed public offering price of
$ per share, less underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
March 31, 2000
Pro Forma
Actual Pro Forma as adjusted
(in thousands, except per
share amounts)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term obligations......................... $ 171 $ 171
-------- -------- ----
Convertible preferred stock, $.001 par value;
17,800 shares authorized; 16,837 shares
issued and outstanding, actual; no shares
issued and outstanding, as adjusted and pro
forma as adjusted.......................... 21,688 -- --
-------- -------- ----
Preferred stock warrants...................... 120 -- --
-------- -------- ----
Stockholders' equity (deficit):
Common stock, $.001 par value; 30,000 shares
authorized; 6,653 shares issued and
outstanding, actual; 23,371 and issued
and outstanding, as adjusted, and pro
forma as adjusted, respectively.......... 7 23
Additional paid-in capital.................. 11,018 43,810
Deferred compensation....................... (4,208) (4,208)
Deficit accumulated during the development
stage.................................... (20,392) (20,392)
-------- -------- ----
Total stockholders' equity (deficit)....... (13,575) 19,233
-------- -------- ----
Total capitalization.................... $ 8,404 $ 19,404
======== ======== ====
</TABLE>
The table above does not include:
.2,135,223 shares of common stock issuable upon exercise of options under our
1997 Stock Option Plan outstanding as of May 15, 2000 at a weighted average
exercise price of $0.215 per share;
.267,000 shares of common stock issuable upon the exercise of warrants
outstanding as of May 15, 2000 at a weighted average exercise price of $0.63
per share;
. shares of common stock reserved for issuance under our 2000 Stock Plan; and
. shares available for issuance under our 2000 Employee Stock Purchase Plan.
See "Use of proceeds," "Capitalization," "Management--Employee Benefit Plans"
and "Description of capital stock."
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19
<PAGE>
- --------------------------------------------------------------------------------
Dilution
If you invest in our common stock, your interest will be diluted immediately to
the extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. Net tangible book value dilution per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after completion of this offering.
The pro forma net tangible book value of our common stock as of March 31, 2000,
was $7,765,000, or $0.33 per share. Net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities and divided by the total number of shares of common stock
outstanding after giving effect to the conversion of all outstanding shares of
preferred stock into 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 afterwards. After giving effect to
our sale of shares of common stock offered by this prospectus and after
deducting the underwriting discount, estimated offering expenses payable by us
and payment of an outstanding settlement obligation, our net tangible book
value will be $ , or approximately $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution in net tangible book value of $ per share to new
investors.
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................. $
Net tangible book value per share as of March 31, 2000............. $0.33
Increase per share attributable to new investors...................
-----
As adjusted pro forma net tangible book value per share after the
offering.........................................................
----
Dilution per share to new investors................................. $
====
</TABLE>
The table above assumes no exercise of options after March 31, 2000. The number
of shares outstanding as of March 31, 2000 excludes 2,181,013 shares of common
stock issuable upon exercise of options outstanding as of March 31, 2000,
having a weighted average exercise price of $0.21 per share and 267,000 shares
of stock issuable upon exercise of warrants outstanding at March 31, 2000,
having a weighted average exercise price of $0.63 per share. The exercise of
outstanding options and warrants having an exercise price less than the
offering price would increase the dilutive effect to new investors.
The following table sets forth, as of March 31, 2000, the differences between
the number of shares of common stock purchased from us, the total consideration
paid and average price per share paid by existing stockholders and by the new
investors, before deducting expenses payable by us, using an assumed public
offering price of $ per share.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...............
New investors.......................
---- --- ---- ---
Total...............................
==== === ==== ===
</TABLE>
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20
<PAGE>
Dilution
- --------------------------------------------------------------------------------
If the underwriters' over-allotment option is exercised in full, the following
will occur:
.the number of shares of common stock held by existing stockholders will
decrease to or approximately % of the total number of shares of common
stock outstanding; and
.the number of shares held by new public investors will be increased to or
approximately % of the total number of shares of our common stock
outstanding after this offering.
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
Selected financial data
The selected financial data set forth below should be read in conjunction with
our financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included in this
prospectus. The statement of operations data for the period from May 1, 1997
(date of inception) to December 31, 1997, for the years ended December 31, 1998
and 1999, and the balance sheet data as of December 31, 1998 and 1999, are
derived from our audited financial statements included elsewhere in this
prospectus. The balance sheet data as of December 31, 1997 is derived from our
audited financial statements that are not included in this prospectus. The
statement of operations data for the three months ended March 31, 1999 and 2000
and the balance sheet data as of March 31, 2000 are derived from our unaudited
financial statements included elsewhere in this prospectus. In the opinion of
management, the unaudited financial statements include all adjustments,
consisting principally of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for the
period. The historical results are not necessarily indicative of the operating
results to be expected in the future and the results of interim periods are not
necessarily indicative of the results for a full year.
See the notes to the consolidated financial statements for an explanation of
the method used to determine the numbers of shares used in computing basic and
diluted and pro forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
Period from
May 1, 1997
(Inception)
to Year Ended Three Months
December 31, December 31, Ended March 31,
1997 1998 1999 1999 2000
(unaudited)
Statement of operations
data: (In thousands, except per share data)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues.................... $ -- $ -- $ -- $ -- $ 44
Cost of goods sold.......... -- -- -- -- 21
---- ------- -------- ------- -------
Gross profit................ -- -- -- -- 23
Operating expenses:
Research and development... 28 1,581 8,961 990 1,756
Clinical and regulatory.... -- 335 2,012 369 410
Sales and marketing........ -- -- 940 105 339
General and
administrative............ 13 959 2,345 312 931
---- ------- -------- ------- -------
Operating loss.............. (41) (2,875) (14,258) (1,776) (3,413)
Interest income............. -- 8 258 38 117
Interest expense............ -- (86) (89) (17) (13)
---- ------- -------- ------- -------
Net loss.................... $(41) $(2,953) $(14,089) $(1,755) $(3,309)
==== ======= ======== ======= =======
Net loss per share, basic
and diluted................ $ -- $ (1.28) $ (4.35) $ (0.57) $ (0.92)
==== ======= ======== ======= =======
Shares used in computing net
loss per share, basic and
diluted.................... N/A 2,306 3,237 3,089 3,590
Pro forma net loss per
share, basic and diluted... $ (1.04) $ (0.16)
======== =======
Shares used in computing pro
forma net loss per share,
basic and diluted.......... 13,519 20,427
</TABLE>
<TABLE>
<CAPTION>
As of December 31, March 31,
1997 1998 1999 2000
Balance sheet data: (In thousands)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash, cash equivalents and marketable
securities................................ $ 1 $ 4,502 $ 9,498 $ 6,879
Working capital............................ (96) 4,223 8,176 6,158
Total assets............................... 56 5,842 11,686 9,680
Long-term obligations...................... -- 459 227 171
Convertible preferred stock and warrants... -- 7,713 21,808 21,808
Total stockholders' deficit................ (41) (2,877) (12,099) (13,575)
</TABLE>
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22
<PAGE>
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Management's discussion and analysis of financial condition and results of
operations
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements included elsewhere in this prospectus. This discussion may
contain forward-looking statements that involve risks and uncertainties. As a
result of the factors set forth under "Risk factors," our actual results may
differ materially from those anticipated in these forward-looking statements.
OVERVIEW
We were incorporated in May 1997. Business activities before January 1998 were
negligible. In 1998, our primary activity was developing the Curon Control
Module and Stretta Catheter for the treatment of GERD. We are still in the
development stage and since our inception, have devoted substantially all of
our efforts to developing our products, raising capital and have recently
commenced marketing efforts.
In early 1999, we began a multi-center clinical trial of the Stretta System in
the United States. We also developed our manufacturing capability to support
the production of Stretta Catheters and Curon Control Modules for the clinical
trial. Based on the data acquired in the trial, we submitted a 510(k)
notification to the FDA in January 2000 for clearance to market the Stretta
System for treatment of GERD. We received 510(k) clearance in April 2000. In
May 2000, we launched the Stretta System commercially at Digestive Disease
Week, a large gastroenterology professional conference. Also, in May 2000, we
initiated a randomized controlled trial of the Stretta System, which we
anticipate will be completed in the second half of 2001.
In April 1999, we began developing the Secca System for the treatment of fecal
incontinence. In November 1999, we conducted a 10-patient human clinical pilot
study outside the United States and, in May 2000, we received FDA conditional
approval to begin a U.S. multi-center clinical trial of the Secca System under
an Investigational Device Exemption. We intend to begin the clinical trial in
the third quarter of 2000 and, assuming successful results, we intend to submit
a 510(k) supported by these results to the FDA in mid-2001 or, if required by
the FDA, a PMA supported by these results.
We recognize revenue upon shipment of products to customers. To date, we have
generated limited revenues. Our revenues will be derived from the sale of
radiofrequency generators and our disposable devices, such as the Stretta
Catheter. We intend that disposables will form the basis of a recurring revenue
stream and intend to price catheters, at high volumes, to generate greater
margins than generators. We expect the percentage of revenue from disposables
to increase over time as our installed base of generators grows.
Initially, we will focus our sales efforts in the United States through a
direct sales force. We do not expect to generate international sales in the
near future. In international markets, we expect to rely primarily on third-
party distributors. Our gross margins on sales through international third-
party distributors will be lower than our gross margins on U.S. sales as a
result of distributor discounts.
Our costs of revenues represent the cost of producing generators and disposable
devices. Research and development expenses consist primarily of amortization of
stock-based compensation, personnel costs, professional services, patent
application costs, materials, supplies and equipment. Clinical and regulatory
expenses consist primarily of expenses associated with the costs of clinical
trials, clinical support personnel, the collection and analysis of the results
of these trials, and the costs of submission of the results to the FDA. Sales
and marketing expenses consist of personnel costs, advertising, public
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operations
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relations and attendance at selected medical conferences. General and
administrative expenses consist primarily of amortization of stock-based
compensation, the cost of corporate operations and personnel, legal, accounting
and other general operating expenses of our company.
Through March 31, 2000, we recorded limited product sales while incurring
cumulative net losses of $20.4 million. We intend to use the net proceeds of
the offering to increase spending on sales and marketing initiatives to support
commercial sales and market penetration of the Stretta System, which was
launched in May 2000. We will also increase spending on administrative
infrastructure as sales increase. In addition to increasing expenditures
related to market launch of the Stretta System, we anticipate that our expenses
will increase as we continue to develop new products, conduct clinical trials,
commercialize our products and acquire additional technologies as the
opportunities arise. As a result, we expect our operating expenses and net
losses to increase.
We grant stock options to hire, motivate and retain employees and non-employee
consultants. With respect to these stock options, we may record deferred stock
compensation. For stock options granted to employees the difference between the
exercise price of the stock options and the fair value of our stock at the date
of grant is recorded as deferred compensation on the date of grant. For stock
options granted to non-employees, the fair value of the options, estimated
using the Black-Scholes valuation model is initially recorded on the date of
grant. As the non-employee options become exercisable, we revalue the remaining
unvested options, with the change in fair value from period to period
represented as change in the deferred compensation charge.
We are amortizing these amounts in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" (FIN 28).
As a result of stock options granted through March 31, 2000, we recorded $10.3
million in deferred stock compensation, including $3.1 million related to the
release of certain stock repurchase rights, of which $4.2 million remained
unamortized as of March 31, 2000. As a result of stock options granted after
March 31, 2000 we anticipate recording an additional $774,000 in deferred stock
compensation. The remaining deferred stock compensation as of March 31, 2000,
and the additional deferred stock compensation recorded in 2000 will be
amortized over the respective vesting terms of the underlying options resulting
in anticipated amortization of approximately $3.4 million in 2000 (of which
$1.1 million was recorded in the three months ended March 31, 2000), $1.7
million in 2001, $778,000 in 2002 and $273,000 in 2003.
RESULTS OF OPERATIONS
Three months ended March 31, 1999 and 2000
Revenue
In the quarter ended March 31, 2000, we generated $44,000 in revenues from the
sale of generators to another medical device company for use in its clinical
research in an unrelated field.
Cost of goods sold
In the quarter ended March 31, 2000, the cost of goods sold was $21,000.
Research and development expenses
Research and development expenses were $990,000 in the quarter ended March 31,
1999 and $1.8 million in the quarter ended March 31, 2000. Amortization of
stock-based compensation accounted for $82,000 in the quarter ended March 31,
1999 and $585,000 in the quarter ended
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operations
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March 31, 2000. The remaining increase in spending over the first quarter of
1999 was primarily due to preparing the Stretta Catheter for commercial
manufacturing and increased development activity for the Secca Handpiece.
Clinical and regulatory expenses
Clinical and regulatory expenses were $369,000 in the quarter ended March 31,
1999 and $410,000 in the quarter ended March 31, 2000. Amortization of stock-
based compensation accounted for $4,000 in the quarter ended March 31, 1999 and
$62,000 in the quarter ended March 31, 2000. The remaining increase in spending
in 2000 over 1999 was primarily due to hiring clinical and regulatory personnel
and the costs involved in filing the Stretta System 510(k) submission with the
FDA.
Sales and marketing expenses
Sales and marketing expenses were $105,000 in the quarter ended March 31, 1999
and $339,000 in the quarter ended March 31, 2000. Amortization of stock-based
compensation accounted for $9,000 in the quarter ended March 31, 1999 and
$46,000 in the quarter ended March 31, 2000. The remaining increase in spending
in 2000 over 1999 was primarily due to an increase in expenditures for
personnel, public relations designed to heighten awareness for our product
within the physician community, and activities to promote reimbursement for our
products.
General and administrative expenses
General and administrative expenses were $312,000 in the quarter ended March
31, 1999 and $931,000 in the quarter ended March 31, 2000. Amortization of
stock-based compensation accounted for $40,000 in the quarter ended March 31,
1999 and $416,000 in the quarter ended March 31, 2000. The remaining increase
in spending in 2000 over 1999 was primarily due to increased personnel costs as
our company expanded.
Income taxes
As a result of our net losses, we did not incur any income tax obligations in
either the quarter ended March 31, 1999 or the quarter ended March 31, 2000.
Years ended December 31, 1998 and 1999
Although we were incorporated in May 1997, there was little activity in 1997.
Financial statements for 1997 included only $41,000 in total expenses.
Revenues; cost of revenues
We generated no revenues and incurred no cost of revenues in either 1998 or
1999.
Research and development expenses
Research and development expenses were $1.6 million in 1998 and $9.0 million in
1999. Amortization of stock-based compensation accounted for $71,000 in 1998
and $4.1 million in 1999. The remaining year-to-year increases resulted
primarily from costs associated with the development and refinement of
engineering prototypes for commercialization of the Stretta System. We also
started developing our Secca System in May 1999.
Clinical and regulatory expenses
Clinical and regulatory expenses were $335,000 in 1998 and $2.0 million in
1999. Amortization of stock-based compensation accounted for $7,000 in 1998 and
$96,000 in 1999. The remaining increase in 1999 resulted primarily from costs
associated with the open-label Stretta System clinical trial, which started in
February 1999, and the Secca System pilot clinical trial, which started in
November 1999.
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Sales and marketing expenses
Sales and marketing expenses were $0 in 1998 and $940,000 in 1999. Amortization
of stock-based compensation accounted for $0 in 1998 and $85,000 in 1999. The
remaining spending in 1999 resulted primarily from personnel, public relations,
market research, reimbursement related activities and attendance at medical
conferences.
General and administrative expenses
General and administrative expenses were $959,000 in 1998 and $2.3 million in
1999. Amortization of stock-based compensation accounted for $19,000 in 1998
and $554,000 in 1999. The remaining year-to-year increases resulted primarily
from increased personnel costs as we expanded our general and administrative
organization.
Income taxes
As a result of our net losses, we have not incurred any income tax obligations.
At December 31, 1999, we had estimated net operating loss carryforwards of $7.4
million which will expire at various dates through 2019. The principal
differences between losses for financial and tax reporting purposes are the
result of the capitalization of research and development and start-up expenses
for tax purposes and the amounts recorded as stock-based compensation expense.
Federal and state tax laws contain provisions that may limit the net operating
loss carryforwards that can be used in any given year, should certain changes
in the beneficial ownership of our shares occur. Such events could limit the
future utilization of our net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and capital investments from the
private sale of equity securities totaling $21.5 million and from bank
equipment line financing totaling $781,000. At March 31, 2000, we had $6.2
million in working capital and our primary source of liquidity was $6.9 million
in cash and cash equivalents. In May 2000, we issued $11.1 million in
convertible notes and warrants exercisable at $2.50 per share into 998,100
shares of common stock in conjunction therewith to current investors. The notes
may be converted, if not earlier prepaid, into 3,696,666 shares of common stock
beginning in May 2001 and mature in May 2005.
Three months ended March 31, 1999 and 2000
Cash used in operating activities was $1.3 million in the quarter ended March
31, 1999 and $2.7 million in the quarter ended March 31, 2000. The increase in
cash used reflects the increased net loss incurred primarily as a result of
higher development and clinical expenses, offset by non-cash amortization and
depreciation charges.
Cash used in investing activities amounted to $253,000 in the quarter ended
March 31, 1999 related to the purchase of property and equipment and cash
provided by investing activities was $1.4 million in the quarter ended March
31, 2000. During the quarter ended March 31, 2000, $1.5 million of marketable
securities matured. As of March 31, 2000, we had no material commitments for
capital expenditures.
Cash used in financing activities was $39,000 in the quarter ended March 31,
1999 and cash provided by financing activities in the quarter ended March 31,
2000 was $141,000. During the quarter ended March 31, 2000, $231,000 was
realized from the exercise of incentive stock options.
Years ended December 31, 1998 and 1999
Cash used in operating activities was $2.2 million in 1998 and $8.1 million in
1999. The increase in cash used reflects the increased net loss incurred
primarily as a result of higher development and clinical expenses, partially
offset by non-cash amortization and depreciation charges and increases in
liability accounts.
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Cash used in investing activities amounted to $867,000 in 1998 and $2.5 million
in 1999, primarily for the purchase of equipment to support our clinical and
development programs and the purchase of marketable securities.
Cash provided by financing activities was $7.6 million in 1998 and $14.1
million in 1999, primarily as a result of the sale of preferred equity
securities.
We will expend substantial funds in the future for research and development,
pre-clinical and clinical testing, capital expenditures, and the manufacturing,
marketing, and sale of our products. We cannot accurately predict the timing
and amount of spending of such capital resources, which will depend on several
factors, including:
.the results of the Stretta System market launch;
.the progress of our research and development efforts;
.the timing of our clinical trials for the Secca System and any other clinical
activities;
.competing technological and market developments;
.the time and costs of obtaining regulatory approvals;
.the time and costs involved in filing, prosecuting and enforcing patent
claims;
.the progress and cost of commercialization of products currently under
development; and
.market acceptance and demand for our products if approved for marketing.
While we believe that the net proceeds of this offering together with our
existing capital resources and projected interest income will be sufficient to
fund our operations and capital investments for at least the next 12 months, we
cannot assure you that we will not require additional financing before that
time. We cannot assure you that such additional financing will be available on
a timely basis on terms acceptable to us or at all, or that such financing will
not be dilutive to our stockholders. If adequate funds are not available to us,
we could be required to delay development or commercialization of our products,
to license to third parties the rights to commercialize products or
technologies that we would otherwise seek to commercialize ourselves or to
reduce the marketing, customer support or other resources devoted to our
products, any of which could have a material adverse effect our business,
financial condition and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK
We invest our excess cash primarily in U.S. government securities and
marketable debt securities of financial institutions and corporations with
strong credit ratings. These instruments have maturities of three months or
less when acquired. We do not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, we believe that
while the instruments we hold are subject to changes in the financial standing
of the issuer of such securities, we are not subject to any material risks
arising
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from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 as
amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133, is effective for fiscal years beginning
after June 15, 2000. We are evaluating the impact, if any, that SFAS No. 133
may have on our financial statements. To date, we have not engaged in
derivative and hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition, which provides guidance on the
recognition, presentation and disclosure on revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. We believe that our current revenue recognition policy is
in compliance with SAB 101.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation an
Interpretation of APB 25, which clarifies (a) the definition of an employee for
purposes of applying opinion 25 (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, with certain
provisions effective earlier. We do not expect FIN 44 to have a significant
impact on our financial statements.
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Business
OVERVIEW
We develop, manufacture and market innovative proprietary products for the
treatment of gastrointestinal disorders. Our products consist of radiofrequency
generators and single-use disposable devices. Our first product, the Stretta
System, received FDA clearance in April 2000 for the treatment of GERD, which
affects approximately 14 million U.S. adults on a daily basis. GERD is the
backward flow, or reflux, of stomach contents into the esophagus, which leads
to heartburn, chest pain and other symptoms. The Stretta System applies
radiofrequency energy to treat GERD. The system is used in an outpatient
procedure and is designed to eliminate or reduce the need to manage GERD
symptoms over an extended period of time with medication. In a multi-center
clinical trial used to support FDA clearance, 47 patients who required daily
GERD medications were treated with the Stretta System. Three weeks after the
procedure, these patients were taken off all GERD medication. After six months,
the need for all anti-acid medication was eliminated in 70% of the 44 patients
available for follow-up, and the need for the most potent prescription GERD
medication was eliminated in 87% of those patients that required such
medication before treatment.
We believe that the Stretta System represents a fundamental advance in the
treatment of GERD, most commonly recognized as a condition that causes chronic,
severe heartburn. In the United States, approximately $8 billion is spent
annually on anti-acid medications, including Prilosec, Prevacid, Tagamet,
Pepcid and Zantac. These medications temporarily reduce the acidity of the
stomach, which eases heartburn symptoms, but may have unwelcome side effects
and do not treat the causes of GERD. Currently, fundoplication surgery is the
most common procedure to treat the actual causes of GERD. In 1999, only 70,000
U.S. GERD patients opted for this surgical treatment, which involves an
inpatient hospital stay, significant potential for side effects, a long
recovery period, and an average cost of $10,000 per procedure. We believe that
the Stretta System is an attractive alternative for patients seeking to
discontinue lifetime medication treatment and to avoid surgery. The Stretta
System is used in a procedure which, unlike medication, is designed to address
the underlying causes of GERD and, unlike surgery, is an outpatient procedure
with reduced side effects. The Stretta procedure, which we believe will cost an
average of $2,000, enables most patients to return to normal activities within
a day and has enabled most patients in our 47-patient clinical trial to reduce
or discontinue medication use while achieving control of heartburn. We are
devoting substantial resources to the commercial launch of this product, which
was introduced in May 2000.
We are also developing a product called the Secca System, which is designed to
use radiofrequency energy to treat fecal incontinence, a condition that affects
up to 16 million U.S. adults, or 8% of the adult U.S. population. Only limited
treatment options currently exist to manage fecal incontinence. Most patients
control the disorder by using protective undergarments and typically avoid
travel and activities away from home. Very few patients undergo costly surgical
treatment, which involves a lengthy inpatient hospital stay, significant side
effects and a long recovery period. By contrast, the Secca System is intended
to be a lower cost outpatient procedure to improve continence with minimal
interruption in patients' everyday lives and with few side effects. This
product has shown initial promising results in a 10-patient pilot study. We
have received conditional approval from the FDA to begin a U.S. clinical trial
of the Secca System and, assuming successful results, we intend to seek
permission from the FDA in mid-2001 to market the system.
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INDUSTRY
Gastrointestinal disorders
Gastrointestinal disorders affect broad segments of the United States and
worldwide population, but many conditions lack corrective treatments. Common
current therapies for gastrointestinal disorders, such as acid suppressive
medication for GERD and protective undergarments for fecal incontinence, are
designed not to correct the disorder, but to manage symptoms. We believe that
there is a significant opportunity for technologies aimed at resolution of the
underlying causes of these disorders, rather than just symptom management.
GASTROESOPHAGEAL REFLUX DISEASE
Overview of the disease
GERD is the backward flow, or reflux, of stomach contents into the esophagus,
the muscular tube that connects the mouth to the stomach. In the lower part of
the esophagus, there is an area of thickened muscle, known as the lower
esophageal sphincter, which, when functioning properly, acts as a one-way
valve, allowing food to pass down from the esophagus into the stomach, but
preventing reflux. In GERD patients, the lower esophageal sphincter does not
function properly due to low sphincter pressure or inappropriate nerve impulses
leading to frequent sphincter relaxations. This lack of proper sphincter
function allows stomach contents to reflux into the esophagus. While the
stomach lining provides a natural protective barrier to stomach acid, enzymes,
and bile, the esophagus lacks such protection. Frequent reflux of stomach
contents causes chronic irritation of the esophagus, which can result in a wide
range of symptoms and complications.
Symptoms and complications
Most commonly, GERD patients feel persistent, severe heartburn, which is caused
by stomach acid, enzymes, and bile entering and irritating the esophagus. In
some patients, the chest pain caused by this heartburn may be severe enough to
require an emergency room visit. Patients often have difficulty sleeping due to
increased reflux and heartburn when they lie down. Other common symptoms
include regurgitation of stomach contents into the back of the throat, chronic
cough and sore throat, laryngitis and difficulty swallowing.
Irritation of the esophagus caused by reflux may also result in more serious
complications. Approximately 30% to 40% of GERD patients examined by endoscopy
have evidence of damage to the esophagus in the form of a break in the
esophageal lining. The following complications may be experienced by these
patients:
.Erosion or Ulceration: Damage to the esophageal lining may lead to scar tissue
formation and eventual development of a stricture.
.Stricture: Build-up of scar tissue caused by repeated injury from reflux can
narrow and obstruct the esophagus.
.Barrett's Epithelium: Intestinal cells may develop in the esophagus, which
increases the patient's risk of esophageal cancer.
.Esophageal Cancer: Esophageal cancer may occur with or without Barrett's
epithelium. In a March 1999 New England Journal of Medicine study,
investigators found that patients who experienced heartburn or regurgitation
at least once per week were eight times more likely to develop esophageal
cancer than the general population.
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Market size
Approximately 7% of American adults, or 14 million Americans, experience daily
GERD symptoms. International studies show similar prevalence rates around the
world. GERD incidence increases significantly in individuals over the age of
40, with individuals over 65 accounting for approximately 36% of GERD-related
physician visits. The disease affects men and women equally. Acid-suppressive
medication accounts for over $8 billion in annual U.S. medication expenditures,
the majority of which is used to control GERD symptoms.
Traditional treatment options
Initially, people manage GERD symptoms with a combination of lifestyle
modification and over-the-counter antacids. Generally, people avoid fatty or
spicy foods, chocolate, coffee and alcohol, all of which can aggravate GERD
symptoms. In addition, some people elevate the head of their beds while
sleeping to avoid reflux.
When lifestyle modifications and over-the-counter medications fail to
satisfactorily relieve GERD symptoms, people may seek a physician's help.
Gastroenterologists are the primary physician contact for patients seeking
treatment for GERD. Treatment options for GERD include prescription medication
and inpatient surgery.
.Prescription Medications. Most patients are prescribed anti-acid medication to
manage GERD symptoms, including Prilosec, Prevacid, Pepcid, Zantac and
Tagamet. Prilosec is the single largest selling prescription medication, with
worldwide sales of $6 billion in 1999. These medications reduce the amount of
acid produced by the stomach, which alleviates the symptomatic pain associated
with reflux and enables esophageal inflammation to heal. While medications may
be effective in reducing symptoms, they do not prevent reflux or correct the
condition that causes GERD.
.Surgery. The most common surgical procedure used to correct the condition is
fundoplication surgery, in which the upper stomach is wrapped around the lower
esophageal sphincter to provide support. Fundoplication surgery is an
inpatient laparoscopic procedure performed by general surgeons and requires
one to four days in the hospital and up to five weeks recovery. In 1999,
approximately 70,000 fundoplications were performed in the United States.
Drawbacks of current treatment options
The currently available GERD treatments have significant drawbacks including:
.Failure to treat the underlying causes of GERD. Medications help patients
manage GERD symptoms. However, they do not address the causes of the disease.
Consequently, these medications are required for the patient"s lifetime and
some symptoms, such as regurgitation, persist.
.Discomfort and other side effects. Side effects of medications include
diarrhea, headaches, dizziness and nausea. Side effects of fundoplication
surgery include difficulty swallowing, the inability to belch or vomit,
excessive flatulence, nausea and diarrhea.
.Patient compliance. Patients often have difficulty complying with lifestyle
modifications which require continuous and fundamental changes in eating,
drinking and sleeping behavior. For patients who must take medication on a
long-term basis, compliance can be a problem due to the side effects, cost, or
forgetting to take the medication.
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.Significant costs to health care system. To be effective, prescription
medications are taken regularly throughout a patient's lifetime, costing an
estimated average of $2,300 per year based on retail prices and the medication
requirements of patients in our clinical trial. Fundoplication surgery
typically costs $10,000.
.Risk of complications. Complications of fundoplication surgery include damage
to the nerves which control stomach function, injury to the pancreas, spleen,
colon, or other organs, postoperative breakdown of the surgical repair,
gastric ulceration, and, in rare cases, death. Because of these complications,
many physicians are reluctant to refer an otherwise healthy patient for
surgery.
As a result of these drawbacks with traditional GERD treatment options, we
think there is a significant need for a new GERD treatment.
THE CURON SOLUTION: THE STRETTA SYSTEM
Our proprietary Stretta System is designed to provide GERD patients with a
minimally invasive, outpatient and cost-effective alternative to existing
treatments. The Stretta System consists of the Stretta Catheter, which is a
disposable flexible catheter with needle electrodes, and the Curon Control
Module, which is a radiofrequency energy generator. Using this system,
physicians deliver precisely controlled radiofrequency energy to create thermal
lesions in the muscle of the lower esophageal sphincter.
The Stretta System treats GERD by improving the barrier function of the lower
esophageal sphincter. The Stretta procedure is designed to take less than an
hour, utilizing endoscopy techniques commonly used by gastroenterologists. The
procedure is performed on an outpatient basis under conscious sedation.
Patients return home the same day and are typically able to resume normal
activities the next day. We believe that the Stretta System's efficacy and
relative cost, combined with the absence of significant discomfort and side
effects, makes it a clinically and economically attractive GERD treatment.
Based upon our clinical trial results to date, we believe that the Stretta
procedure has benefits over both medication and surgery:
BENEFITS OVER MEDICATION
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.Reduction in reflux, not just symptom control
.No patient compliance issues
.No observed persistent side effects
.One time estimated $2,000 cost, as compared to an estimated average annual
medication cost of $2,300
BENEFITS OVER FUNDOPLICATION SURGERY
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.One-hour procedure under conscious sedation, as compared to a three-hour
surgical procedure performed under general anesthesia
.Less invasive: performed endoscopically, through the mouth, compared to
laparoscopically, through small incisions in the abdomen
.Outpatient procedure, as compared to a one to four day inpatient
hospitalization
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.Resumption of normal activities within a day, as compared to up to five weeks
after surgery
.No observed persistent side effects
.Minimal risk of complications
.Costs an estimated $2,000, as compared to an estimated $10,000 per surgical
procedure
.Performed by gastroenterologists who otherwise would refer patients to general
surgeons
The Stretta procedure
With the patient sedated but awake, the physician first inserts an endoscope
into the esophagus to examine the lower esophageal sphincter and measure the
distance to the areas to be treated. The physician then removes the endoscope
and inserts the Stretta Catheter through the esophagus to the treatment area.
The physician inflates a balloon on the end of the Stretta Catheter and deploys
the needle electrodes into the tissue of the lower esophageal sphincter. Using
the Curon Control Module, the physician then delivers radiofrequency energy
through the needles to create well-defined thermal lesions in the tissue.
Cooled water is delivered through ports in the catheter to the lining of the
esophagus while the deeper tissue is treated. The temperature of the treated
tissue and the surface tissue are constantly monitored as a safety precaution.
The physician repeats this sequence multiple times along the length of the
lower esophageal sphincter. The lesions reabsorb over several weeks and cause
tissue contraction, which increases the barrier function of the lower
esophageal sphincter. In addition, we believe that radiofrequency energy
interrupts nerve pathways responsible for inappropriately frequent sphincter
relaxations.
THE SECCA SYSTEM: TREATMENT OF FECAL INCONTINENCE
Overview and drawbacks of current treatment options
Fecal incontinence is the involuntary leakage of stool, typically caused by
physical damage to the anal sphincter from childbirth or surgery, neurologic
disease, injury or age. Fecal incontinence is a life-altering condition that
affects up to 8% of U.S. adults and has similar prevalence rates around the
world. This condition is the second leading cause of nursing home placement of
elderly people. Fifty percent of elderly people in nursing homes suffer from
fecal incontinence. In addition, approximately 3% of women report fecal
incontinence as a result of natural childbirth. Two-thirds of the people with
fecal incontinence do not seek medical attention.
People with fecal incontinence lack adequate minimally invasive treatment
alternatives that treat the cause of the problem, rather than the symptoms.
Current treatment options include:
.Use of protective undergarments. Most patients wear protective undergarments
as the sole response to incontinence. Protective undergarments do not
alleviate the symptoms of the disorder and do not diminish embarrassment or
lifestyle limitations.
.Diet modification and supplements. People are often advised by their
physicians to alter dietary habits, use dietary bulking products like
Metamucil, or take anti-diarrheal agents. These treatments are limited in
effectiveness and require lifetime use.
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.Biofeedback. Biofeedback is a procedure utilizing an electronic device to aid
patients in consciously retraining and strengthening sphincter muscles.
Biofeedback"s effectiveness is limited unless the patient is highly motivated,
is mentally capable and has the ability to consciously contract the sphincter.
In addition, biofeedback training requires multiple sessions with a therapist
and can be costly.
.Surgery. Otherwise healthy patients with severe incontinence may opt for
highly invasive surgical treatment. Surgical procedures take several hours,
require hospitalization for up to ten days, and have long recovery periods.
Surgical risks include failure to improve continence, urinary tract infection,
hemorrhage and hematoma, infection and, in rare cases, death.
The Curon Solution: The Secca System
The Secca System is designed to provide a simple, minimally invasive and cost-
effective treatment option for patients. The Secca procedure utilizes the same
technology and treatment concept as the Stretta System. Using our proprietary
radiofrequency generator, the Curon Control Module, and our proprietary
handheld disposable delivery device, known as the Secca Handpiece, a physician
delivers precisely controlled radiofrequency energy to create thermal lesions
in the muscle of the anal canal. We believe that reabsorption of these lesions
over the next several weeks and months will cause tissue contraction and
increase the barrier function of the anal sphincter. In a limited 10-patient
pilot study conducted outside the United States, the Secca procedure
demonstrated encouraging three-month follow-up results in patients with fecal
incontinence.
We intend to begin a U.S. multi-center clinical trial in the third quarter of
2000 to study the safety and efficacy of the Secca System for treatment of
fecal incontinence. If we achieve successful results, we intend to submit these
results to the FDA in mid-2001. See "Government Regulation."
STRATEGY
Our strategy is to be the leading provider of minimally-invasive and cost-
effective treatments for gastrointestinal disorders. The key elements of our
strategy are to:
.Provide innovative medical devices for the treatment of inadequately-addressed
gastrointestinal disorders. Our Stretta System and Secca System target GERD
and fecal incontinence, markets in which we believe there is a significant
demand for new treatment options. These systems are designed to address
drawbacks of current therapies, such as lifestyle modification, medication and
surgery, as well as underlying causes of the conditions, instead of simply
managing the symptoms. In addition to GERD and fecal incontinence, we have
identified several other gastrointestinal disorders which may be attractive
future markets.
.Increase awareness and market penetration of our products through education
and aggressive sales effort. We intend to generate demand for our products by
increasing market awareness of our new treatment alternatives and their
corresponding benefits relative to current therapies. To this end, we are
focusing our initial sales and marketing efforts for the Stretta System on the
8,000 practicing U.S. gastroenterologists who would perform the Stretta
procedure and the hospital endoscopy suites where the procedure may be
performed. Because these physicians typically practice in group and hospital
settings, we believe that we will be able to access our potential customer
base efficiently and expeditiously by using a direct sales effort focused on
both group practices and endoscopy suites of hospitals. We participate in
professional conferences typically attended by gastroenterologists, including
Digestive Disease Week, where we launched our Stretta System in May 2000. We
also intend to sponsor education courses at our 14 clinical investigation
centers around the United States.
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Because the Stretta System incorporates existing gastroenterologist skill sets
and techniques, we do not believe that training will impede physician
adoption. We intend to focus initially on the U.S. market and longer-term on
selling our products internationally through a distributor network supported
by our employees.
.Generate a recurring revenue stream through disposable product sales. To
perform the Stretta procedure, physicians must be equipped with our Curon
Control Module and our disposable Stretta Catheter. Each Stretta Catheter is
designed for single-use and incorporates reuse prevention features to prevent
multiple uses by a physician. We intend that disposables will form the basis
of a recurring revenue stream and that disposables, as a percentage of
revenue, will increase over time as our installed base of generators grows. We
will seek to expand our recurring revenue stream through the introduction of
new proprietary disposable devices and accessories for new gastrointestinal
disorders.
.Provide reimbursement support to physicians and payors. Securing reimbursement
for our existing and future products is critical to our success. The Health
Care Financing Administration, the governmental agency responsible for
reimbursement policy, has approved the use of an existing Medicare
reimbursement code in conjunction with the use of our Stretta System. We
intend to assist our physician customers in securing reimbursement for the
Stretta System through a dedicated reimbursement group. This group will
provide payors with copies of the HCFA coding decision, published literature
and clinical data designed to facilitate reimbursement. In addition, our
reimbursement group will call on third-party payors to educate them about the
economic benefits of the Stretta System, as compared to currently reimbursed
treatments. We also intend to sponsor post-clearance clinical studies to
generate additional data to support reimbursement.
.Acquire and license complementary technologies and products. We intend to
acquire and license complementary technologies and products for use in the
gastroenterology marketplace. We believe that this will allow us to broaden
our product line, leverage our gastroenterology distribution network, and
expand and accelerate the marketing of our existing products.
PRODUCTS
We have developed a suite of products incorporating proprietary design features
for use in the Stretta and Secca procedures. These products consist of a
disposable catheter and a disposable handpiece for delivery of controlled
radiofrequency energy to tissue and a radiofrequency generator, known as the
Curon Control Module. Both our current products and products under development
utilize proprietary software to interface with our Curon Control Module.
Single-use disposable devices
Both the Stretta Catheter and the Secca Handpiece are disposable products
incorporating innovative designs that enable a physician to easily access the
treatment site and accurately deliver radiofrequency energy into the tissue.
Features include:
.Four electrode needles, which are deployed into the tissue at the treatment
site for delivery of radiofrequency energy;
.Irrigation ports located at the base of each electrode, which deliver cooled
water to the surface tissue during treatment;
.Thermocouples located at each needle tip and base, which provide continuous
temperature readings to the Curon Control Module, enabling precise temperature
control;
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.A balloon in the Stretta Catheter, which is inflated once the Stretta Catheter
reaches the lower esophageal sphincter to maintain catheter positioning; and
.An illuminated clear window in the Secca Handpiece that enables the physician
to view the treatment site.
Curon Control Module
The Stretta System and the Secca System both incorporate our radiofrequency
energy generator, the Curon Control Module. The Curon Control Module has four
channels, which allow for independent control of each of the four needle
electrodes on the Stretta Catheter and Secca Handpiece. The generator uses
continuous data feedback to achieve precise tissue temperatures at the
treatment site. The generator tracks surface tissue temperatures from each
electrode, and if temperatures at either the treatment site or surface tissue
exceed pre-set safe levels, the generator automatically stops delivering energy
to that electrode. An integrated pump delivers cooled water to surface tissue
during the procedure. The Stretta System and the Secca System each utilize
proprietary software installed onto the Curon Control Module. The software
provides a distinct graphical user interface and the functions and parameters
that are required for the particular procedure.
Radiofrequency energy
Our products are based on radiofrequency energy delivery, which has a long
history of use in medical applications. Radiofrequency energy has been cleared
by the FDA for many therapies involving tissue heating, tissue remodeling and
nerve pathway interruption, including:
.shrinking prostatic tissue to treat enlarged prostates;
.interrupting nerve pathways in the heart to treat irregular heartbeats;
.shrinking tissue in the shoulder joint to prevent repeated shoulder
dislocation; and
.shrinking tissue in the base of the tongue to alleviate obstructive sleep
apnea.
We intend to develop additional innovative products that utilize
radiofrequency, as well as expand beyond radiofrequency for treatment of
additional gastrointestinal disorders.
CLINICAL STUDIES
Stretta clinical studies
To evaluate the Stretta System, we conducted an open label multi-center U.S.
clinical trial with leading investigators at 14 institutions, in which 131
patients were treated. We measured how well the procedure eliminated the need
for heartburn medication, improved symptoms, improved quality of life, and
reduced the amount of acid detected in the esophagus. Six-month data, which was
available for 44 treated patients, indicated that the Stretta procedure led to
significant improvement in both objective and subjective measurements. A subset
of this data was presented at the Digestive Disease Week and published in
abstract form in GI Endoscopy. The six-month data shows:
.Reduced need for medication. As of six months after treatment with the Stretta
System, the need for all anti-acid medication was eliminated in 70% of the 44
patients available for follow-up, and the need for the most potent
prescription GERD medication was eliminated in 87% of those patients that
required this medication before treatment.
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.Fewer GERD symptoms. GERD symptom scores improved 73% as defined by a
standardized GERD symptom measurement test.
.Reduced heartburn. Heartburn symptom scores improved 75% as defined by a
heartburn symptom measurement test.
.Decreased regurgitation. Regurgitation was eliminated in 59% of patients.
.Improved quality of life scores. Quality of life scores, as measured using a
validated scoring questionnaire, improved significantly.
.Reduced esophageal acid exposure. After treatment with the Stretta procedure,
patients experienced a 60% reduction in esophageal acid exposure.
Patients in our trials experienced no persistent side effects or other
significant complications during the treatment and follow-up period. Most
patients resumed normal levels of activity on the day after treatment. A few
patients reported difficulty swallowing, increased flatulence or mild abdominal
discomfort for a period of days. These symptoms were significantly milder and
shorter in duration than those typically experienced after surgical
fundoplication.
We believe that the lower esophageal sphincter is more resistant to reflux
after radiofrequency treatment. We believe that this increased resistance is
due to the collagen contraction that occurs after the creation of the lesions,
as well as interruption of nerve pathways that are responsible for
inappropriate relaxations of the lower esophageal sphincter. These neural
pathways are similar to those in the heart muscle, which may cause irregular
heartbeats shown in electrophysiology procedures to respond favorably to
radiofrequency energy treatment. Two scientific papers were presented at the
annual major meeting of the American Gastroenterological Association in May
2000 reporting on the ability of the Stretta procedure to disrupt nerve
pathways in animals and humans.
In May 2000, we began an eight-center, randomized controlled trial of the
Stretta System in the United States. In this trial, patients will receive
either the Stretta procedure or a placebo procedure, and the results will be
compared. We intend to use the data generated for future peer-reviewed
publications and for presentations at national scientific meetings and that
this data will influence physician adoption rates, facilitate reimbursement
approvals and enhance marketing activity.
Secca clinical studies
In November 1999, we conducted a pilot study at a leading medical institution
in Mexico City. Ten patients with fecal incontinence were treated with the
Secca System. Three months following the procedure, patients showed significant
improvements in continence, incontinence-related quality of life and general
quality of life, each as measured by validated questionnaires. We have received
no reports of persistent complications or persistent side effects. Based on
these encouraging preliminary results, we intend to further evaluate the Secca
System in a multi-center U.S. clinical study involving five sites and 50
patients, beginning in the third quarter of 2000. Assuming success of the
study, we intend to compile and submit data from this study to the FDA for
510(k) clearance, or for a PMA if required by the FDA, to market the Secca
System for treatment of fecal incontinence. We intend to target the Secca
System, if and when commercialized, primarily to colorectal surgeons, 1,000 of
whom practice in the United States. Secondarily, we intend to target
gastroenterologists, particularly those who are familiar with the Stretta
System.
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SALES AND MARKETING
Our strategy to achieve market penetration in the United States with the
Stretta System is to initially market directly to high volume practicing
gastroenterologists, gastroenterology practice groups and endoscopy suite
facilities. Secondarily, we intend to target lower volume gastroenterology
practices and general surgeons. In the United States, there are approximately
8,000 practicing gastroenterologists, approximately 4,000 hospital endoscopy
suites and approximately 4,000 ambulatory treatment centers that perform
endoscopy. We believe that the Stretta System represents a significant
opportunity for gastroenterologists because it enables them to keep patients
within their practices and perform revenue generating procedures instead of
referring these patients to surgeons. In addition to providing an incentive for
gastroenterologists, the procedure represents an opportunity for endoscopy
suites to expand their business by increasing the number of procedures done at
the facility.
We intend to sell, market and distribute the Stretta System in the United
States through a direct sales force supported by a team of clinical training
and support specialists. Currently, we have five sales representatives and one
support specialist. By the end of 2000, we plan to have six sales
representatives in regions across the country supported by three clinical
specialists. Sales representatives will call on gastroenterologists and
endoscopy suites. The clinical specialists will be responsible for initial
training of physicians as well as ongoing clinical field support. We intend to
expand this sales and clinical support organization to facilitate product
introduction and physician adoption. In 2001, we intend to introduce the
Stretta System internationally in select countries through distributors
supported by our local employees. Initially, we intend to target countries
within Europe that have demonstrated favorable acceptance and reimbursement of
new technologies and then target similar countries in the Pacific Rim.
Our training strategy is to provide significant physician support early in the
training process. The techniques employed in the Stretta System build upon
skills used in typical endoscopic procedures performed by gastroenterologists.
Training will consist of on-site physician and nurse training on the equipment
as well as training on the procedure using web-based modules, videos and
written training materials. In addition, the clinical training specialists will
offer support for the physician's first two to three procedures. We intend to
sponsor educational courses around our 14 clinical investigation centers and
have a significant presence at national and regional gastroenterology events
including the major conferences held by the American Gastroenterological
Association and the American College of Gastroenterology.
REIMBURSEMENT
In the United States, health care providers generally rely on third-party
payors, principally private health insurance plans, Medicare and Medicaid, to
reimburse all or part of the cost of procedures in which medical devices are
used. The Health Care Financing Administration, the governmental agency
responsible for Medicare reimbursement policy, has approved the use of an
existing Medicare reimbursement code, which includes the ablation of nerves in
the lower esophageal sphincter, for billing costs associated with the Stretta
procedure by physicians and facilities. In appropriate cases, we believe that
physicians and facilities can use this code for billing costs associated with
the Stretta Catheter and the Stretta procedure. However, we cannot assure you
that the procedure will be reimbursed or that the amounts reimbursed under this
code will be adequate. We do not currently have arrangements with any private
payors or with Medicaid for cost reimbursement related to the use of the
Stretta System. While these organizations frequently follow HCFA coding
decisions, we cannot assure you that these payors will reimburse the procedure
or accept the Medicare established code.
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The current cost reduction orientation of the third-party payor community makes
it exceedingly difficult for new medical devices and surgical procedures to
obtain reimbursement. Often, it is necessary to convince these payors that the
new devices or procedures will establish an overall cost savings compared to
currently reimbursed devices and procedures. We believe that the Stretta System
may offer an opportunity for payors to reduce the cost of treating GERD
patients by possibly eliminating or reducing the costs of medication or
fundoplication surgery. While we believe that the Stretta System possesses
economic advantages that will be attractive to payors, we cannot assure you
that they will make reimbursement decisions based upon these advantages.
Reimbursement by third-party payors is often positively influenced by the
existence of peer-reviewed publications of long-term safety and efficacy data.
We have collected and published data on six-month results after treatment with
the Stretta System. Additional clinical abstracts and papers have been accepted
for publication in 2000. We cannot assure you that our products will be
reimbursed without publications of longer-term data. We are actively
encouraging ongoing research studies to evaluate and publish the long-term
safety and efficacy of the Stretta System. In addition, many third-party payors
require that randomized studies be conducted to determine the effect of the
procedure versus placebo or another standard of care. Currently, we are
conducting a randomized, controlled, multi-center study to generate this data.
We cannot assure you that the Stretta System will have compelling results in
this study, that the results will be published in a timely manner or at all, or
that such publication will benefit our reimbursement efforts.
To facilitate reimbursement for the Stretta System, we have hired a director of
reimbursement and are establishing a dedicated reimbursement group to assist
physicians and facilities in obtaining reimbursement for the Stretta System.
This group will assist in pre-approving patients for the Stretta procedure, and
will provide payors with copies of the HCFA coding decision, published
literature and clinical data. In addition, this group will educate third-party
payors about the economic benefits of the Stretta System and seek to influence
them to reimburse for the Stretta System and to incorporate the Stretta System
into their standards of care for GERD.
Reimbursement systems in international markets vary significantly by country
and, within some countries, by region. Reimbursement approvals must be obtained
on a country-by-country basis or a region-by-region basis. In addition,
reimbursement systems in international markets may include both private and
government sponsored insurance. We have not obtained any international
reimbursement approvals. We cannot assure you that we will obtain any such
approvals in a timely manner, if at all. If we fail to receive international
reimbursement approvals at all or in acceptable amounts, market acceptance of
our products would be adversely affected.
MANUFACTURING
Our manufacturing strategy is to conduct a significant portion of the
manufacturing process in-house to control quality and manufacturing efficiency.
Over time, we intend to move some labor-intensive operations to less-costly
manufacturing locations within the United States and, eventually, outside the
United States to manufacturers meeting our quality standards in order to reduce
costs and to add additional capacity.
We manufacture, assemble and test each Stretta Catheter in-house. The
manufacturing process consists primarily of assembling internally manufactured
and externally purchased components and sub-assemblies in an environmentally
controlled area. After assembly, each Stretta Catheter is internally inspected
and then sent out for sterilization by a sub-contractor. We manufacture the
Curon Control Module primarily by in-house assembly and testing of components
ordered from outside manufacturers.
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We have no experience manufacturing our products in the volumes that will be
necessary for us to achieve significant commercial sales, and we cannot assure
you that we can establish high volume manufacturing or, if established, that we
will be able to manufacture our products in high volumes with commercially
acceptable yields. To achieve our business plan, we expect to hire additional
personnel to assemble our catheters. There is a shortage of such personnel in
our area and we cannot be sure that we will be able to recruit and retain them.
We will also need to achieve some enhancements to our manufacturing operations
to increase our capacity. We cannot be sure about achieving this objective.
We purchase various materials and components from qualified suppliers that are
subject to stringent quality specifications and inspections. We conduct quality
audits of our key suppliers, several of which are experienced in the supply of
components to manufacturers of medical devices. Most purchased components and
services are available from more than one supplier. For the few components for
which relatively few alternate supply sources exist, we are currently trying to
qualify back-up suppliers.
Currently, only one supply source exists for the peristaltic pump and the
computer chip used in our Curon Control Module. For these two components, we
believe we have accumulated enough product to allow time to research
alternatives without harming our business. The peristaltic pump integrated into
the Control Module is manufactured by our supplier in accordance with our
specifications. We are in the process of contracting with the supplier for
ongoing supply, but, in the meantime, we have scheduled long-term delivery of
pumps in an amount that we believe is sufficient to allow us time to locate and
qualify a new pump supplier should our current supplier fail to fulfill our
needs. If a new pump is incorporated into the Control Module, then the Control
Module may require regulatory clearance under the 510(k) process, which could
take several months or more. Also, a computer chip in the Control Module is no
longer manufactured. This chip is currently available from multiple suppliers,
but we cannot assure you that it will be available in the future. We have
purchased a large inventory of these chips and we are currently working on
developing a new generator that will use newer chip technology. As with the
pump, we cannot incorporate a new chip into the generator without regulatory
clearance under the 510(k) process, which could take several months or more.
Our manufacturing facility is subject to periodic inspection by regulatory
authorities. Our quality assurance systems are subject to FDA regulations.
These regulations require that we conduct our product design, testing,
manufacturing, and control activities in conformance with these regulations and
that we maintain our documentation of these activities in a prescribed manner.
Our manufacturing facility is licensed by the California Department of Health
Services, Food and Drug Branch. In addition, our facility has received ISO
9001/EN46001 certification and the EU Certificate pursuant to the European
Union Medical Device Directive 93/42/EEC, allowing us to CE mark our products
after assembling appropriate documentation. ISO 9001/EN46001 certification
standards for quality operations have been developed to ensure that companies
know the standards of quality on a worldwide basis. Failure to maintain the CE
mark will preclude us from selling our products in Europe. We cannot assure you
that we will be successful in maintaining certification requirements in Europe
or elsewhere.
RESEARCH & DEVELOPMENT
Our research and development activities are conducted internally by a research
and development staff consisting of ten employees. Our research and development
efforts are focused on development of additional products for new
gastrointestinal indications as well as improvements to existing products. We
intend to develop products that leverage our existing radiofrequency energy
platform, and we also plan to explore options utilizing technology not
associated with this platform. We have a number of new projects and products
under development, including several projects related to development of a new
generator as well as development of additional products for treatment of GERD.
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In addition to working on new products, our research and development
organization is developing products and fixtures that are designed to reduce
the time to manufacture, improve quality or reduce cost of products. Our
research and development expenditures were $1.6 million in 1998 and
$9.0 million in 1999.
PATENTS AND PROPRIETARY TECHNOLOGY
We have an aggressive program to obtain or license intellectual property in the
United States, Europe and Asia for our medical advances. We are building a
portfolio of apparatus and method patents covering aspects of our current and
future technology.
As of May 9, 2000, we had four issued U.S. patents, five notices of allowance,
and a number of pending U.S. and foreign patent applications, which are
assigned to us. We intend to continue to file for patents for our technologies
to strengthen our position.
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 employees, consultants and advisors who
are expected to work on our products to agree to disclose and assign to us all
inventions conceived during the 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.
Certain aspects of our products incorporate technology subject to patents that
we have licensed from others. As of May 9, 2000, we have licensed in ten issued
U.S. patents and a number of pending U.S. and foreign patent applications. For
example, in December 1998, we entered into an agreement with Somnus Medical
Technologies, Inc. for the license of the technology related to Somnus'
radiofrequency generator. The license gives us the right to manufacture, have
manufactured, use, offer to sell, sell and import Somnus' radiofrequency
generator technology for use in the treatment of GERD and other medical
disorders of the digestive tract. The term of the license is 15 years if no
patents related to the licensed technology issue, or the earlier expiration of
the last patent related to the technology. During the term of the license, we
are obligated to pay a royalty to Somnus for our sale of generators that
incorporate the licensed technology. We have also licensed patented technology
from the University of Kansas Medical Research Institute relating to applying
radiofrequency energy to tissue. This is an exclusive, worldwide and royalty-
bearing license allowing us to incorporate the patented technology in our
products to treat medical disorders throughout the gastrointestinal tract. The
license expires with the licensed patents and may be terminated for breach. We
have also licensed other patents that we believe may apply to our current
business or that we may incorporate into future products. We intend to continue
to license technologies to strengthen our competitive position.
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 addition, our competitors may assert
that future products we may market infringe their patents.
COMPETITION
The medical device industry is subject to intense competition. To be
successful, we must establish our products, and the procedures in which our
products are used, as attractive alternatives to currently available
treatments.
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Our primary competitors in the GERD market are manufacturers and marketers of
existing pharmaceutical and surgical treatments for GERD, and manufacturers
focused on innovative outpatient treatments. We compete with manufacturers of
medications, such as Zantac, Tagamet, Pepcid and Prilosec. These manufacturers
and manufacturers of generic medication equivalents have significantly greater
resources than we do. These companies may market products more aggressively,
gain influence among opinion leaders, or lower their prices, all of which may
affect the adoption of and the market for our products. We also compete with
manufacturers of devices and equipment used in laparoscopic fundoplication.
Increased publicity regarding these procedures or advantageous pricing may
adversely affect the market for our products. Both medication treatment and
fundoplication are established GERD therapies with well-defined reimbursement
profiles.
We also compete with a number of companies that are working on GERD treatments
that eliminate or reduce the need for medication but are less invasive than
surgery. For example, C.R. Bard has developed an endoscopic suturing system
that enables patients to undergo a fundoplication-like surgery in the endoscopy
suite as an outpatient procedure. The device used in this procedure received
FDA marketing clearance in March 2000. We compete with several companies that
are developing bulking agents to be injected into the muscle of the lower
esophageal sphincter. There may also be other companies developing innovative
therapies of which were are not aware.
In the fecal incontinence market, we consider our primary competitors to be
American Medical Systems and Medtronic, both of which are developing
implantable devices for treatment of severe incontinence. Both of these
competitors have significantly greater resources than we do, and we cannot
assure you that we will be able to compete effectively with these companies.
GOVERNMENT REGULATION
FDA's premarket clearance and approval requirements
Unless an exemption applies, each medical device that we wish to market in the
United States must receive either 510(k) clearance or premarket application, or
PMA, approval in advance from the FDA pursuant to the Federal Food, Drug and
Cosmetic Act. The FDA's 510(k) clearance process usually takes from four to
twelve months, but it can last longer. The process of obtaining PMA approval is
much more costly, lengthy and uncertain. It generally takes from one to three
years or even longer. We cannot be sure that 510(k) clearance or PMA approval
will ever be obtained or, once obtained, maintained, for any product or
indication we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance or
PMA approval based upon statutory criteria. These criteria include the level of
risk that the agency perceives is associated with the device and a
determination of whether the product is a type of device that is similar to
devices that are already legally marketed. Devices deemed to pose relatively
less risk are placed in either class I or class II, which requires the
manufacturer to submit a premarket notification requesting 510(k) clearance,
unless an exemption applies. The premarket notification must demonstrate that
the proposed device is substantially equivalent in intended use and in safety
and effectiveness to a legally marketed predicate device that is either in
class I, class II, or is a preamendment class III device for which the FDA has
not yet called for submission of a PMA application.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any such decision.
If the FDA disagrees
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with a manufacturer's decision, the agency may retroactively require the
manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require
the manufacturer to cease marketing and/or recall the modified device until
510(k) clearance or PMA approval is obtained.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or deemed not substantially equivalent
to a predicate device, are placed in class III. Such devices are required to
undergo the PMA approval process in which the manufacturer must prove the
safety and effectiveness of the device to the FDA's satisfaction. A PMA
application must provide extensive preclinical and clinical trial data and also
information about the device and its components regarding, among other things,
device design, manufacturing and labeling. After any PMA approval, a new PMA or
PMA supplement is required in the event of certain modifications to the device,
its labeling, intended use or indication, or its manufacturing process.
A clinical trial may be required in support of a 510(k) submission and
generally is required for a PMA application. Such trials generally require an
Investigational Device Exemption, or IDE, application approved in advance by
the FDA for a specified number of patients and study sites, unless the product
is deemed a nonsignificant risk device eligible for more abbreviated IDE
requirements. The IDE application must be supported by appropriate data, such
as animal and laboratory testing results. Clinical trials may begin if the IDE
application is approved by the FDA and the appropriate institutional review
boards at the clinical trial sites. In May 2000, we received conditional
approval allowing us to begin a U.S. multi-center clinical trial of the Secca
System. We intend to follow up with the FDA to satisfy the conditions of
approval.
In April 2000, we received 510(k) clearance from the FDA for the Stretta System
when used to treat GERD. Based on preliminary discussions with the FDA staff,
we believe that the Secca System may be permitted to follow the 510(k)
clearance pathway. However, we cannot assure you that FDA will not deem the
Secca System, or one or more of our future products, to be a class III device
subject to the more burdensome PMA approval process.
Pervasive and continuing FDA regulation
Numerous regulatory requirements apply to our marketed devices. These
requirements include the Quality System Regulation, or QSR, which requires
manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures, the Medical Device Reporting regulation,
which requires that manufacturers report to the FDA certain types of adverse
events involving their products, labeling regulations, and the FDA's general
prohibition against promoting products for unapproved or off-label uses. Class
II devices also can have special controls such as performance standards, post-
market surveillance, patient registries, and FDA guidelines that do not apply
to class I devices. Unanticipated changes in existing regulatory requirements
or adoption of new requirements could hurt our business, financial condition
and results of operations.
We are subject to inspection and market surveillance by the FDA to determine
compliance with regulatory requirements. If the FDA finds that we have failed
to comply, the agency can institute a wide variety of enforcement actions,
ranging from a public warning letter to more severe sanctions such as:
.fines, injunctions, and civil penalties;
.recall or seizure of our products;
.operating restrictions, partial suspension or total shutdown of production;
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43
<PAGE>
Business
- --------------------------------------------------------------------------------
.refusing our requests for 510(k) clearance or PMA approval of new products;
.withdrawing 510(k) clearance or PMA approvals already granted; and
.criminal prosecution.
The FDA also has the authority to require repair, replacement or refund of the
cost of any medical device manufactured or distributed by us. Our failure to
comply with applicable requirements could lead to an enforcement action that
may have an adverse effect on our financial condition and results of
operations.
We have been an FDA registered medical device facility since January 1999 and
we obtained our manufacturing license from the California Department of Health
Services in September 1999. We are subject to periodic inspection by both the
FDA and CDHS for compliance with the QSR and other applicable regulations.
Other U.S. regulation
We also must comply with numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and hazardous substance disposal. We may be
required to incur significant costs to comply with such laws and regulations in
the future and such laws and regulations may hurt our business, financial
condition and results of operations.
Foreign regulation
Our products are also regulated outside the United States as medical devices by
government agencies and are subject to registration requirements in many of the
foreign countries in which we plan to sell our products. Our Stretta System
carries a CE Mark for sale in Europe and TGA for sale in Australia. Our
facility has been audited and certified to be ISO9001/EN46001 compliant, which
allows us to sell our products in Europe. Our facility is subject to inspection
by TUV/Essen. We plan to seek approval to sell the Stretta System in additional
foreign countries. The time and cost 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.
EMPLOYEES
As of May 15, 2000, we had 56 employees, with 20 employees in operations, 10
employees in research and development, 9 employees in sales and marketing, 9
employees in general and administrative, and 8 employees in clinical and
regulatory affairs. We believe that our future success will depend in part on
our continued ability to attract, hire and retain qualified personnel. None of
our employees is represented by a labor union, and we believe our employee
relations are good.
FACILITIES
We are headquartered in Sunnyvale, California, where we lease one building with
approximately 20,000 square feet of office, research and development, and
manufacturing space under leases expiring
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44
<PAGE>
Business
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September 30, 2003. We believe our current facilities are adequate to meet our
current and foreseeable requirements through the end of 2001 and that suitable
additional or substitute space will be available as needed.
LITIGATION
We are not a party to any pending litigation.
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45
<PAGE>
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Scientific Advisory Board
The members of our Scientific Advisory Board work collaboratively with us to
provide advice, assistance and consultation in the field of gastrointestinal
disorders. We consider our advisory board members to be opinion leaders in
their fields, and they offer us advice regarding the following:
.pre-clinical and clinical study design;
.clinical and marketing feedback on existing products;
.design and clinical feedback on new products;
.methods of gaining physician acceptance; and
.physician training.
Scientific Advisory Board members
<TABLE>
<CAPTION>
Name Position and Affiliation
- -------------------------------------------------------------------------------
<S> <C>
Donald O. Castell, M.D... Professor and Chairman, Department of Medicine,
Graduate Hospital, Philadelphia, Pennsylvania;
Professor of Medicine, MCP/Hahnemann University,
Philadelphia, Pennsylvania; Past President, American
Gastroenterological Association
John Dent, M.D........... Clinical Professor of Medicine, University of
Adelaide, Australia; Director, Department of
Gastroenterology, Hepatology and General Medicine,
Royal Adelaide Hospital, Adelaide, Australia
Richard H. Holloway, Clinical Associate Professor, University of
M.D. ................. Adelaide, Australia; Senior Consultant, Department
of Gastrointestinal Medicine, Royal Adelaide
Hospital, Adelaide, Australia
Michael A. Kamm, M.D..... Professor of Gastroenterology, St. Mark's
University, London; Director, Physiology Unit and
Chairman of Medicine, St. Mark's Hospital, London
Joel E. Richter, M.D. ... Chairman, Gastroenterology Department, The Cleveland
Clinic Foundation, Cleveland, Ohio; Professor of
Medicine, The Cleveland Clinic Health Science
Center, Ohio State University; Past President,
American College of Gastroenterology
George Triadafilopoulos, Professor of Medicine, Stanford University School of
M.D................... Medicine; Chief, Section of Gastroenterology, Palo
Alto Veterans Affairs Health Care System, Palo Alto,
California
Mark Vierra, M.D......... Assistant Professor of Surgery, Division of
Gastrointestinal Surgery, Stanford University School
of Medicine, Palo Alto, California
Arnold Wald, M.D......... Professor of Medicine, University of Pittsburgh;
Associate Chief, Division of Gastroenterology and
Hepatology, University of Pittsburgh Medical Center,
Pittsburgh, Pennsylvania
</TABLE>
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46
<PAGE>
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Management
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is the name, age, position and a brief account of the business
experience of each of our executive officers and directors.
<TABLE>
<CAPTION>
Name Age Position(s)
- -------------------------------------------------------------------------------
<S> <C> <C>
John W. Morgan............. 40 President, Chief Executive Officer and Director
Alistair F. McLaren........ 59 Chief Financial Officer and Vice President of
Finance and Administration
David S. Utley, M.D........ 36 Chief Medical Officer
Carol A. Chludzinski....... 45 Vice President of Sales and Marketing
John W. Gaiser............. 42 Vice President of Engineering, Research and
Development
Viorica Filimon............ 42 Vice President of Quality Affairs
David I. Fann.............. 36 Director
Alan L. Kaganov............ 61 Director
Robert F. Kuhling, Jr. .... 51 Director
</TABLE>
Messrs. Fann, Kaganov and Kuhling are members of the audit committee of our
board of directors. Messrs. Kaganov and Kuhling are members of the compensation
committee of our board of directors.
John W. Morgan Mr. Morgan has served as our President and Chief Executive
Officer and as a member of our board of directors since November 1999. From
October 1997 to October 1999, Mr. Morgan worked as Chief Executive Officer at
Epitope Inc., a manufacturer of medical devices and diagnostic products
utilizing oral fluid technologies. From October 1996 to October 1997, Mr.
Morgan was President of Regent Medical Products Group for London International
Group, PLC, a manufacturer of latex medical products. From April 1983 to
October 1996, Mr. Morgan worked at Baxter International, a large medical supply
and distribution company, in various management positions including President
of the MidAmerican Regional Company. He holds a B.S. degree in Public
Administration and Economics from the University of Arizona.
Alistair F. McLaren Mr. McLaren has served as our Chief Financial Officer and
Vice President of Finance and Administration since January 1998. From April
1994 to May 1998, Mr. McLaren was Co-President of NeoCon Associates, Inc., an
interim management services company. During his tenure with NeoCon Associates,
Inc., Mr. McLaren served at various times as General Manager of Advanced
Closure Systems, Inc., a medical device company, Chief Financial Officer and
Director of Operations of RITA Medical Systems, Inc., a manufacturer of
radiofrequency devices, and President and Chief Operating Officer of Southern
Pump and Tank, a construction company and SPATCO Environmental, Inc. Mr.
McLaren is a member of the Institute of Chartered Accountants of Scotland.
David S. Utley, M.D. Dr. Utley is a co-founder of the company. He has served as
our Chief Medical Officer since July 1998. From October 1997 to July 1998, Dr.
Utley was Medical Director of Somnus Medical Technologies, Inc., a manufacturer
of medical devices for treatment of ear, nose and throat disorders. From June
1997 through June 1998, he was a fellow in plastic and reconstructive surgery
at Stanford University Medical Center. From June 1992 through June 1997, Dr.
Utley was a resident of surgery at Stanford University Medical Center. Dr.
Utley currently holds faculty positions at Stanford University Medical Center
and the VA Palo Alto Health Care System. He received his M.D. from Harvard
Medical School and holds a B.A. in Science/Arts from Pennsylvania State
University.
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47
<PAGE>
Management
- --------------------------------------------------------------------------------
Carol A. Chludzinski Ms. Chludzinski has served as our Vice President of Sales
& Marketing since February 1999. From August 1995 to January 1999, Ms.
Chludzinski was employed by VidaMed, Inc., a manufacturer of devices for
treatment of urologic disorders, where she first served as Vice President of
North American Sales and Worldwide Marketing and later as Senior Vice
President, where she was responsible for reimbursement activities. From January
1995 to July 1995, Ms. Chludzinski was Director of Sales for Cybex, Inc., a
manufacturer of products sold to hospitals and clinics. Ms. Chludzinski holds a
B.A. in Liberal Arts from Chestnut Hill College.
John W. Gaiser Mr. Gaiser has served as our Vice President of Engineering,
Research and Development since May 1998. From August 1991 to January 1998, Mr.
Gaiser was Vice President of Research and Development for Medtronic
Cardiorhythm Inc., a developer of devices for treatment of cardiac disorders.
From May 1986 to July 1991, he was project group leader for Advanced
Cardiovascular System Inc., a cardiovascular device company. From February 1981
until May 1986, Mr. Gaiser held senior engineering positions at Baxter
International. Mr. Gaiser holds a B.S. in Mechanical Engineering from Purdue
University.
Viorica Filimon Ms. Filimon has served as our Vice President of Quality Affairs
since March 2000 and served as our Director of Quality Affairs from May 1999 to
March 2000. From April 1998 to May 1999, Ms. Filimon was Director of Quality
Assurance for EndoTex Interventional Systems Inc., an endovascular company.
From September 1995 to January 1998, Ms. Filimon served as Quality Engineering
Manager for Boston Scientific-Target Therapeutics Inc., a developer and
manufacturer of cardiovascular devices. From January 1995 to September 1995,
she served as a senior engineer for Toshiba America MRI, a medical imaging
company. Ms. Filimon holds an M.S. in Electrical Engineering from Bucharest
Polytechnic Institute and is certified by the American Society of Quality as a
Certified Reliability Engineer, a Certified Quality Engineer, and a Certified
Quality Auditor.
David I. Fann Mr. Fann has served as a director since September 1999. Since
March 1997, he has been President and Chief Executive Officer of Excelsior
Private Equity Fund II, Inc., a business development company, and, since
September 1994, he has also served as President and Chief Executive Officer of
UST Private Equity Investors Fund, Inc., a business development company. Since
April 1994, Mr. Fann also has been a managing director of U.S. Trust Company of
New York. Mr. Fann holds a B.A.S. in Industrial Engineering and Economics from
Stanford University.
Alan L. Kaganov Mr. Kaganov has served as a director since December 1998. Since
July 1996, he has served as a partner in the venture capital firm of U.S.
Venture Partners. From March 1993 to June 1996, Mr. Kaganov served as Vice
President of Strategic Planning for Boston Scientific, a large medical device
manufacturer. Mr. Kaganov holds Sc.D. and M.S. degrees in Biomedical
Engineering from Columbia University, an M.B.A. from New York University, and a
B.S. in Mechanical Engineering from Duke University.
Robert F. Kuhling, Jr. Mr. Kuhling has served as a director since December
1999. Since February 1987, Mr. Kuhling has been a general partner or managing
director of several venture capital partnerships managed by ONSET Ventures. He
also serves as a director of Euphonix, Inc., a publicly- traded professional
audio products company, Gadzoox Networks, Inc., a publicly-traded computer
networking company, and several private companies. Mr. Kuhling holds an M.B.A.
from Harvard Business School and an A.B. in Economics from Hamilton College.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
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Management
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BOARD OF DIRECTORS
Currently, we have authorized a range of four to seven directors. Our board of
directors consists of Messrs. Fann, Kaganov, Kuhling and Morgan. All our
directors hold office until the next annual meeting of stockholders or until
their successors are duly qualified. Our amended and restated certificate of
incorporation to be effective upon completion of this offering provides that,
as of the first annual meeting of stockholders, our board of directors will be
divided into three classes, each with staggered three-year terms. As a result,
only one class of directors will be elected at each annual meeting of our
stockholders, with the other classes continuing for the remainder of their
respective three-year terms. Mr. Fann has been designated as the Class I
director whose term expires at the 2001 annual meeting of stockholders; Mr.
Kaganov has been designated as the Class II director whose term expires at the
2002 annual meeting of stockholders; and Messrs. Morgan and Kuhling have been
designated as Class III directors whose terms expire at the 2003 annual meeting
of stockholders.
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
The audit committee was formed in October 1999 and currently consists of
Messrs. Fann, Kaganov and Kuhling. The audit committee reviews the results and
scope of the annual audit and other services provided by our independent
accountants, reviews and evaluates our internal audit and control functions,
and monitors transactions between us and our employees, officers and directors.
The compensation committee was formed in January 1999 and currently consists of
Messrs. Kaganov and Kuhling. The compensation committee administers the 1997
Stock Option Plan, the 2000 Stock Option Plan and the 2000 Employee Stock
Purchase Plan, and reviews the compensation and benefits for our executive
officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. None of
our compensation committee members and none of our executive officers have a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
DIRECTOR COMPENSATION
Our non-employee directors are reimbursed for their out-of-pocket expenses
incurred in connection with attending board and committee meetings, but they
are not compensated for their services as board members. In the past, we have
granted directors options to purchase our common stock pursuant to the terms of
our 1997 Stock Option Plan. See "--Employee Benefit Plans."
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49
<PAGE>
Management
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
of our chief executive officer and each of the next four most highly
compensated current executive officers whose aggregate cash compensation
exceeded $100,000 during the year ended December 31, 1999. We refer to these
persons as the "named executive officers" elsewhere in this prospectus. The
amounts listed under the column captioned "All Other Compensation" represent
car allowances for the named executive officers, unless otherwise indicated.
Summary compensation
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Long-Term
Compensation
Securities
1999 Compensation Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John W. Morgan (1)............. $ 41,667 $ -- 975,000 $ -- (2)
President and Chief Executive
Officer
Stuart D. Edwards (3).......... 179,538 -- -- 25,463(4)
Former President and Chief
Executive Officer
Alistair F. McLaren............ 165,000 -- 200,000 5,400
Chief Financial Officer and
Vice President of Finance
and Administration
David S. Utley, M.D............ 157,500 -- 350,000 3,600
Chief Medical Officer
Carol A. Chludzinski (5)....... 131,250 -- 100,000 3,150
Vice President of Sales and
Marketing
John W. Gaiser................. 160,000 -- 300,000 3,600
Vice President of Engineering,
Research and Development
</TABLE>
- --------
(1) Mr. Morgan joined our company in November 1999 as President and Chief
Executive Officer and as a member of our board of directors, at an annual
salary of $250,000.
(2) In 1999, Mr. Morgan accrued the right to $125,000 in other compensation,
$50,000 of which was attributable to a signing bonus and $75,000 of which
was attributable to relocation expenses. These expenses were paid in 2000.
(3) Mr. Edwards served as President and Chief Executive Officer through October
1999. As of December 31, 1999, Mr. Edwards held 1,141,146 shares of
restricted stock subject to vesting valued at $399,400.
(4) Mr. Edwards received $21,463 in consulting fees following his termination
as President and Chief Executive Officer.
(5) Ms. Chludzinski joined our company in February 1999 as Vice President of
Sales and Marketing, at an annual salary of $150,000.
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50
<PAGE>
Management
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Options
The following table sets forth certain information with respect to stock
options granted to each of our named executive officers during the fiscal year
ended December 31, 1999.
Option grants in fiscal year 1999
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Individual Grants
Potential Realizable
Number of Percent of Value At Assumed
Securities Total Annual Rates Of
Underlying Net Options Exercise Stock Price Appreciation
Options Granted to Price Per Expiration For Option Term
Name Granted Employees Share (1) Date 5% 10%
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John W. Morgan.......... 975,000 38.5 $0.15 10/27/09
Alistair F. McLaren..... 100,000 3.9 $0.11 4/1/09
David S. Utley, M.D..... 100,000 3.9 $0.11 4/1/09
David S. Utley, M.D..... 150,000 5.9 $0.15 10/27/09
Carol A. Chludzinski.... 100,000 3.9 $0.11 2/19/09
John W. Gaiser.......... 100,000 3.9 $0.11 4/1/09
</TABLE>
- --------
(1) We recorded deferred compensation with respect to the option grants for the
difference between the exercise price and the deemed fair value of these
options. See Note 9 of Notes to Financial Statements.
In 1999, we granted options to purchase an aggregate of 2,785,500 shares.
1,300,000 options are fully exercisable, subject to our lapsing right to
repurchase any unvested shares at the original exercise price in the event of
the optionee's termination. Shares generally vest at the rate of 25.0% after
one year of service from the date of grant, and 2.1% at the end of each month
thereafter. Options have a term of ten years but may terminate before their
expiration dates if the optionee's status as an employee is terminated or upon
the optionee's death or disability.
With respect to the amounts disclosed in the column captioned "Potential
Realizable Value At Assumed Annual Rates Of Stock Price Appreciation For Option
Term," the 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission
and do not represent our estimate or projection of our future common stock
prices. The potential realizable values are calculated by assuming the initial
offering price of common stock appreciates at the indicated rate for the entire
term of the option, and that the option is exercised at the exercise price and
sold on the last day of the option term at the appreciated price. Actual gains,
if any, on stock option exercises are dependent on the future performance of
our common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.
Aggregate option exercises in last fiscal year and year-end option values
The following table sets forth certain information concerning exercises of
stock options during the fiscal year ended December 31, 1999 by the named
executive officers and the number and value of unexercised options held by each
of the named executive officers on December 31, 1999. No options were exercised
by the named executive officers in 1999.
All options are fully exercisable, subject to our lapsing right to repurchase
any unvested shares at the original exercise price in the event of the
optionee's termination.
The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options and the fair market value of the
options, based upon an assumed public offering price of $ per share minus
the exercise price per share.
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51
<PAGE>
Management
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<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At December 31, 1999 At December 31, 1999
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John W. Morgan.............. 650,000 325,000
Alistair F. McLaren......... 137,500 62,500
David S. Utley, M.D. ....... 285,416 64,584
Carol A. Chludzinski........ 100,000 --
John W. Gaiser.............. 196,428 103,572
</TABLE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
Our bylaws provide that we will indemnify our directors and executive officers,
and may indemnify our other officers, employees and other agents, to the
fullest extent permitted by the General Corporation Law of the State of
Delaware. Under our bylaws, we also are empowered to enter into indemnification
agreements with our directors and officers and to purchase insurance on behalf
of any person whom we are required or permitted to indemnify. We intend to
purchase a directors' and officers' liability insurance policy that insures
such persons against the costs of defense, settlement or payment of a judgment
under certain circumstances.
We intend to enter into indemnification agreements with our directors and
executive officers. Under these agreements, we would be required to indemnify
them against all expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred, in connection with any actual, or any
threatened, proceeding if any of them may be made a party because he or she is
or was one of our directors or officers. We are obligated to pay these amounts
only if the officer or director acted in good faith and in a manner that he or
she reasonably believed to be in or not opposed to our best interests. With
respect to any criminal proceeding, we are obligated to pay these amounts only
if the officer or director had no reasonable cause to believe that his or her
conduct was unlawful. The indemnification agreements also set forth procedures
that will apply in the event of a claim for indemnification thereunder.
In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under
the General Corporation Law of the State of Delaware. This provision in our
amended and restated certificate of incorporation does not eliminate a
director's duty of care, and, in appropriate circumstances, equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to liability for any
breach of the director's duty of loyalty to us, for acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law,
for acts or omissions that the director believes to be contrary to our best
interests or our stockholders, for any transaction from which the director
derived an improper personal benefit, for improper transactions between the
director and us, and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable.
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52
<PAGE>
Management
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There is no pending litigation or proceeding involving any of our directors or
officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
EMPLOYMENT AGREEMENTS
In September 1999, we entered into an employment agreement with John W. Morgan
whereby we have agreed to provide Mr. Morgan with a lump sum severance payment
equal to six months current monthly salary and six months accelerated vesting
on any unvested options upon termination of his employment other than for
cause. The agreement also provides that, upon Mr. Morgan's termination other
than for cause within 12 months following an acquisition, merger or sale of a
majority of the company's assets, Mr. Morgan's outstanding stock options will
fully and immediately vest. The agreement also provides for mortgage assistance
in the amount of $8,500 per month for four years. See also "Certain
transactions."
Each of our other named executive officers signed an offer letter before
commencing their employment with us. The offer letters set forth each
officer's:
.position and title,
.salary and other compensation,
.health benefits,
.option grant and vesting schedule, and
.obligation to abide by confidentiality provisions.
Additionally, each offer letter states that employment with us is at-will and
may be terminated by either party at any time with or without notice or cause.
EMPLOYEE BENEFIT PLANS
1997 Stock Option Plan
On May 1, 1997, our sole director at the time adopted our 1997 Stock Option
Plan, referred to as the 1997 Plan, and the stockholders approved our 1997 Plan
in March 1998. Our board of directors has decided not to grant any additional
awards under the 1997 Plan as of the effective date of this offering. However,
the 1997 Plan will continue to govern the terms and conditions of the
outstanding awards granted under the 1997 Plan.
A total of 4,700,000 shares of our common stock are authorized for issuance
under the 1997 Plan. As of May 15, 2000, options and stock purchase rights to
acquire a total of 2,135,223 shares of our common stock were issued and
outstanding, and a total of 1,652,527 shares of our common stock had been
issued upon the exercise of options and stock purchase rights granted under the
1997 Plan.
Our board of directors or a committee of our board administers the 1997 Plan.
The administrator of the 1997 Plan has the authority to determine the terms and
conditions of the options and stock purchase rights granted under the 1997
Plan.
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53
<PAGE>
Management
- --------------------------------------------------------------------------------
Our 1997 Plan provides for the grant of options and stock purchase rights.
Stock purchase rights and nonstatutory stock options may be granted to our
employees, directors and consultants, and incentive stock options within the
meaning of Section 422 of the Internal Revenue Code may be granted to our
employees.
The exercise price of options granted under our 1997 Plan may not be less than
85% of fair market value of our common stock on the date of grant, or 100% of
fair market value in the case of an incentive stock option and the term of an
option may not exceed 10 years. An outstanding option may terminate before the
end of its 10 year term if an optionee ceases to be a service provider.
Stock purchase rights provide an eligible service provider the right to
purchase shares of our common stock. The shares under a stock purchase right
may or may not be fully vested on the date of grant. If the shares are
initially unvested, the shares will vest over the individual's period of
continued service with us. We will have the right to repurchase any unvested
shares upon the individual's termination of service with us.
Our 1997 Plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option. If the outstanding options
are not assumed or substituted, the options will terminate. However, the
administrator of the 1997 Plan has the discretionary authority to provide that
each option that is not assumed or substituted in a merger or asset sale will
accelerate and become fully exercisable before termination.
2000 Stock Plan
Our board of directors adopted the 2000 Stock Plan, referred to as the 2000
Plan, in 2000 and the stockholders approved our 2000 Plan in 2000.
Our 2000 Plan is the successor equity incentive plan to our 1997 Plan.
The 2000 Plan is designed to allow us to retain and attract employees,
directors and consultants who are essential to our future growth and success by
providing such individuals with an opportunity to acquire shares of our common
stock. Our 2000 Plan provides for the grant of nonstatutory stock options to
our employees, directors and consultants, and for the grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code, to our
employees and employees of our corporations.
Number of shares of common stock available under the 2000 Plan
A total of 2,000,000 shares of our common stock are authorized for issuance
under the 2000 Plan. On the first day of each fiscal year during the term of
the 2000 Plan, beginning with our fiscal year 2001, the number of shares
available for issuance under our 2000 Plan will increase by an amount of shares
equal to the lesser of % of the outstanding shares of our common stock on the
last day of our immediately preceding fiscal year, shares, or such lesser
number of shares as our board may determine.
Administration of the 2000 Plan
Our board of directors or a committee of our board administers the 2000 Plan.
In the case of options intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Internal Revenue Code, the
committee will consist of two or more "outside directors" within the meaning of
Section 162(m) of the Internal Revenue Code. The administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the exercisability of the options, and
the form of consideration payable upon exercise.
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54
<PAGE>
Management
- --------------------------------------------------------------------------------
Options
The administrator determines the exercise price of options granted under the
2000 Plan, but with respect to nonstatutory stock options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code and all incentive stock options, the exercise price must
at least be equal to the fair market value of our common stock on the date of
grant. The term of an incentive stock option may not exceed 10 years, except
that with respect to any participant who owns 10% of the voting power of all
classes of our outstanding capital stock, the term must not exceed five years
and the exercise price must equal at least 110% of the fair market value on the
grant date. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than shares in any
fiscal year. In connection with his or her initial service, an optionee may be
granted options to purchase up to an additional shares.
After termination of one of our employees, directors or consultants, he or she
may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
Automatic grants to nonemployee directors
Our 2000 Plan provides for the periodic automatic grant of options to our
nonemployee directors. Each option granted under this automatic grant provision
will have an exercise price per share equal to 100% of the fair market value
per share of our common stock on the date of grant, and will have a term of 10
years, unless terminated earlier upon the optionee's termination of service as
a director. Following is a brief description of the options that will
automatically be granted to nonemployee directors under the 2000 Plan:
.Initial Grant. A nonemployee director will automatically be granted an option
to purchase shares of our common stock on the later of the effective date
of the 2000 Plan, or the date the individual first becomes a nonemployee
director, whether by appointment by our board or election by our stockholders.
An employee director who ceases to be an employee will not be eligible to
receive this initial grant. Each initial -share option grant will become
vested and exercisable with respect to the shares in four successive equal
annual installments measured from the option grant date.
.Annual Grants. Each nonemployee director will automatically be granted an
option to purchase shares of our common stock on of each year, provided
the individual has been a nonemployee director for at least six months on the
date of grant. Each annual -share option grant will become vested and
exercisable in [one installment] on the first anniversary of the option grant
date.
The other terms and conditions of the options automatically granted to
nonemployee directors under the 2000 Plan will be governed by the terms of our
2000 Plan.
Transferability of options
Our 2000 Plan generally does not allow for the transfer of options and only the
optionee may exercise an option during his or her lifetime. The administrator
may, however, allow options to be transferable.
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55
<PAGE>
Management
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Adjustments upon merger or asset sale
Our 2000 Plan provides that in the event of our merger with or into another
corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option. If the outstanding options
are not assumed or substituted, the administrator will provide notice to the
optionee that he or she has the right to exercise the option as to all of the
shares subject to the option, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period.
Amendment and termination of our 2000 Plan
Our 2000 Plan will automatically terminate in 2010, unless we terminate it
sooner. In addition, our board of directors has the authority to amend, suspend
or terminate the 2000 Plan provided it does not adversely affect any option
previously granted under our 2000 Plan.
2000 Employee Stock Purchase Plan
Our board of directors adopted the 2000 Employee Stock Purchase Plan, referred
to as the Purchase Plan, in 2000 and the stockholders approved our Purchase
Plan in 2000. Our Purchase Plan provides eligible employees the opportunity
to purchase shares of our common stock at a discount through payroll
deductions.
Number of shares of common stock available under the Purchase Plan
A total of 400,000 shares of our common stock are authorized for issuance under
the Purchase Plan. In addition, the number of shares authorized for issuance
under the Purchase Plan will increase annually on the first day of each fiscal
year, beginning with our fiscal year 2001, equal to the lesser of 1.5% of the
outstanding shares of our common stock on the last day of the immediately
preceding fiscal year 500,000 shares, or such lesser number of shares as may be
determined by our board of directors.
Administration of the Purchase Plan
Our board of directors or a committee of our board administers the Purchase
Plan. Our board of directors or its committee has full and exclusive authority
to interpret the terms of the Purchase Plan and determine eligibility.
Eligibility to participate
All of our employees are eligible to participate if they are customarily
employed by us for at least 20 hours per week and more than five months in any
calendar year. However, an employee may not be granted an option to purchase
stock under the Purchase Plan if such employee:
.immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of our capital stock; or
.whose rights to purchase stock under all of our employee stock purchase plans
accrues at a rate that exceeds $25,000 worth of stock for each calendar year.
Offering periods and contributions
Our Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code and contains consecutive, overlapping 24-month offering periods.
Each offering period includes four six-month purchase periods. The offering
periods generally start on the first trading day on or after May 1st and
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56
<PAGE>
Management
- --------------------------------------------------------------------------------
November 1st of each year, except for the first such offering period which will
begin on the first trading day on or after the effective date of this offering
and will end on the last trading day on or after May 1, 2002.
Our Purchase Plan permits participants to purchase common stock through payroll
deductions of up to 15% of their eligible compensation which includes a
participant's base straight time gross earnings and commissions. A participant
may purchase a maximum of 5,000 shares during a six-month purchase period.
Purchase of shares
Amounts deducted from a participant's eligible compensation and accumulated
during a six-month purchase period are used to purchase shares of our common
stock at the end of the six-month purchase period. The price is 85% of the
lower of the fair market value of our common stock at the beginning of an
offering period or at the end of a purchase period. If the fair market value at
the end of a purchase period is less than the fair market value at the
beginning of the offering period, participants will be withdrawn from the
current offering period after their purchase of shares on the purchase date and
will be automatically re-enrolled in a new offering period. Participants may
end their participation at any time during an offering period, and will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
Transferability of rights
A participant may not transfer rights granted under the Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the Purchase Plan.
Adjustments upon merger or asset sale
In the event of our merger with or into another corporation or a sale of all or
substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Amendment and termination of the Purchase Plan
Our Purchase Plan will terminate in 2010. However, our board of directors has
the authority to amend or terminate our Purchase Plan, except that, subject to
certain exceptions described in the Purchase Plan, no such action may adversely
affect any outstanding rights to purchase stock under our Purchase Plan.
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57
<PAGE>
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Certain transactions
In January and February 1998, we issued and sold an aggregate of 5,010,000
shares of common stock to a total of 29 investors at a purchase price of $0.001
per share. The officers, directors and five percent stockholders who purchased
shares of common stock were (i) Stuart D. Edwards, 3,130,000 shares,
(ii) Alistair F. McLaren, 100,000 shares and (iii) David S. Utley, 200,000
shares.
In December 1998, we sold shares of our Series B preferred stock, which is
convertible into an aggregate of 5,132,744 shares of common stock, at a price
per common equivalent share of $1.13. We sold the shares pursuant to a
preferred stock purchase agreement and a registration rights agreement under
which, among other things, we made standard representations, warranties and
covenants, and provided the purchasers with registration rights and information
rights. See "Description of capital stock."
In August 1999, we sold shares of our Series C preferred stock convertible into
an aggregate of 9,833,333 shares of common stock at a price per common
equivalent share of $1.50. We sold the shares pursuant to a preferred stock
purchase agreement and a registration rights agreement under which, among other
things, we made standard representations, warranties and covenants, and
provided the purchasers with registration rights and information rights. See
"Description of capital stock."
The purchasers of the Series B and Series C preferred stock included, among
others, the following principal stockholders, directors and affiliates:
<TABLE>
<CAPTION>
Series B Series C
Stockholders, directors and affiliates Preferred Preferred
- --------------------------------------------------------------------------------
<S> <C> <C>
ONSET Ventures.............................................. 2,544,248 1,666,667
U.S. Venture Partners....................................... 2,544,248 2,666,667
Alan L. Kaganov............................................. 44,248 33,333
Excelsior Private Equity Fund II............................ 4,000,000
Travelers Insurance Co...................................... 1,333,333
</TABLE>
In May 2000, we issued promissory notes in the aggregate principal amount of
$11,090,000, all of which is currently outstanding. The notes bear interest at
8%. If not prepaid, the notes are convertible into 3,696,666 shares of common
stock beginning in May 2001 and are due in May 2005. Notes were issued to
affiliates ONSET Ventures in the amount of $7,500,000, U.S. Venture Partners in
the amount of $2,000,000, and Excelsior Private Equity Fund in the amount of
$1,500,000. In connection with the issuance of the notes, each holder received
warrants to purchase the number of shares of common stock equal to nine percent
of the face value of each note, exercisable at a price of $2.50 per share.
Effective October 29, 1999, Stuart D. Edwards resigned as our Chief Executive
Officer and President. Mr. Edwards maintains a consulting arrangement with us
until April 2001, whereby he is paid $17,167 monthly.
On December 10, 1999, we extended a loan to Mr. Edwards in the aggregate
principal amount of $250,000, all of which is currently outstanding. This loan
bears interest at the rate of 6% per annum, matures on December 10, 2000 and is
secured by 1,565,000 shares of our common stock.
Robert F. Kuhling is a general partner of ONSET Ventures and beneficially owns
4,210,915 shares of our stock. Mr. Kuhling disclaims beneficial ownership of
the shares held by such entity except to his
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58
<PAGE>
Certain transactions
- --------------------------------------------------------------------------------
proportionate ownership interest therein. Mr. Morgan has invested $200,000,
Mr. Gaiser has invested $200,000 and Dr. Utley has invested $100,000 in a fund
managed by ONSET Ventures.
In March 2000, John W. Morgan exercised his option for 650,000 shares of common
stock; Alistair F. McLaren exercised his options for 143,750 shares of common
stock; David S. Utley exercised his options for 291,666 shares of common stock;
Carol Chludzinski exercised her options for 150,000 shares of common stock;
John W. Gaiser exercised his options for 253,571 shares of common stock; and
Alan L. Kaganov exercised his option for 100,000 shares of common stock. The
shares issued or issuable upon exercise are subject to repurchase by us, with
such repurchase right lapsing with respect to various amounts depending on the
date of grant and vesting schedule. Our right of repurchase lapses in full in
the event of our merger with or into another corporation, or the sale of all or
substantially all of our assets, in which our stockholders before the
transaction own less than 50% of the voting securities of the surviving
corporation or its parent following the transaction.
We provide Mr. Morgan with mortgage assistance in the amount of $8,500 per
month for four years following the commencement of his employment. The loan
will be forgiven upon termination of his employment other than for cause or
upon death or disability. The loan is immediately due and payable if he
voluntarily terminates employment within 12 months of an initial public
offering or within 6 months of a change in control, unless the acquiring entity
assumes the loan.
We have entered into a termination agreement with Stuart D. Edwards providing
for his resignation as President and Chief Executive Officer, effective October
29, 1999. The agreement provides for continuation of services as a consultant
until April 1, 2001 at a fee of $17,000 per month. In addition, the agreement
provides that his remaining restricted stock will continue to lapse through the
consulting period. If Mr. Edwards dies during the consulting period, his spouse
will continue to receive consulting payments.
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59
<PAGE>
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Principal stockholders
The following table sets forth certain information known to us with respect to
beneficial ownership of our common stock as of May 15, 2000, and as adjusted to
reflect the sale of the shares offered, by:
.each person known by us to own beneficially more than 5% of our outstanding
stock;
.each of our directors;
.each named executive officer; and
.all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of May 15, 2000 are deemed
outstanding. Percentage of beneficial ownership is based upon 23,534,743 shares
of common stock outstanding before this offering and shares of common stock
outstanding after this offering, based on the number of shares outstanding as
of May 15, 2000. To our knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the shares set
forth opposite such person's name. Except as otherwise indicated, the address
of each of the persons in this table is as follows: c/o Curon Medical, Inc.,
735 Palomar Ave., Sunnyvale, California 94086.
<TABLE>
<CAPTION>
Number of Percent Percent
shares owned owned
Number of underlying before after
shares options or this this
Name of beneficial owner outstanding warrants offering offering
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Entities affiliated with U.S.
Venture Partners (1)...... 5,210,915
Alan L. Kaganov
2180 Sand Hill Road, Suite
300
Menlo Park, CA 94025
Entities affiliated with
ONSET Ventures (2)........ 4,210,915
Robert F. Kuhling, Jr.
2490 Sand Hill Road
Menlo Park, CA 94025
Excelsior Private Equity Fund
II........................ 4,000,000
David I. Fann
114 W. 47th Street
New York, NY 10036-1532
Alan L. Kaganov (3).......... 5,388,496
Robert F. Kuhling, Jr. (4)... 4,210,915
David I. Fann (5)............ 4,000,000
Stuart D. Edwards............ 2,600,484
658 Westridge Drive
Portola Valley, CA 94028
</TABLE>
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60
<PAGE>
Principal stockholders
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<TABLE>
<CAPTION>
Number of
shares Percent Percent
Number of underlying owned owned
shares options or before this after this
Name of beneficial owner outstanding warrants offering offering
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Insurance Co.......... 1,333,333 --
One Tower Square
Nine Plaza Building
Hartford, CT 06183
John W. Morgan.................. 650,000 325,000
David S. Utley, M.D............. 491,666 58,334
John W. Gaiser.................. 253,571 96,429
Alistair F. McLaren............. 243,750 56,250
Carol Chludzinski............... 150,000 --
All executive officers and
directors as a group
(9 persons).................. 19,322,215 636,013
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) Includes 4,689,824 shares held by U.S. Venture Partners V, L.P., 260,545
shares held by USVP V International, L.P., 145,906 shares held by 2180
Associates Fund V, L.P., and 114,640 shares held by USVP V Entrepreneur
Partners, L.P. Excludes 177,581 shares held by Mr. Kaganov, 100,000 of
which are the result of exercising his option and are subject to repurchase
by us. Mr. Kaganov is a general partner of U.S. Venture Partners, L.P.
(2) Included 4,210,915 shares held by ONSET Enterprise Associates III, L.P.
(3) Includes 5,210,915 shares held by entities affiliated with U.S. Venture
Partners, L.P. Mr. Kaganov is a venture partner of U.S. Venture Partners,
L.P. and disclaims beneficial ownership of the shares held by U.S. Venture
Partners, L.P. except to the extent of his proportionate partnership
interest therein. Also includes 177,581 shares held by Mr. Kaganov.
(4) Includes 4,210,915 shares held by ONSET Enterprise Associates III, L.P. Mr.
Kuhling is a general partner of ONSET Enterprise Associates, III L.P. and
disclaims beneficial ownership of the shares held by ONSET Enterprise
Associates III, L.P. except to the extent of his proportionate partnership
interest therein.
(5) Includes 4,000,000 shares held by Excelsior Private Equity Fund II, Inc.
Mr. Fann is President and Chief Executive Officer of Excelsior Private
Equity Fund II, Inc. and disclaims beneficial ownership of the shares held
by Excelsior Private Equity Fund II, Inc. except to the extent of his
proportionate investment interest therein.
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61
<PAGE>
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Description of capital stock
The following information describes our common stock and preferred stock, as
well as options to purchase our common stock, and provisions of our certificate
of incorporation and our bylaws. This description is only a summary. You should
also refer to the certificate and bylaws which have been filed with the
Securities and Exchange Commission as exhibits to our registration statement,
of which this prospectus forms a part.
Upon the completion of this offering, we will be authorized to issue up to
55,000,000 shares of capital stock, $0.001 par value, to be divided into two
classes to be designated, respectively, "common stock" and "preferred stock."
Of such shares authorized, 50,000,000 shares shall be designated as common
stock, and 5,000,000 shares shall be designated as preferred stock.
COMMON STOCK
As of May 15, 2000, there were 23,534,743 shares of common stock outstanding
that were held of record by approximately 96 stockholders, assuming conversion
of all shares of preferred stock outstanding as of May 15, 2000 into 16,837,077
shares of common stock. There will be shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options, after giving effect to the sale of common stock offered
in this offering. As of May 15, 2000, there are outstanding options to purchase
a total of 2,135,223 shares of our common stock under our stock plans.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Our stockholders
do not have cumulative voting rights in the election of directors. Accordingly,
holders of a majority of the shares voting are able to elect all of the
directors. Subject to preferences that may be granted to any then outstanding
preferred stock, holders of common stock are entitled to receive ratably only
those dividends as may be declared by the board of directors out of funds
legally available therefor, as well as any distributions to the stockholders.
See "Dividend policy." In the event of our liquidation, dissolution or winding
up, holders of common stock are entitled to share ratably in all of our assets
remaining after we pay our liabilities and distribute the liquidation
preference of any then outstanding preferred stock. Holders of common stock
have no preemptive or other subscription or conversion rights. There are no
redemption or sinking fund provisions applicable to the common stock.
WARRANTS
As of May 15, 2000, there were warrants outstanding to purchase 267,000 shares
of common stock at a weighted average exercise price of $0.63 per share,
assuming conversion of series A preferred warrants to common. As of May 15,
2000, there were warrants outstanding to purchase 217,000 shares of Series A
preferred stock at a weighted average exercise price of $0.65 per share, which
upon completion of this offering will be exercisable into 217,000 shares of
common stock. We issued all of the warrants to Venture Banking Group, a
division of Cupertino National Bank, in connection with a line of credit.
Warrants to purchase 50,000 shares of common stock are exercisable at any time
prior to the earlier of January 8, 2008, or five years after the effective date
of this offering. Warrants for 7,000, 60,000 and 150,000 shares of series A
preferred stock are exercisable at any time prior to the earlier of February,
August and October, 2008, respectively, or five years after the effective date
of this offering. In addition, on May 19, 2000 we issued warrants to purchase
998,100 shares of common stock at an exercise price of $2.50 per share in
connection with a convertible note financing.
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<PAGE>
Description of capital stock
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PREFERRED STOCK
Upon completion of this offering, our 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 fix the rights,
preferences, privileges and restrictions thereof. These rights, preferences and
privileges include dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, any or all of
which may be greater than the rights of common stock. The issuance of preferred
stock could adversely affect the voting power of holders of common stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation. In addition, the issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in control of Curon
Medical. We have no present plan to issue any shares of preferred stock.
REGISTRATION RIGHTS
After the closing of this offering, the holders of approximately 16,837,077
shares of our common stock will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. In the event that we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders, these holders are
entitled to notice of such registration and are entitled to include their
common stock in such registration, subject to certain marketing and other
limitations. Beginning six months after the closing of this offering, the
holders of at least 40% of these securities have the right to require us, on
not more than three occasions, to file a registration statement under the
Securities Act in order to register shares of their common stock. We may, in
certain circumstances, defer such registrations and the underwriters have the
right, subject to certain limitations, to limit the number of shares included
in such registrations. Further, these holders may require us to register all or
a portion of their shares on Form S-3, subject to certain conditions and
limitations.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Our bylaws provide for our board of directors to be divided into three classes,
with staggered three-year terms. When this division is effective, only one
class of directors will be elected at each annual meeting of our stockholders,
with the other classes continuing for the remainder of their respective three-
year terms. However, until this classification of our board of directors is
effective, and because our stockholders have no cumulative voting rights, our
stockholders representing a majority of the shares of common stock outstanding
will be able to elect all of the directors. Our bylaws also provide that all
stockholder action must be effected at a duly called meeting of stockholders
and not by a consent in writing, and that only our board of directors, chairman
of the board, chief executive officer, president and one or more stockholders
holding shares in the aggregate in at least 10% of the voting shares of our
stock may call a special meeting of stockholders.
The combination of the classification of our board of directors, when
effective, and the lack of cumulative voting will make it more difficult for
our existing stockholders to replace our board of directors as well as for
another party to obtain control of Curon Medical by replacing our board of
directors. Since the board of directors has the power to retain and discharge
our officers, these provisions could also make it more difficult for existing
stockholders or another party to effect a change in management. In addition,
the authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
Curon Medical.
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<PAGE>
Description of capital stock
- --------------------------------------------------------------------------------
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Curon Medical. These provisions are
intended to enhance the likelihood of continued stability in the composition of
our board of directors and in the policies furnished them and to discourage
certain types of transactions that may involve an actual or threatened change
of control of Curon Medical. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our shares that could result from
actual or rumored takeover attempts. Such provisions may also have the effect
of preventing changes in our management.
SECTION 203 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
We are subject to Section 203 of the General Corporation Law of the State of
Delaware, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years after
the date that such stockholder became an interested stockholder, with the
following exceptions:
.before such date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder
becoming an interested holder;
.upon consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
began, excluding for purposes of determining the number of shares outstanding
those shares owned by persons who are directors and also officers and by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
.on or after such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of the stockholders,
and not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include the following:
.any merger or consolidation involving the corporation and the interested
stockholder;
.any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder;
.subject to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder;
.any transaction involving the corporation that has the effect of increasing
the proportionate share of the stock or any class or series of the corporation
beneficially owned by the interested stockholder; or
.the receipt by the interested stockholder of the benefit of any loss,
advances, guarantees, pledges or other financial benefits by or through the
corporation.
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64
<PAGE>
Description of capital stock
- --------------------------------------------------------------------------------
In general, Section 203 defines interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation or any entity or person affiliated with or controlling or
controlled by such entity or person.
NASDAQ NATIONAL MARKET LISTING
Application has been made for quotation of our common stock on the Nasdaq
National Market under the symbol "CURN."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services L.L.C. Its address is 400 South Hope St., 4th Floor, Los
Angeles, California 90071, and its telephone number is (213) 553-9730.
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<PAGE>
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Shares eligible for future sale
Upon completion of this offering, we will have shares of common stock
outstanding based on shares outstanding as of March 15, 2000. Of these shares,
the shares sold in this offering will be freely transferable without
restriction under the Securities Act, unless they are held by our "affiliates"
as that term is used under the Securities Act and the regulations promulgated
thereunder.
Of these shares, the remaining shares were sold by us in reliance on
exemptions from the registration requirements of the Securities Act, are
restricted securities within the meaning of Rule 144 under the Securities Act
and become eligible for sale in the public market as follows:
.beginning 90 days after the effective date, shares will become eligible
for sale subject to the provisions of Rules 144 and 701; and
.beginning 180 days after the date of this prospectus, additional shares
will become eligible for sale, subject to the provisions of Rule 144, Rule
144(k) or Rule 701, upon the expiration of agreements not to sell such shares
entered into between the underwriters and such stockholders;
Beginning 180 days after the date of this prospectus, additional shares
subject to vested options as of the date of completion of this offering will be
available for sale subject to compliance with Rule 701 and upon the expiration
of agreements not to sell such shares entered into between the underwriters and
such stockholders. Any shares subject to lock-up agreements may be released at
any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, including an affiliate, who has beneficially owned
restricted shares for at least one year is entitled to sell, within any three-
month period commencing 90 days after the date of completion of this offering,
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock, approximately shares immediately after
this offering, or the average weekly trading volume in the common stock during
the four calendar weeks preceding such sale, subject to the filing of a Form
144 with respect to such sale and certain other limitations and restrictions.
In addition, a person who is not deemed to have been an affiliate of our
company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
Any of our employees, officers, directors or consultants who purchased his or
her shares before the date of completion of this offering or who holds vested
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits non-
affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after the date of completion of this offering. However, we and certain
officers, directors and other stockholders have agreed not to sell or otherwise
dispose of any shares of our common stock for the 180-day period after the date
of this prospectus without the prior written consent of the underwriters. See
"Underwriting."
Approximately 180 days after the date of completion of this offering, we intend
to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for
- --------------------------------------------------------------------------------
66
<PAGE>
Shares eligible for future sale
- --------------------------------------------------------------------------------
issuance under the 1997 Plan, the 2000 Plan and the Purchase Plan, thus
permitting the resale of such shares by non-affiliates in the public market
without restriction under the Securities Act. Such registration statements will
become effective immediately upon filing.
Before this offering, there has been no public market for our common stock, and
any sale of substantial amounts in the open market may adversely affect the
market price of our common stock offered hereby.
- --------------------------------------------------------------------------------
67
<PAGE>
- -------------------------------------------------------------------------------
Underwriting
Curon Medical and the underwriters for the offering named below have entered
into an underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, CIBC World Markets
Corp. and SG Cowen Securities Corporation are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
- --------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC.........................................................
CIBC World Markets Corp. ...............................................
SG Cowen Securities Corporation.........................................
----
Total.................................................................
====
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares
in approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up
to an additional shares.
<TABLE>
<CAPTION>
No exercise Full exercise
- --------------------------------------------------------------------------------
<S> <C> <C>
Per share............................................ $ $
Total.............................................. $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock to be offered.
Curon Medical, its directors, officers and substantially all of its
stockholders, option holders and warrant holders have agreed with the
underwriters not to offer, sell, contract to sell, hedge or otherwise dispose
of, directly or indirectly, or file with the SEC a registration statement
under the Securities Act relating to, any of its common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after
the date of this prospectus, without the prior written consent of UBS Warburg
LLC.
- -------------------------------------------------------------------------------
68
<PAGE>
Underwriting
- --------------------------------------------------------------------------------
The underwriters have reserved for sale, at the initial public offering price,
up to shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our management, other parties,
including our employees, may participate in the reserve shares program. The
number of shares available for sale to the general public in the offering will
be reduced to the extent these persons purchase reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares in this offering.
Before this offering, there has been no public market for our common stock. The
initial public offering price will be negotiated by us and the representatives.
The principal factors to be considered in determining the initial public
offering price include:
.the information set forth in this prospectus and otherwise available to the
representatives;
.the history and the prospects for the industry in which we compete;
.the ability of our management;
.our prospects for future earnings, the present state of our development, and
our current financial position;
.the general condition of the securities markets at the time of this offering;
and
.the recent market prices of, and the demand for, publicly traded common stock
of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933 and to contribute to
payments that the underwriters may be required to make in respect thereof.
- --------------------------------------------------------------------------------
69
<PAGE>
- --------------------------------------------------------------------------------
Legal matters
The validity of the shares of common stock offered hereby will be passed upon
for Curon Medical, Inc. by Wilson Sonsini Goodrich & Rosati, Palo Alto,
California. Partners and associates of Wilson Sonsini Goodrich & Rosati, Palo
Alto, California maintain beneficial ownership of 160,000 shares of our common
stock. Dewey Ballantine LLP, New York, New York, is acting as counsel for the
underwriters in connection with various legal matters relating to the shares of
common stock offered by this prospectus.
Experts
The financial statements as of December 31, 1998 and 1999 and for the period
from May 1, 1997 (date of inception) to December 31, 1997, for each of the two
years in the period ended December 31, 1999 and for the cumulative period from
May 1, 1997 (date of inception) to December 31, 1999, included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act with respect to
the shares of common stock to be sold in this offering. This prospectus does
not contain all the information set forth in the registration statement. For
further information with respect to us and the shares of common stock to be
sold in this offering, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. Whenever
a reference is made in this prospectus to any contract or other document of
ours, the reference may not be complete, and you should refer to the exhibits
that are apart of the registration statement for a copy of the contract or
document.
You may read and copy all or any portion of the registration statement or any
other information that Curon Medical, Inc. files at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies
of these documents, upon payment of a duplicating fee, by writing to the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our SEC filings, including the registration
statement, are also available to you on the SEC's web site
(http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors
of these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.
- --------------------------------------------------------------------------------
70
<PAGE>
Curon Medical, Inc. (a company in the development stage)
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
- --------------------------------------------------------------------------------
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
- --------------------------------------------------------------------------------
F-1
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Curon Medical, Inc.
(a company in the development stage)
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Curon Medical, Inc. (a company in
the development stage) at December 31, 1998 and December 31, 1999, and the
results of its operations and its cash flows for the period from May 1, 1997
(date of inception) to December 31, 1997, for each of the two years in the
period ended December 31, 1999 and for the cumulative period from May 1, 1997
(date of inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
May 3, 2000, except for Note 13
for which the date is May 19, 2000
San Jose, California
- --------------------------------------------------------------------------------
F-2
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro forma
Stockholders
Equity at
December 31, March 31, March 31,
1998 1999 2000 2000
- -------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............. $4,502,000 $7,988,000 $6,879,000
Marketable securities.... -- 1,510,000 --
Accounts receivable...... -- -- 16,000
Related party
receivables............. 262,000 -- --
Prepaid expenses and
other current assets.... 6,000 88,000 143,000
Inventories.............. -- 321,000 377,000
---------- ----------- -----------
Total current assets...... 4,770,000 9,907,000 7,415,000
Related party note
receivable............... 250,000 250,000 277,000
Property and equipment,
net...................... 767,000 1,458,000 1,437,000
Intangible assets......... -- -- 468,000
Other assets.............. 55,000 71,000 83,000
---------- ----------- -----------
Total assets.............. $5,842,000 $11,686,000 $9,680,000
========== =========== ===========
Liabilities, Convertible
Preferred Stock and
Warrants and
Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable......... $183,000 $586,000 $333,000
Accrued liabilities...... 207,000 922,000 701,000
Current portion of long-
term debt............... 157,000 223,000 223,000
---------- ----------- -----------
Total current
liabilities.............. 547,000 1,731,000 1,257,000
Long-term debt, net of
current portion.......... 459,000 227,000 171,000
Other liabilities......... -- 19,000 19,000
---------- ----------- -----------
Total liabilities......... 1,006,000 1,977,000 1,447,000
---------- ----------- -----------
Convertible preferred
stock: $0.001 par value;
Authorized: 17,800,000
shares
Issued and outstanding:
7,004,000 shares at
December 31, 1998,
16,837,000 shares at
December 31, 1999, and
March 31, 2000
(unaudited) and none
pro forma (unaudited)
(Liquidation value:
$22,421,000 at December
31, 1999) .............. 7,593,000 21,688,000 21,688,000 $ --
---------- ----------- ----------- ------------
Preferred stock
warrants................ 120,000 120,000 120,000 --
---------- ----------- ----------- ------------
Commitments and
Contingency (Note 6)
Stockholders' equity
(deficit):
Common Stock: $0.001 par
value;
Authorized: 30,000,000
shares
Issued and outstanding:
4,970,000 shares at
December 31, 1998,
4,945,000 shares at
December 31, 1999,
6,653,000 shares at
March 31, 2000
(unaudited) and
23,371,000 shares pro
forma (unaudited)....... 5,000 5,000 7,000 23,000
Additional paid-in
capital................. 288,000 8,642,000 11,018,000 32,810,000
Deferred stock
compensation............ (176,000) (3,663,000) (4,208,000) (4,208,000)
Deficit accumulated
during the development
stage................... (2,994,000) (17,083,000) (20,392,000) (20,392,000)
---------- ----------- ----------- ------------
Total stockholders'
equity (deficit)........ (2,877,000) (12,099,000) (13,575,000) $ 8,233,000
---------- ----------- ----------- ============
Total liabilities,
convertible preferred
stock and warrants and
stockholders' equity
(deficit)................ $5,842,000 $11,686,000 $9,680,000
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-3
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
Period from Period from
May 1, 1997 May 1, 1997
(Date of (Date of
Inception) Inception)
to to Three Months Ended
December 31, Years Ended December 31, December 31, March 31,
1997 1998 1999 1999 1999 2000
---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ -- $ -- $ -- $ 44,000
Cost of goods sold...... -- -- -- -- -- 21,000
-------- ----------- ------------ ------------ ----------- -----------
Gross profit............ -- -- -- -- -- 23,000
Operating expenses:
Research and
development......... 28,000 1,581,000 8,961,000 10,570,000 990,000 1,756,000
Clinical and
regulatory.......... -- 335,000 2,012,000 2,347,000 369,000 410,000
Sales and marketing.... -- -- 940,000 940,000 105,000 339,000
General and
administrative...... 13,000 959,000 2,345,000 3,317,000 312,000 931,000
-------- ----------- ------------ ------------ ----------- -----------
Operating loss.......... (41,000) (2,875,000) (14,258,000) (17,174,000) (1,776,000) (3,413,000)
Interest income......... -- 8,000 258,000 266,000 38,000 117,000
Interest expense........ -- (86,000) (89,000) (175,000) (17,000) (13,000)
-------- ----------- ------------ ------------ ----------- -----------
Net loss................ $(41,000) $(2,953,000) $(14,089,000) $(17,083,000) $(1,755,000) $(3,309,000)
======== =========== ============ ============ =========== ===========
Net loss per share,
basic and diluted.... $ -- $ (1.28) $ (4.35) $ (0.57) $ (0.92)
======== =========== ============ =========== ===========
Shares used in computing
net loss per share,
basic and diluted.... N/A 2,306,000 3,237,000 3,089,000 3,590,000
======== =========== ============ =========== ===========
Pro forma net loss per
share, basic and
diluted.............. $ (1.04) $ (0.16)
============ ===========
Shares used in computing
pro forma net loss
per share, basic and
diluted.............. 13,519,000 20,427,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-4
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' DEFICIT
Period from May 1, 1997 (Date of Inception) to March 31, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional Deferred during the Total
----------------- Paid-In Stock Development Stockholders'
Shares Amount Capital Compensation Stage Deficit
--------- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
May 1, 1997 (date of
inception)...........
Net loss................ -- $-- $-- $-- $(41,000) $(41,000)
--------- ------ ----------- ----------- ------------ ------------
Balance at December 31,
1997................. -- -- -- -- (41,000) (41,000)
Issuance of common
stock in February
1998 at $0.001 per
share in exchange
for services
rendered............ 3,130,000 3,000 -- -- -- 3,000
Issuance of common
stock in February
and March 1998 at
$0.001 per share ... 1,880,000 2,000 -- -- -- 2,000
Repurchase of common
stock in June,
October and November
1998 at $0.001 per
share............... (190,000) -- -- -- -- --
Issuance of common
stock in July 1998
in exchange for
services rendered at
$0.10 per share..... 150,000 -- 15,000 -- -- 15,000
Deferred stock
compensation........ -- -- 273,000 (273,000) -- --
Amortization of
deferred stock
compensation........ -- -- -- 97,000 -- 97,000
Net loss............... -- -- -- -- (2,953,000) (2,953,000)
--------- ------ ----------- ----------- ------------ ------------
Balance at December 31,
1998................. 4,970,000 5,000 288,000 (176,000) (2,994,000) (2,877,000)
Common shares forfeited
against unpaid
employee loan in
March 1999.......... (25,000) -- -- -- -- --
Deferred stock
compensation........ -- -- 8,354,000 (8,354,000) -- --
Amortization of
deferred stock
compensation........ -- -- -- 4,867,000 -- 4,867,000
Net loss............... -- -- -- -- (14,089,000) (14,089,000)
--------- ------ ----------- ----------- ------------ ------------
Balance at December 31,
1999................. 4,945,000 5,000 8,642,000 (3,663,000) (17,083,000) (12,099,000)
Issuance of common
stock in February
2000 at $4.93 per
share in exchange
for patent license
agreement........... 100,000 -- 493,000 -- -- 493,000
Issuance of common
stock in January and
March 2000 at $0.14
per share .......... 1,608,000 2,000 229,000 -- -- 231,000
Deferred stock
compensation........ -- -- 1,654,000 (1,654,000) -- --
Amortization of
deferred stock
compensation........ -- -- -- 1,109,000 -- 1,109,000
Net loss............... -- -- -- -- (3,309,000) (3,309,000)
--------- ------ ----------- ----------- ------------ ------------
Balance at March 31,
2000 (unaudited)..... 6,653,000 $7,000 $11,018,000 $(4,208,000) $(20,392,000) $(13,575,000)
========= ====== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-5
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
Period from Period from
May 1, 1997 May 1, 1997
(Date of (Date of
Inception) Inception) Three Months Ended
to Year Ended December 31, to March 31,
December 31, ------------------------- December 31, ------------------------
1997 1998 1999 1999 1999 2000
------------ ----------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $(41,000) $(2,953,000) $(14,089,000) $(17,083,000) $(1,755,000) $(3,309,000)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... -- 151,000 325,000 476,000 58,000 136,000
Write-off of related
party receivables..... -- -- 73,000 73,000 -- --
Amortization of stock-
based compensation.... -- 97,000 4,867,000 4,964,000 135,000 1,109,000
Amortization of
discount on notes
payable............... -- 69,000 22,000 91,000 5,000 7,000
Common stock issued in
exchange for services
rendered.............. -- 18,000 -- 3,000 -- --
Preferred stock issued
in exchange for
intellectual property
and services
rendered.............. -- 175,000 3,000 193,000 -- --
Changes in current
assets and
liabilities:
Accounts receivable
trade................. -- -- -- -- -- (16,000)
Inventories............ -- -- (321,000) (321,000) -- (56,000)
Prepaid expenses and
other current assets.. -- (6,000) (82,000) (88,000) (2,000) (55,000)
Other assets........... (4,000) (51,000) (16,000) (71,000) 10,000 (12,000)
Accounts payable....... 96,000 87,000 403,000 586,000 289,000 (253,000)
Accrued liabilities.... -- 207,000 715,000 922,000 (72,000) (221,000)
Other long-term
liabilities........... -- -- 19,000 19,000 -- --
-------- ----------- ------------ ------------ ----------- -----------
Net cash provided by
(used in) operating
activities........... 51,000 (2,206,000) (8,081,000) (10,236,000) (1,332,000) (2,670,000)
-------- ----------- ------------ ------------ ----------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment......... (51,000) (867,000) (1,016,000) (1,934,000) (253,000) (90,000)
Purchase of marketable
securities............ -- -- (1,510,000) (1,510,000) --
Maturities of
marketable
securities............ -- -- -- -- -- 1,510,000
-------- ----------- ------------ ------------ ----------- -----------
Net cash provided by
(used in) investing
activities........... (51,000) (867,000) (2,526,000) (3,444,000) (253,000) 1,420,000
-------- ----------- ------------ ------------ ----------- -----------
Cash flows from
financing activities:
Proceeds from issuance
of notes payable...... 1,000 780,000 -- 781,000 -- --
Proceeds from issuance
of convertible notes
payable............... -- -- 800,000 800,000 -- --
Principal payments on
notes payable......... -- (114,000) (188,000) (302,000) (28,000) (63,000)
Related party
receivables........... -- (262,000) 189,000 (73,000) (9,000) --
Related party note
receivable............ -- (250,000) -- (250,000) (2,000) (27,000)
Proceeds from issuance
of convertible
preferred stock, net.. -- 7,418,000 13,292,000 20,710,000 -- --
Proceeds from issuance
of common stock....... -- 2,000 -- 2,000 -- 231,000
-------- ----------- ------------ ------------ ----------- -----------
Net cash provided by
(used in) financing
activities........... 1,000 7,574,000 14,093,000 21,668,000 (39,000) 141,000
-------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 1,000 4,501,000 3,486,000 7,988,000 (1,624,000) (1,109,000)
Cash and cash
equivalents at
beginning of period.... -- 1,000 4,502,000 -- 4,502,000 7,988,000
-------- ----------- ------------ ------------ ----------- -----------
Cash and cash
equivalents at end of
period................. $1,000 $4,502,000 $7,988,000 $7,988,000 $2,878,000 $6,879,000
======== =========== ============ ============ =========== ===========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest.............. $-- $16,000 $67,000 $83,000 $17,000 $12,000
Cash paid for taxes.... $-- $3,000 $1,000 $4,000 $-- $ --
Supplemental disclosure
of non-cash investing
and financing
information:
Conversion of notes
payable and accrued
interest to preferred
stock................. $-- $-- $803,000 $803,000 $-- $--
Deferred compensation.. $-- $273,000 $8,354,000 $8,549,000 $474,000 $1,654,000
Issuance of warrants
with debt............. $-- $120,000 $-- $120,000 $-- $--
Issuance of common
stock in exchange for
patent license
agreement............. $-- $-- $-- $-- $-- $493,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-6
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1--FORMATION AND BUSINESS OF THE COMPANY:
Curon Medical, Inc., formerly Conway Stuart Medical, Inc., (the "Company") was
incorporated in the state of Delaware on May 1, 1997. The Company develops,
manufactures, and markets proprietary products for the treatment of
gastrointestinal disorders. The Company is in the development stage and since
inception has devoted substantially all of its efforts to developing its
products and raising capital.
In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue over the next several
years. The Company intends to finance its operations primarily through its cash
and cash equivalents, marketable securities, future financing and future
revenues. However, there can be no assurance that such efforts will succeed or
that sufficient funds will be made available.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited interim financial information
The interim financial statements for the three months ended March 31, 1999 and
March 31, 2000 are unaudited and have been prepared on the same basis as the
annual financial statements. In the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for the fair presentation
of the financial statements have been included. The results of operations of
any interim period are not necessarily indicative of the results of operations
for the full year.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Initial public offering
In April 2000, the Board of Directors authorized management of the Company to
file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the outstanding preferred stock and warrants to purchase preferred stock as of
December 31, 1999, will automatically convert into 16,837,000 shares of common
stock. Unaudited pro forma stockholders' equity, as adjusted for the assumed
conversion of the preferred stock, is set forth on the balance sheet.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with remaining
maturities of three months or less at the date of purchase to be cash
equivalents. The Company's cash and cash equivalents include deposit funds,
money market funds and commercial paper.
Marketable securities
Marketable securities consist primarily of marketable corporate bonds and
commercial paper with a remaining maturity at the date of purchase of greater
than three months. These investments are classified as available-for-sale
securities and are stated at market value (which approximates cost), with any
temporary differences between an investment's amortized cost and its market
value recorded as a
- --------------------------------------------------------------------------------
F-7
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
separate component of stockholders' equity (deficit) until such gains or losses
are realized. Gains or losses on the sales of securities are determined on a
specific identification basis. At December 31, 1999, marketable securities were
invested in corporate bonds and commercial paper which mature in 2000.
Concentration of credit risk and other risks and uncertainties
The Company's cash and cash equivalents are maintained at one financial
institution. Deposits in this institution may exceed the amount of insurance
provided on such deposits.
The majority of products developed by the Company may require clearance from
the Food and Drug Administration ("FDA") or other international regulatory
agencies prior to commercial sales. There can be no assurance the Company's
products will receive the necessary clearance. If the Company was denied
clearance or clearance was delayed, it may have a material adverse impact on
the Company.
The Company's products and services are concentrated in rapidly changing,
highly competitive markets which are characterized by rapid technological
advances, changes in customer requirements and evolving regulatory requirements
and industry standards. Any failure by the Company to anticipate or to respond
adequately to technological developments in its industry, changes in customer
requirements or changes in regulatory requirements or industry standards, or
any significant delays in the development or introduction of products or
services, could have a material adverse effect on the Company's business and
operating results.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-
out basis) or market.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Fixed assets are depreciated over a life
of 3-5 years. Leasehold improvements are amortized using the straight-line
method over the estimated useful life of the improvement, or the lease term if
shorter. Upon retirement or sale, the cost and related accumulated depreciation
are removed from the balance sheet and the resulting gain or loss is reflected
in operations. Maintenance and repairs are charged to operations as incurred.
Intangible assets
Intangible assets consist of a technology license which is being amortized on a
straight-line basis over its estimated useful life of five years.
Long-lived assets
Long-lived assets and intangible assets are reviewed for impairment when events
or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of the asset's carrying
amount to future net undiscounted cash flows the assets are expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the projected discounted future net cash flows arising from the asset.
Research and development
Research and development costs related to present and future products are
expensed as incurred.
Income taxes
The Company accounts for income taxes under the liability method whereby
deferred tax asset or liability account balances are calculated at the balance
sheet date using current tax laws and rates in
- --------------------------------------------------------------------------------
F-8
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
Accounting for stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25,
unearned stock compensation is based on the difference, if any, on the date of
grant, between the fair value of the Company's common stock and the exercise
price.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The equity instruments are valued using the Black-Scholes model.
All deferred stock compensation is amortized and expensed in accordance with
FASB Interpretation No. 28, an accelerated vesting model.
Net loss per share
Basic net loss per share is calculated based on the weighted-average number of
common shares outstanding during the period excluding those shares that are
subject to repurchase. Diluted net loss per share would give effect to the
dilutive effect of common stock equivalents consisting of preferred stock,
stock options, warrants, and common stock subject to repurchase (calculated
using the treasury stock method). Potentially dilutive securities have been
excluded from the diluted net loss per share computations as they have an
antidilutive effect due to the Company's net loss.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1999 and the three
months ended March 31, 2000 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's preferred stock into shares of common stock
effective upon the closing of the offering, as if such conversion occurred on
January 1, 1999 and January 1, 2000 or at the date of the original issuance, if
later. The resulting pro forma adjustment includes an increase in the weighted
average shares used to compute basic and diluted net loss per share of
10,282,000 shares and 16,837,000 shares for the year ended December 31, 1999
and for the 3 months ended March 31, 2000, respectively.
Fair value of financial instruments
The carrying value of the Company's financial instruments, including cash and
cash equivalents, related party receivables, and accounts payable approximate
fair value. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of obligations approximates fair
value.
Segments
The Company operates in one segment, using one measurement of profitability to
manage its business. All long-lived assets are maintained in the United States.
- --------------------------------------------------------------------------------
F-9
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") which establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 as amended
by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB
Statement No. 133" is effective for fiscal years beginning after June 15, 2000.
The Company is evaluating the impact, if any, that SFAS No. 133 may have on its
financial statements. The Company, to date, has not engaged in derivative and
hedging activities.
In December 1999, the Securities and Exchange commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition, which provides guidance
on the recognition, presentation and disclosure on revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to
revenue recognition policies. The Company believes that its current revenue
recognition policy is in compliance with SAB 101.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation an Interpretation of APB 25," which clarifies (a)
the definition of an employee for purposes of applying opinion 25 (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. This interpretation is
effective July 1, 2000, with certain provisions effective earlier. The Company
does not expect FIN 44 to have a significant impact on its financial
statements.
NOTE 3--INVENTORIES:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Raw materials...................................... $ -- $ 209,000
Finished goods..................................... -- 112,000
-------- ----------
$ -- $ 321,000
======== ==========
NOTE 4--PROPERTY AND EQUIPMENT:
<CAPTION>
December 31, December 31,
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Computer and office equipment...................... $178,000 $ 336,000
Equipment.......................................... 614,000 1,072,000
Furniture and fixtures............................. 7,000 85,000
Leasehold improvements............................. 83,000 283,000
Software........................................... 36,000 158,000
-------- ----------
918,000 1,934,000
Less: Accumulated depreciation and amortization.... (151,000) (476,000)
-------- ----------
$767,000 $1,458,000
======== ==========
</TABLE>
Depreciation and amortization expense on property and equipment, for the years
ended December 31, 1998 and 1999 was $151,000 and $325,000, respectively.
Depreciation expense from May 1, 1997 (date of inception) to December 31, 1999
totaled $476,000.
- --------------------------------------------------------------------------------
F-10
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 5--LONG-TERM DEBT:
Long-term borrowings
The Company entered into an equipment line of credit in 1998. On February 18,
1999, the Company converted its equipment line of credit into a term debt
agreement which is collateralized by the equipment purchased under the original
line of credit and under substantially the same terms as the original
agreement. No gain or loss resulted on this conversion. At December 31, 1999,
the Company had $430,000 outstanding on this debt. Monthly payments began on
March 18, 1999 and will continue through February 2002. The term debt bears
interest at a rate of prime plus 2% per annum (10.5% at December 31, 1999).
Under the agreement, the Company is required to comply with certain financial
covenants.
The Company has a term loan with an outstanding balance at December 31, 1999 of
$49,000. The note is collateralized by the Company's assets. Monthly payments
of principal and interest will continue through December 18, 2001. Interest on
this note is set at the prime rate plus 2% per annum (10.5% at December 31,
1999).
On July 29, 1999, the Company issued 6% convertible promissory notes totaling
$800,000 in exchange for cash. The notes were due on August 31, 1999. On August
31, 1999, the notes had accrued interest of $3,000 were converted into 535,698
shares of Series C Preferred Stock based on a conversion price of $1.50 per
preferred share.
Principal payments on notes payable are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- --------------------------------------------------------------------------------
<S> <C>
2000................................................................. $ 223,000
2001................................................................. 223,000
2002................................................................. 33,000
2003 and thereafter.................................................. --
---------
479,000
Less:
Unamortized discount related to stock warrants....................... (29,000)
Current portion...................................................... (223,000)
---------
$ 227,000
=========
</TABLE>
NOTE 6--COMMITMENTS AND CONTINGENCY:
Leases
The Company leases office space under noncancelable operating leases expiring
in September 2003. Rent expense for the period May 1, 1997 through December 31,
1997, the years ended December 31, 1998, 1999 and for the cumulative period
from May 1, 1997 (date of inception) to December 31, 1999 was $0, $144,000,
$406,000 and $550,000, respectively.
At December 31, 1999, future minimum facility lease payments, are as follows:
<TABLE>
<S> <C>
2000................................................................. $ 508,000
2001................................................................. 525,000
2002................................................................. 543,000
2003................................................................. 414,000
----------
$1,990,000
==========
</TABLE>
In October 1999, the Company entered into a mutual agreement to terminate an
employment relationship with the former president and CEO. As a result of the
agreement, the Company released from restriction
- --------------------------------------------------------------------------------
F-11
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
the remaining shares subject to repurchase, totaling 1,239,000 shares.
Additionally, the Company agreed to pay $310,000 over a period of 18 months.
The total amount expensed in 1999 related to this agreement was $3,317,000.
Contingency
The Company is involved in routine legal and administrative proceedings that
arise from the normal conduct of business. Management believes that the
ultimate disposition of these matters will not have a material adverse effect
on the financial results or condition of the Company.
Development and technology license agreements
In December 1998, the Company entered into a technology license agreement with
Somnus Medical Technologies, Inc. granting the Company a license to
manufacture, use or sell products based on licensed technology in exchange for
a one-time license fee and shares of the Company's Series A Preferred Stock. At
the time of the licensing agreement, the Company believed that any knowledge
gained would be useful in developing their new product, however, there were no
alternative future uses (in other research and development projects or
otherwise) as the product was still undergoing significant testing and
development. Therefore, all amounts paid, including the value of the preferred
shares, were included as a component of research and development expense in
1998. Additionally, the Company is obligated to make royalty payments tied to
the Company's average selling price on licensed products. At the time of the
agreement, the Company paid to Somnus document fees upon receipt of the design
and manufacturing documents.
The technology agreement allows the Company to use the technology in a licensed
field, as defined in the technology agreement, and gives the Company an
irrevocable license to manufacture, have manufactured, use, offer to sell, sell
and import Radio Frequency generators based on the licensed technology in the
licensed field. The term of the agreement will be until the earlier of (i) the
expiration of the term of the last patent within the licensed technology owned
by Somnus or (ii) fifteen years if no patents within the licensed technology
are issued.
NOTE 7--CONVERTIBLE PREFERRED STOCK:
At December 31, 1999, the amounts, terms and liquidation values of Series A,
Series B and Series C convertible preferred stock are as follows:
<TABLE>
<CAPTION>
Shares of
Common
Stock
Shares Amount Net Reserved Aggregate
Shares Issued and Issue of Issuance for Liquidation
Designated Outstanding Date of Issuance Price Costs Conversion Preference
- ------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C>
Series A.. 2,100,000 1,871,000 March, May and June 1998 $1.00 $ 1,850,000 2,100,000 $ 1,871,000
Series B.. 5,200,000 5,133,000 December 1998 $1.13 5,743,000 5,200,000 5,800,000
Series C.. 10,500,000 9,833,000 August 1999 $1.50 14,095,000 10,500,000 14,750,000
---------- ---------- ----------- ---------- -----------
17,800,000 16,837,000 $21,688,000 17,800,000 $22,421,000
========== ========== =========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
F-12
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Voting
Each share of Series A, Series B and Series C convertible preferred stock has
voting rights equal to an equivalent number of shares of common stock into
which it is convertible.
As long as any shares of Series C convertible preferred stock remains
outstanding, the Company must obtain the approval from the holders of a
majority of the outstanding Series C convertible preferred stock in order to
make any change to the liquidation preference of the Series C convertible
preferred stock.
As long as any shares of Series A, Series B and Series C convertible preferred
stock remain outstanding, the Company must obtain approval from the holders of
at least two-thirds of the outstanding Series A, Series B and Series C
convertible preferred stock voting together as a single class in order to alter
the certificate of incorporation as related to convertible preferred stock,
change the authorized number of shares of convertible preferred stock or common
stock, repurchase any shares of common stock other than shares from employees
or consultants to the Company or pursuant to the Company's right of first
refusal, change the authorized number of Directors, create a new class of stock
or effect a merger or sale of all or substantially all of the assets of the
Company.
Dividends
Holders of Series A, Series B and Series C convertible preferred stock are
entitled to receive noncumulative dividends at the per annum rate of $0.07,
$0.08 and $0.105 per share, respectively, when and if declared by the Board of
Directors. The holders of Series A, Series B and Series C convertible preferred
stock will also be entitled to participate in dividends on common stock, when
and if declared by the Board of Directors, based on the number of shares of
common stock held on an as-if converted basis. No dividends on convertible
preferred stock or common stock have been declared by the Board from inception
through December 31, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company, the
holders of Series C preferred stock shall be entitled to receive an amount of
$1.50 per share plus any declared but unpaid dividends prior to and in
preference to any distribution to the holders of Series A and Series B
convertible preferred stock and common stock. After payments have been made to
the holders of Series C convertible preferred stock, the holders of Series A
and Series B convertible preferred stock are entitled to receive an amount of
$1.00 and $1.13 per share, respectively, plus any declared but unpaid dividends
prior to and in preference to any distribution to the holders of common stock.
After payment has been made to the holders of Series A, Series B and Series C
convertible preferred stock, each share of Series A, Series B and Series C
convertible preferred stock and common stock shall receive pro rata payment on
an as-if-converted to common stock basis until the holders of Series A, Series
B and Series C convertible preferred stock have received an aggregate of $3.00,
$3.39 and $4.50 per share, respectively, after which all remaining assets or
surplus funds of the Company shall be distributed to the holders of common
stock.
Should the Company's legally available assets distributed among the holders of
the Series C convertible preferred stock, be insufficient to satisfy the
liquidation preferences, the entire assets and funds of the Company legally
available for distribution shall be distributed among the holders of Series C
convertible preferred stock in proportion to the respective amounts which would
be payable on the shares held by them if the preferential amounts were paid in
full.
- --------------------------------------------------------------------------------
F-13
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Should the Company's legally available assets, distributed among the holders of
the Series A and Series B Convertible Preferred Stock, be insufficient to
satisfy the liquidation preferences, the entire assets and funds of the Company
legally available for distribution shall be distributed among the holders of
Series A and Series B convertible preferred stock in proportion to the
respective amounts which would be payable on the shares held by them if the
preferential amounts were paid in full.
Conversion
Each share of Series A, Series B and Series C convertible preferred stock is
convertible, at the option of the holder, according to a conversion ratio,
subject to adjustment for dilution. Each share of Series A, Series B and Series
C convertible preferred stock automatically converts into the number of shares
of common stock into which such shares are convertible at the then effective
conversion ratio upon: (1) the closing of an initial public offering of common
stock under the Securities Act of 1933 at a per share price of at least $5.00
per share with gross proceeds of at least $15,000,000, or (2) the closing of a
firm commitment public offering of common stock at a price per share of less
than $5.00 but not less than $4.00 and an aggregate offering price of not less
than $15,000,000 provided that the holders of a majority of the holders of
outstanding preferred stock voting as a single class, or (3) upon the Company's
receipt of the written consent of the holders of a majority of the outstanding
shares of the Series B and C convertible preferred stock, voting separately.
Warrants for Convertible Preferred Stock
In February and August 1998, the Company issued warrants to purchase 7,000 and
60,000 shares of Series A convertible preferred stock for $1.00 per share in
connection with a line of credit arrangement (Note 5). Should the Company
complete an initial public offering, the warrants would provide for the
purchase of common stock based on the conversion ratio of the common to
preferred on the closing date. Such warrants are outstanding at December 31,
1999 and expire the later of 2008 or five years after the closing of an initial
public offering of the Company's common stock. The value of these warrants,
determined by using a Black-Scholes model, was not material.
In connection with a line of credit agreement (Note 5), the Company issued a
warrant to purchase 150,000 shares of series A preferred stock for $0.50 per
share. Should the Company complete an initial public offering, the warrants
would provide for the purchase of common stock based on the conversion ratio of
the common to preferred on the closing date. The warrant expires the later of
October 2008 or five years after the closing of an initial public offering of
the Company's common stock. The aggregate value of these warrants of $120,000,
determined using a Black-Scholes valuation model, has been recorded as a
discount to notes payable and is being accreted as interest expense over the
life of the line.
NOTE 8--COMMON STOCK:
The Company's Certificate of Incorporation, as amended, authorizes the Company
to issue 30,000,000 shares of $0.001 par value common stock. Certain of the
shares issued are subject to a right of repurchase by the Company subject to
vesting, which is generally over a three or four year period from the issuance
date until vesting is complete. At December 31, 1998 and 1999, there were
2,295,000 and 1,753,000 shares subject to repurchase, respectively.
Warrants for Common Stock
During January and February 1998, the Company issued warrants to purchase
50,000 shares of common stock, respectively, for $0.50 per share in connection
with a line of credit. Such warrants were outstanding
at December 31, 1999 and expire the later of January and February 2008,
respectively, or five years after the closing of an initial public offering of
the Company's common stock. The value of these warrants, determined using a
Black-Scholes valuation model, was not material.
- --------------------------------------------------------------------------------
F-14
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 9--STOCK OPTION PLANS AND OTHER EMPLOYEE BENEFITS:
During 1997, the Company adopted the 1997 Stock Plan (the "Plan"). The Plan
provides for the granting of stock options to employees and consultants of the
Company. Options granted under the Plan may be either incentive stock options
or nonstatutory stock options. Incentive stock options ("ISO") may be granted
only to Company employees (including officers and directors who are also
employees). Nonstatutory stock options ("NSO") may be granted to Company
employees, officers, directors, and consultants. The Company has reserved
4,700,000 shares of Common Stock for issuance under the Plan. The first options
were issued in 1998.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options generally vest 25% one year from the vest start date and
ratably over the next 36 months and expire 10 years from the date of grant.
Deferred stock compensation
During the years ended December 31, 1999 and 1998 and the quarter ended March
31, 2000, the Company issued stock options under the Plan at exercise prices,
deemed by the Board of Directors at the date of grant to be equal to the fair
value of the common stock. In anticipation of the Company's initial public
offering, the Company has subsequently determined that, for financial statement
purposes, the estimated value of its common stock was in excess of the exercise
prices. Accordingly, the Company has recorded deferred stock compensation for
stock options issued to both employees and non-employees.
For stock options granted to employees (683,500 and 2,583,000 in 1998 and 1999,
respectively, and 285,500 in the quarter ended March 31, 2000), the difference
between the exercise price of the stock options and the fair value of the
Company's stock at the date of grant is recorded as deferred compensation on
the date of grant. For stock options granted to non-employees (260,000 and
202,500 in 1998 and 1999, respectively, and 21,000 in the quarter ended March
31, 2000), the fair value of the options, estimated using the Black-Scholes
valuation model, is initially recorded on the date of grant. As the non-
employee options vest, the Company revalues the remaining unvested options,
with the change in fair value from period to period represented as additional
deferred compensation.
- --------------------------------------------------------------------------------
F-15
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
All deferred compensation charges are amortized over the service period,
generally four years, using an accelerated model (FIN 28). During 1998 and
1999, and the three months ended March 31, 2000, the Company recorded deferred
stock compensation related to these options of $273,000, $8,354,000 (including
$3.1 million related to the release of certain stock repurchase rights) and
$1,654,000 respectively, of which $97,000, $4,867,000 and $1,109,000 has been
amortized to expense during the years then ended, respectively. Amortization of
deferred stock compensation is as follows:
<TABLE>
<CAPTION>
Cumulative
Period from period from
May 1, 1997 May 1, 1997
(date of (date of
inception) Years ended inception) Three months
to December 31, to ended March 31,
December 31, ------------------ December 31, -------------------
1997 1998 1999 1999 1999 2000
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amortization of stock-
based compensation:
Research and
development........ -- $71,000 $4,132,000 $1,105,000 $82,000 $585,000
Clinical and
regulatory......... -- 7,000 96,000 103,000 4,000 62,000
Sales and marketing... -- -- 85,000 85,000 9,000 46,000
General and
administrative..... -- 19,000 554,000 573,000 40,000 416,000
------- ------- ---------- ---------- -------- ----------
$ -- $97,000 $4,867,000 $1,866,000 $135,000 $1,109,000
======= ======= ========== ========== ======== ==========
</TABLE>
Included in the 1999 research and development stock-based compensation is $3.1
million related to the release of repurchase rights for 1,239,000 shares of
common stock (Note 6). During 1999, the Company granted to certain employees
and non-employees, options which were immediately exercisable into common
stock, subject to repurchase by the Company based on the same remaining vesting
schedule as the related option. Shares are subject to repurchase at the option
exercise price.
<TABLE>
<CAPTION>
1998 1999
- -------------------------------------------------------------------------------
Weighted Weighted
Shares average Shares average
under exercise under exercise
options price options price
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance outstanding............. -- $ -- 944,000 $0.10
Granted.................................. 944,000 $0.10 2,785,000 $0.13
Exercised................................ -- $ -- -- $ --
Forfeited................................ -- $ -- (252,000) $0.11
------- ----- --------- -----
Ending balance outstanding................ 944,000 $0.10 3,477,000 $0.12
======= ===== ========= =====
Exercisable at end of year................ 69,000 $0.10 1,884,000 $0.13
======= ===== ========= =====
</TABLE>
The weighted average grant-date fair value of stock options granted in 1998 and
1999 are $0.35 per share and $1.57 per share, respectively.
- --------------------------------------------------------------------------------
F-16
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
The options outstanding and currently exercisable by exercise price at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------- --------------------------
Weighted Average
Exercise Number Remaining Contractual Number
Price Outstanding Life (Years) Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.10 844,000 8.56 $0.10 360,000 $0.10
0.11 1,474,000 9.28 0.11 724,000 0.11
0.15 1,137,000 9.82 0.15 800,000 0.15
0.35 22,000 9.92 0.35 -- 0.35
--------- ---------
3,477,000 9.28 $0.12 1,884,000 $0.13
========= =========
</TABLE>
Fair value disclosures
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate......................................... 5.3% 5.6%
Expected life................................................... 4 years 4 years
Expected volatility............................................. 75% 75%
</TABLE>
As discussed in Note 2, the Company accounts for its stock-based compensation
using the method prescribed by APB No. 25. Had the Company determined its
stock-based compensation cost based on the fair value at the grant dates for
the awards under a method prescribed by SFAS No. 123, the Company's net loss
would have been increased to the FAS 123 adjusted amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss.................................. $(41,000) $(2,953,000) $(14,089,000)
-------- ----------- ------------
Net loss--FAS 123 adjusted................ $(41,000) $(2,956,000) $(14,108,000)
-------- ----------- ------------
Net loss per share--as reported
Basic and diluted......................... N/A $ (1.28) $ (4.35)
-------- ----------- ------------
Net loss per share--FAS 123 adjusted
Basic and diluted......................... N/A $ (1.28) $ (4.35)
-------- ----------- ------------
</TABLE>
401(k) Savings Plan
In October, 1999, the Company began a 401(k) savings plan (the "401(k) Plan").
The 401(k) Plan is a defined contribution plan intended to qualify under
Section 401(a) and 401(k) of the Internal Revenue Code. All full-time employees
of the Company are eligible to participate in the 401(k) Plan pursuant to the
terms of the Plan. Contributions by the Company are discretionary and no
contributions have been made by the Company for the year ended December 31,
1999 and for the three months ended March 31, 2000.
- --------------------------------------------------------------------------------
F-17
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 10--NET LOSS PER SHARE:
Net loss per share is calculated as follows:
<TABLE>
<CAPTION>
Period Ended
December 31, Year Ended December 31,
1997 1998 1999
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic and diluted:
Net loss.............................. $(41,000) $(2,953,000) $(14,089000)
-------- ----------- -----------
Weighted average shares used in basic
and diluted net loss per share........ -- 2,306,000 3,237,000
-------- ----------- -----------
Net loss per share..................... N/A $(1.28) $(4.35)
-------- ----------- -----------
</TABLE>
The Company has issued shares to employees that are subject to repurchase
should an employee terminate employment with the Company. The shares vest
monthly and the vesting periods range from 36 months to 48 months. Shares
subject to repurchase are excluded from the average shares used in the
calculation of basic and diluted net loss per share.
Equity instruments that could dilute basic earnings per share in the future
that were not included in the computation of diluted earnings per share as
their effect is antidilutive are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Unvested common shares (shares subject to
repurchase)....................................... -- 2,295,000 1,753,000
Shares issuable upon exercise of stock options..... -- 944,000 3,477,000
Conversion of convertible preferred stock.......... -- 7,004,000 16,837,000
Shares issuable upon exercise of warrants.......... -- 267,000 267,000
--- ---------- ----------
Total.............................................. -- 10,510,000 22,334,000
--- ========== ==========
</TABLE>
NOTE 11--INCOME TAXES:
At December 31, 1999, the Company has approximately $7,360,000 in federal and
state net operating loss carryforwards to reduce future taxable income. These
carryforwards will expire by the year 2019 for federal and 2006 for state, if
not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax credit
carryforwards in the case of an "ownership change" of a corporation. Any
ownership changes, as defined, may restrict utilization of carryforwards.
- --------------------------------------------------------------------------------
F-18
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Temporary differences and carryforwards which gave rise to significant portions
of deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $1,106,000 $2,932,000
Research and development tax credit................ 88,000 280,000
Depreciation and amortization...................... 81,000 162,000
Capitalized start-up costs......................... -- 1,542,000
Other.............................................. 9,000 180,000
---------- ----------
1,284,000 5,096,000
Less: Valuation allowance.......................... (1,284,000) (5,096,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its deferred tax assets. The change in the valuation allowance was
$1,284,000, $3,812,000 and $851,000 for the years ended December 31, 1998 and
1999 and the three months ended March 31, 2000, respectively.
NOTE 12--RELATED PARTY TRANSACTIONS:
During the period from May 1, 1997 (date of inception) to December 9, 1998, the
Company paid for various operating expenses for two privately held companies in
which the founder of the Company is a shareholder. Amounts due to the Company
at December 31, 1998 and 1999, net of allowance for doubtful accounts are
reported as related party receivables and equal $262,000 and $0, respectively.
During December 1998, the Company entered into a promissory note agreement with
the Company's founder, whereby the founder borrowed $250,000 from the Company
to be due upon the earlier of December 10, 2000 or the date of any breach by
the founder of either proprietary information and technology agreements or his
nonsolicitation agreement with the Company. Interest accrues at a rate of 6%
per year and is payable no later than the maturity date.
NOTE 13--SUBSEQUENT EVENTS
Technology license agreement
In February, 2000, the Company entered into a licensing agreement with a
university for the use of a certain proprietary radiofrequency technology
developed by the university and used in certain of the Company's products.
The Company issued 100,000 shares of its common stock, valued at $493,000 on
the date of the agreement, in exchange for the right to use the technology. As
part of the agreement, the Company is also required to pay a royalty on all
revenues collected when the licensed technology is part of the sold item. The
license of the technology is included in intangible assets and is to be
amortized over its remaining estimated useful life of five years using the
straight-line method.
- --------------------------------------------------------------------------------
F-19
<PAGE>
CURON MEDICAL, INC. (a company in the development stage)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Convertible Note and Warrant Agreement
In May 2000, the Company entered into a Convertible Note (Notes) and Warrant
Purchase Agreement (Warrants) with existing preferred shareholders. The Company
received $11.0 million in cash and services valued at $45,000 in exchange for
Notes bearing interest at 8% per annum and warrants to purchase 998,100 Series
C preferred shares (or an equal number of shares of common stock if converted
after a qualifying public offering) for a purchase price of $2.50 per share.
Notes are convertible into 3,696,666 shares of common stock (if not earlier
repaid) and mature in May 2005. The difference between the conversion price and
the fair value of the common stock on the transaction date resulted in a
beneficial conversion feature in the amount of $11.1 million. The beneficial
conversion feature will be reflected as a discount on the notes and will be
accreted as interest expense over a one year period which is the debt
instrument's earliest conversion date.
Notes
The principal and interest on the Notes is due and payable on May 19, 2005
unless previously converted. The Notes may be prepaid anytime without penalty
following the closing of an initial public offering of the Company's common
stock.
The outstanding principal balance of and any accrued but unpaid interest on the
Notes shall be automatically converted into series D preferred stock priced at
$3.00 per share upon an equity financing of the Company involving the receipt
of at least $10,000,000, at least 50% of which is received from venture capital
or other financial investors at a price of at least $3.00 per share.
If not automatically converted, upon the demand of the holders of 70% of
amounts underlying the Notes, the principal and accrued interest of all Notes
shall be converted into Preferred Series D shares at a price of $3.00 per
share. This demand conversion right may only be exercised after the one year
anniversary of the issuance of the Notes.
In the event of a change in control as defined in the agreement, all
outstanding and unpaid accrued interest due on this Note shall be due and
payable upon the closing of a change in control transaction.
Warrants
The warrants are exercisable immediately and through May 15, 2007 or five years
following the conversion or repayment of the Notes. The value of the warrants
was determined using the Black-Scholes valuation model and allocated based on
its fair value relative to the fair value of the debt, and has been included in
the $11.1 million discount on the notes.
- --------------------------------------------------------------------------------
F-20
<PAGE>
[Image of face]
STRETTA IS CHANGING THE FACE OF GERD
WHILE OTHERS ARE TREATING THE SYMPTOMS, STRETTA IS TREATING THE DISEASE
The Stretta System delivers radiofrequency energy to the lower esophageal
sphincter in a procedure designed to treat gastroesophageal reflux disease, or
GERD. In our clinical study most patients returned to normal activity the day
following treatment and eliminated or reduced anti-acid medication shortly
thereafter.
[Stretta Logo]
<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 underwriting
discounts and commissions, payable by Curon Medical in connection with the sale
of the common stock being registered hereby, other than underwriting
commissions and discounts. All amounts are estimates except the SEC
Registration Fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee................................................... $15,840
NASD Filing Fee........................................................ 6,500
Nasdaq National Market Listing Fee..................................... *
Blue Sky Fees and Expenses............................................. *
Printing and Engraving Expenses........................................ *
Legal Fees and Expenses................................................ *
Accounting Fees and Expenses........................................... *
Transfer Agent and Registrar Fees...................................... *
Miscellaneous.......................................................... *
-------
Total................................................................ $ *
=======
</TABLE>
- --------
* To be supplied by amendment.
ITEM 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article IX of the Registrant's Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.
The Registrant intends to enter into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by
the Underwriters of the registrant and its executive officers and directors,
and by the registrant of the underwriters for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the Underwriters for inclusion in the
Registration Statement.
The Registrant intends to purchase and maintain insurance on behalf of any
person who is or was a director or officer against any loss arising from any
claim asserted against him or her and incurred by him or her in any such
capacity, subject to certain exclusions.
See also the undertakings set out in response to Item 17 herein.
II-1
<PAGE>
ITEM 15. Recent Sales of Unregistered Securities.
The Registrant has issued and sold the following securities:
1. In May 2000, the Registrant issued notes convertible, if not earlier
repaid, beginning in May 2001 into 3,696,666 shares of Series D
Preferred Stock, and warrants immediately exercisable for 998,100
shares of Series C Preferred Stock at $2.50 per share.
2. From February 1998 through May 15, 2000, the Registrant issued and sold
6,697,666 shares of common stock of the Registrant at prices ranging
from $0.001 to $0.35 per share upon exercise of stock options pursuant
to Registrant's 1997 Stock Option Plan, as amended.
3. On August 30, 1999, the Registrant issued and sold to 10 private
investors an aggregate of 9,833,333 shares of Series C Preferred Stock
convertible into an aggregate of 9,833,333 shares of common stock at a
purchase price per share of common stock of $1.50.
4. On December 10, 1998, the Registrant issued and sold to 6 private
investors an aggregate of 5,132,744 shares of Series B Preferred Stock
convertible into an aggregate of 5,132,744 shares of common stock at a
purchase price per share of common stock of $1.13.
5. On March through June 1998, the Registrant issued and sold to 40 private
investors an aggregate of 1,871,000 shares of Series A Preferred Stock
convertible into an aggregate of 1,871,000 shares of common stock at a
purchase price per share of common stock of $1.00.
The above share and dollar amounts reflect the for 1 reverse stock split to
be effected . The sales of the above securities were deemed to be exempt
from registration under the Securities Act with respect to items 2 through 4
above in reliance on Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder, and with respect to item 1 above Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
ITEM 16. Exhibits and Financial Statement Schedules.
a.Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant
dated August 23, 1999 and Certificate of Amendment thereto dated May
19, 2000.
3.2 Bylaws of the Registrant as currently in effect.
3.3* Amended and Restated Certificate of Incorporation of the Registrant to
be effective upon closing of this offering.
3.4* Bylaws of the Registrant to be effective upon the closing of this
offering.
4.1* Specimen common stock certificate of the Registrant.
4.2* Convertible Note and Warrant Purchase agreement dated May 19, 2000 by
and among the Registrant and certain debtholders, along with form of
note and form of warrant.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement for directors and executive
officers.
10.2 1997 Stock Option Plan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------------------------------------------------------------------------
<C> <S>
10.3 2000 Employee Stock Purchase Plan.
10.4 Series C Preferred Stock Purchase Agreement dated August 30, 1999 by
and among the Registrant and the Purchasers named therein.
10.5 Amended and Restated Stockholder Agreement dated August 30, 1999 by
and among the Registrant and certain stockholders.
10.6 Lease dated August 27, 1997 for office space located at 733 Palomar
Avenue, Sunnyvale, California 94086.
10.7 Lease dated May 6, 1998 for office space located at 735 Palomar
Avenue, Sunnyvale, California 94086.
10.8* 2000 Stock Option Plan.
10.9 Sublease dated April 2, 1999 for office space located at 735 Palomar
Avenue, Sunnyvale, California 94086.
10.10 Amendment to Lease, effective April 28, 1999, for office space located
at 735 Palomar Avenue, Sunnyvale, California 94086.
10.11* Amended and Restated Loan and Security Agreement effective August 12,
1998.
10.12* First Amendment to Amended and Restated Loan and Security Agreement
effective October 28, 1998.
10.13* Second Amendment to Amended and Restated Loan and Security Agreement
effective December 3, 1998.
10.14+ Technology license agreement between the Registrant and Somnus Medical
Technologies, Inc. effective December 10, 1998.
10.15* Technology license agreement between the Registrant and University of
Kansas Medical Research Institute effective February 2000.
10.16 Employment Agreement with John W. Morgan, President and Chief
Executive Officer.
23.1 Consent of Independent Accountants.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(See Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Documents to be filed by amendment.
+ Confidential treatment requested.
Financial Statement Schedule
Schedules not listed above have been omitted because they are inapplicable or
the requested information is shown in the financial statements of the
Registrant 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 such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14 or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Sunnyvale, State of
California, on the 25th day of May, 2000.
Curon Medical, Inc.
/s/ John W. Morgan
By:__________________________________
John W. Morgan
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 John W. Morgan and Alistair F. McLaren,
and each of them acting individually, as his true and lawful attorneys-in-fact
and agents, with full power of each to act alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Registration Statement filed herewith and
any and all amendments to said Registration Statement (including post-effective
amendments and any related registration statements thereto filed pursuant to
Rule 462 and otherwise), and file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, with full power of
each to act alone, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection therewith, as
fully for all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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/ John W. Morgan President and Chief May 25, 2000
____________________________________ Executive Officer and
John W. Morgan Director (Principal
Executive Officer)
/s/ Alistair F. McLaren Chief Financial Officer and May 25, 2000
____________________________________ Vice President of Finance
Alistair F. McLaren and Administration
(Principal Financial Officer)
/s/ David I. Fann Director May 25, 2000
____________________________________
David I. Fann
/s/ Alan L. Kaganov Director May 25, 2000
____________________________________
Alan L. Kaganov
/s/ Robert F. Kuhling, Jr. Director May 25, 2000
____________________________________
Robert F. Kuhling, Jr.
</TABLE>
II-5
<PAGE>
Exhibits and Financial Statement Schedules.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant
dated August 23, 1999 and Certificate of Amendment thereto dated May
19, 2000.
3.2 Bylaws of the Registrant as currently in effect.
3.3* Amended and Restated Certificate of Incorporation of the Registrant to
be effective upon closing of this offering.
3.4* Bylaws of the Registrant to be effective upon the closing of this
offering.
4.1* Specimen common stock certificate of the Registrant.
4.2* Convertible Note and Warrant Purchase agreement dated May 19, 2000 by
and among the Registrant and certain debtholders
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement for directors and executive
officers.
10.2 1997 Stock Option Plan.
10.3 2000 Employee Stock Purchase Plan.
10.4 Series C Preferred Stock Purchase Agreement dated August 30, 1999 by
and among the Registrant and the Purchasers named therein.
10.5 Amended and Restated Stockholder Agreement dated August 30, 1999 by
and among the Registrant and certain stockholders.
10.6 Lease dated August 27, 1997 for office space located at 733 Palomar
Avenue, Sunnyvale, California 94086.
10.7 Lease dated May 6, 1998 for office space located at 735 Palomar
Avenue, Sunnyvale, California 94086.
10.8* 2000 Stock Option Plan.
10.9 Sublease dated April 2, 1999 for office space located at 735 Palomar
Avenue, Sunnyvale, California 94086.
10.10 Amendment to Lease, effective April 28, 1999, for office space located
at 735 Palomar Avenue, Sunnyvale, California 94086.
10.11* Amended and Restated Loan and Security Agreement effective August 12,
1998.
10.12* First Amendment to Amended and Restated Loan and Security Agreement
effective October 28, 1998.
10.13* Second Amendment to Amended and Restated Loan and Security Agreement
effective December 3, 1998.
10.14+ Technology license agreement between the Registrant and Somnus Medical
Technologies, Inc. effective December 10, 1998.
10.15* Technology license agreement between the Registrant and University of
Kansas Medical Research Institute effective February 2000.
10.16 Employment Agreement with John W. Morgan, President and Chief
Executive Officer.
23.1 Consent of Independent Accountants.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(See Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Documents to be filed by amendment.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CONWAY-STUART MEDICAL, INC.
Conway-Stuart Medical, Inc. a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Conway-Stuart Medical, Inc. The original
Certificate of Incorporation of the corporation was filed with the Secretary of
the State of Delaware on May 1, 1997.
B. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation.
C. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ONE The name of this corporation is Conway-Stuart Medical, Inc.
TWO The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Zip Code 19801. The name of its registered
agent at such address is the Corporation Trust Company.
THREE 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.
FOUR 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 47,800,000
shares. 30,000,000 shares shall be Common Stock with a par value of $0.001 per
share. 17,800,000 shares shall be Preferred Stock, 2,100,000 of which are
designated Series A Preferred Stock with a par value of $0.001 per share,
5,200,000 of which are designated Series B Preferred Stock with a par value of
$0.001 per share and 10,500,000 of which are designated Series C Preferred Stock
with a par value of $0.001 per share.
The rights, preferences, privileges and restrictions granted to or imposed
upon the Common Stock and Preferred Stock are as follows:
1. Dividends. When and as declared by the corporation's board of
---------
directors, the holders of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock shall be entitled to receive, out of any funds legally
available therefor, dividends prior and in preference to any declaration of
payment of any dividend on the Common Stock at the rate of $0.07 per share,
$0.08
<PAGE>
per share and $0.105 per share, respectively, per annum (each as appropriately
adjusted for any subsequent stock splits, stock dividends, reclassifications and
the like), or if greater, an amount equal to any dividend payment on the Common
Stock of the Company. Thereafter, the holders of Preferred Stock and Common
Stock shall be entitled, when and if declared by the Board of Directors, to
dividends out of the corporation's assets legally available therefor; provided,
however, that the dividend on any series of any Preferred Stock shall be payable
at the same rate per share as would be payable on the shares of Common Stock or
other securities into which such series of Preferred Stock is convertible
immediately prior to the record date for such dividend. The right of the holders
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock to receive dividends shall not be cumulative, and no right shall accrue to
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock by reason of the fact that dividends on such shares are not
declared or paid in any prior year.
2. Liquidation.
(a) Preferred Stock Preference.
--------------------------
(i) In the event of any liquidation, dissolution or winding up of
the corporation, either voluntary or involuntary, the holders of Series C
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 Series A Preferred Stock, Series B Preferred Stock and Common Stock,
by reason of their ownership thereof, the amount of $1.50 per share for each
share of Series C Preferred Stock then held by them (as appropriately adjusted
for any subsequent stock splits, stock dividends, reclassifications and the
like), and, in addition, an amount equal to all declared but unpaid dividends on
the Series C Preferred Stock. If the assets and funds thus distributed among the
holders of the Series C Preferred Stock are insufficient to permit the payment
to such holders of their full preferential amount, then the entire assets and
funds of the corporation legally available for distribution shall be distributed
among the holders of Series C Preferred Stock in proportion to the respective
amounts which would be payable on the shares held by them if the aforesaid
preferential amounts were paid in full.
(ii) After payment or setting apart of payment has been made to
the holders of Series C Preferred Stock as set forth above in Section 2(a)(i),
each share of Series A Preferred Stock and Series B Preferred Stock shall
receive, , prior and in preference to any distribution of any of the assets or
surplus funds of the corporation to the holders of Common Stock by reason of
their ownership thereof, the amount of $1.00 per share and $1.13 per share,
respectively, then held by them (each as appropriately adjusted for any
subsequent stock splits, stock dividends, reclassifications and the like), and,
in addition, an amount equal to all declared but unpaid dividends on the Series
A Preferred Stock and Series B Preferred Stock. If the assets and funds thus
distributed among the holders of the Series A Preferred Stock andSeries B
Preferred Stock are insufficient to permit the payment to such holders of their
full preferential amount, then the entire assets and funds of the corporation
legally available for distribution shall be distributed among the holders of
Series A Prefcrred Stock and Series B Preferred Stock in proportion to the
respective
-2-
<PAGE>
amounts which would be payable on the shares held by them if the aforesaid
preferential amounts were paid in full.
(iii) After payment or setting apart of payment has been made to
the holders of Series A Preferred Stock, and Series B Preferred Stock and Series
C Preferred Stock as set forth above in Section 2(a)(i)-(ii), each share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Common Stock shall receive pro rata payment on an as-if-converted to Common
Stock basis until the holders of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock have received an aggregate of $3.00, $3.39
and $4.50 per share, respectively (each as appropriately adjusted for any
subsequent stock splits, stock dividends, reclassifications and the like), after
which all remaining assets or surplus funds of the corporation shall be
distributed to the holders of Common Stock.
(b) Reorganization or Merger. A reorganization or merger of the
------------------------
corporation with or into any other corporation or corporations, or a sale of all
or substantially all of the assets of the corporation, in which transaction the
corporation's stockholders immediately prior to such transaction own immediately
after such transaction less than 50% of the equity securities of the surviving
corporation or its parent, shall be deemed to be a liquidation within the
meaning of this Section 2.
(c) If the consideration received by this corporation is other than
cash, its value will be deemed its fair market value as determined in good faith
by the Board of Directors. Any securities shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (ii) below:
(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 quotation system over the thirty (30) day
period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, 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 mutually determined by the Board of Directors
and the holders of at least two-thirds of the voting power of all then
outstanding shares of Preferred Stock.
(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 (i)(A), (B) or (C) to reflect the approximate fair market
value thereof, as mutually determined by the Board of Directors and the holders
of at least two-thirds of the voting power of all then outstanding shares of
such Preferred Stock.
-3-
<PAGE>
(d) Consent for Certain Repurchases. Each holder of Preferred Stock
shall be deemed to have consented, for purposes of Section 502, 503 and 506 of
the California Corporations Code, and for purposes of Section 151 and 160 of the
Delaware General Corporations Law, to distributions made by the corporation in
connection with the repurchase of shares of Common Stock issued to or held by
employees or consultants upon termination of their employment or services
pursuant to agreements providing for such right of repurchase between the
corporation and such persons.
3. Conversion. The holders of Series A Preferred Stock, Series B
----------
Preferred Stock and Series C Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock, Series B
----------------
Preferred Stock and Series C Preferred Stock shall be convertible, at the option
of the holder thereof, at any time into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Issuance
Price (as defined below) plus any declared and unpaid dividends by the
Conversion Price (as defined below) in effect at the time of conversion. The
Issuance Price for the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock shall be $1.00 per share, $1.13 per share and $1.50 per
share, respectively. The Conversion Price for the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall initially be $1.00
per share, $1.13 per share and $1.50 per share, respectively, subject to
adjustment as provided below. The number of shares of Common Stock into which a
share of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock is convertible is hereinafter referred to as the "Conversion
Rate" of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock.
(b) Automatic Conversion. Each share of Series A Preferred, Series B
--------------------
Preferred Stock and Series C Preferred Stock shall automatically be converted
into shares of Common Stock at the then effective Conversion Rate (i)
immediately prior to the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "Act") covering the offer and sale of Common Stock
for the account of the corporation to the public at a price per share (prior to
underwriting commissions and offering expenses) of not less than $5.00 per share
(as appropriately adjusted for any subsequent stock splits, stock dividends,
reclassifications and the like) and an aggregate offering price of not less than
$15,000,000, (ii) immediately prior to the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Act covering the offer and sale of Common Stock for the account of the
corporation to the public at a price per share (prior to underwriting
commissions and offering expenses) of less than $5.00 but not less than $4.00
(as appropriately adjusted for any subsequent stock splits, stock dividends,
reclassifications and the like) and an aggregate offering price of not less than
$15,000,000, provided that the corporation has received the written consent of
the holders of a majority of the outstanding shares of Preferred Stock, voting
as a single class, or (iii) upon the corporation's receipt of the written
consent of the holders of a majority of the outstanding shares of the Series B
Preferred Stock and Series C Preferred Stock, voting separately.
-4-
<PAGE>
(c) Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into full shares of Common Stock and to
receive certificates therefor, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or of any
transfer agent for the Preferred Stock, and shall give written notice to the
corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 3(b) above, the outstanding shares of Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
corporation or its transfer agent, and provided further that the corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred Stock are either delivered to the corporation or its
transfer agent as provided above, or the holder notifies the corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the corporation to indemnify the
corporation from any loss incurred by it in connection with such certificates.
The corporation shall, as soon as practicable after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled and a check payable to the holder in the amount of any cash amounts
payable as the result of a conversion into fractional shares of Common Stock.
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, or in the case of automatic conversion, on the date of closing of the
offering, 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 on such date.
(d) Fractional Shares. In lieu of any fractional shares to which the
-----------------
holder of a series of Preferred Stock would otherwise be entitled, the
corporation shall pay cash equal to such fraction multiplied by the fair market
value of one share of such series of Preferred Stock as determined by the board
of directors of the corporation. Whether or not fractional shares are issuable
upon such conversion shall be determined on the basis of the total number of
shares of a series of Preferred Stock of each holder at the time converting into
Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
(e) Adjustment of Conversion Price. The Conversion Price of Series A
------------------------------
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
subject to adjustment from time to time as follows:
(i) If the corporation shall issue (or, pursuant to Subsection
3(e)(i)(2)(c) hereof, shall be deemed to have issued) any Common Stock other
than "Excluded Stock" (as defined below) for a consideration per share less than
the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock in effect immediately prior to the issuance of such
Common Stock (excluding stock dividends, subdivisions, split-ups, combinations,
dividends or recapitalizations which are covered by Subsections 3(e)(iii), (iv),
(v) and (vi)), the Conversion Price for the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock in effect
-5-
<PAGE>
immediately after each such issuance shall forthwith (except as provided in this
Section 3(e)) be adjusted to a price equal to the quotient obtained by dividing:
(1) an amount equal to the sum of
(x) the total number of shares of Common Stock
outstanding (including any shares of Common Stock issuable upon conversion of
the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock, or deemed to have been issued pursuant to subdivision (2)(c) of this
clause (i) and to clause (ii) below) immediately prior to such issuance
multiplied by the Conversion Price for the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock in effect immediately prior to such
issuance, plus
(y) the consideration received by the corporation upon
such issuance, by
(2) the total number of shares of Common Stock outstanding
immediately prior to such issuance of Common Stock (including any shares of
Common Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock or deemed to have been issued
pursuant to subdivision (2)(c) of this clause (i) and to clause (ii) below) plus
the number of shares of Common Stock actually issued in the transaction which
resulted in the adjustment pursuant to this Subsection 3(e)(i).
For the purposes of any adjustment of the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock pursuant
to this clause (i), the following provisions shall be applicable:
a) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor after
deducting any discounts or commissions paid or incurred by the corporation in
connection with the issuance and sale thereof.
b) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as reasonably determined by
the board of directors of the corporation, in accordance with generally accepted
accounting treatment.
c) In the case of the issuance of (i) options to
purchase or rights to subscribe for Common Stock (other than Excluded Stock),
(ii) securities by their terms convertible into or exchangeable for Common Stock
(other than Excluded Stock), or (iii) options to purchase or rights to subscribe
for such convertible or exchangeable securities:
(A) 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 subdivisions (a) and
-6-
<PAGE>
(b) above), if any, received by the corporation upon the issuance of such
options or rights plus the minimum purchase price provided in such options or
rights for the Common Stock covered thereby;
(B) 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 received by the corporation for any
such securities and related options or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus the additional minimum
consideration, if any, to be received by the 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
subdivisions (a) and (b) above);
(C) on any change in the number of shares of Common
Stock deliverable upon exercise of any such options or rights or conversion of
or exchange for such convertible or exchangeable securities, or on any change in
the minimum purchase price of such options, rights or securities, other than a
change resulting from the antidilution provisions of such options, rights or
securities, the Conversion Price shall forthwith be readjusted to such
Conversion Price as would have obtained had the adjustment made upon (x) the
issuance of such options, rights or securities not exercised, converted or
exchanged prior to such change or (y) the options or rights related to such
securities not converted or exchanged prior to such change, as the case may be,
been made upon the basis of such change; and
(D) on 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 shall forthwith be readjusted to such Conversion Price as
would have obtained had the adjustment made upon the issuance of such options,
rights, convertible or exchangeable securities or options or rights relate to
such convertible or exchangeable securities, as the case may be, been made upon
the basis of the issuance of only the number of shares of Common Stock actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such convertible or exchangeable securities or upon the exercise of
the options or rights related to such convertible or exchangeable securities, as
the case may be.
(ii) "Excluded Stock" shall mean:
(1) all shares of Common Stock, warrants to purchase Common
Stock or Preferred Stock or other securities issued and outstanding on the date
this certificate is filed with the Delaware Secretary of State;
(2) all shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock;
-7-
<PAGE>
(3) up to 2,702,000 shares of Common Stock or other
securities, or options or warrants to purchase Common Stock or other securities
issuable to officers, directors, consultants, or employees of the corporation
pursuant to any plan, arrangement, agreement, contract or plan, including any
incentive stock plan, approved by the board of directors of the corporation,
upon approval of the board of directors of the corporation;
(4) all securities issuable in a merger or acquisition that
is approved by the holders of at least two-thirds of the outstanding shares of
Preferred Stock; and
(5) all securities issued or issuable to suppliers, lessors,
lenders or technology providers of the corporation pursuant to any plan or
arrangement approved by the Board of Directors of the corporation.
All outstanding shares of Excluded Stock (including shares issuable upon
conversion of the shares of Preferred Stock) shall be deemed to be outstanding
for all purposes of the computations of subsection 3(e)(i) above.
(iii) If the number of shares of Common Stock outstanding at any
time after the date hereof is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock, then, on
the date such payment is made or such change is effective, the Conversion Price
of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall be appropriately decreased so that the number of shares of Common
Stock issuable on conversion of any shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock be increased in proportion to such
increase of outstanding shares.
(iv) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the outstanding
shares of Common Stock, then, on the effective date of such combination, the
Conversion Price of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of any shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
decreased in proportion to such decrease in outstanding shares.
(v) In case the corporation shall declare a cash dividend upon
its Common Stock payable otherwise than out of retained earnings or shall
distribute to holders of its Common Stock shares of its capital stock (other
than Common Stock), stock or other securities of other persons, evidences of
indebtedness issued by the corporation or other persons, assets (excluding cash
dividends) or options or rights (excluding options to purchase and rights to
subscribe for Common Stock or other securities of the corporation convertible
into or exchangeable for Common Stock), then, in each such case, the holders of
the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall, concurrent with the distribution to holders of Common Stock,
receive a like distribution based upon the number of shares of Common Stock into
which such Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock is then convertible.
-8-
<PAGE>
(vi) In case, at any time after the date hereof, of any capital
reorganization, or any reclassification of the stock of the corporation (other
than as a result of a stock dividend or subdivision, split-up or combination of
shares), or the consolidation or merger of the corporation with or into another
person (other than a consolidation or merger in which the corporation is the
continuing entity and which does not result in any change in the Common Stock),
the shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall, after such reorganization, reclassification,
consolidation, merger, sale or other disposition, be convertible into the kind
and number of shares of stock or other securities or property of the corporation
or otherwise to which such holder would have been entitled if immediately prior
to such reorganization, reclassification, consolidation, merger, sale or other
disposition such holder had converted its shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock into Common Stock. The
provisions of this clause (vi) shall similarly apply to successive
reorganizations, reclassification, consolidations, mergers, sales or other
dispositions.
(vii) All calculations under this section 3 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the case may
be.
(f) Minimal Adjustments. No adjustment in the Conversion Price for any
-------------------
series of Preferred Stock need be made if such adjustment would result in a
change in the Conversion Price of less than $0.01. Any adjustment of less than
$0.01 which is not made shall be carried forward and shall be made at the time
of and together with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $0.01 or more in the Conversion Price.
(g) No Impairment. The corporation will not 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 the 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. This
provision shall not restrict the corporation's right to amend its Certificate of
Incorporation with the requisite stockholder consent.
(h) Certificate as to Adjustments. Upon the occurrence of each adjustment
-----------------------------
or readjustment of the Conversion Rate for a series of Preferred Stock pursuant
to this Section 3, the corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each adjusted holder of Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The corporation shall, upon written request
at any time of any holder of Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) all such adjustments and
readjustments, (ii) the Conversion Rate at the time in effect, and (iii) 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 such holder's shares of
Preferred Stock.
-9-
<PAGE>
(i) Notices of Record Date. In the event of any taking by the
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution (other than a cash dividend), any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property or to receive any other right, the corporation
shall mail to each holder of Preferred Stock at least twenty (20) days prior to
such record date, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution or right, and the amount
and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The 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 Preferred Stock, the 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 purpose.
(k) Notices. Any notice required by the provisions of this Section 3 to
-------
be given to any holder 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 corporation's books.
(l) Reissuance of Converted Shares. No shares of Preferred Stock which
------------------------------
have been converted into Common Stock after the original issuance thereof shall
ever again be reissued and all such shares so converted shall upon such
conversion cease to be a part of the authorized shares of the corporation.
4. Voting Rights.
-------------
(a) General Voting Rights. Except as otherwise provided in this Section
---------------------
4, the holder of each share of Preferred Stock shall be entitled to the number
of votes equal to the number of shares of Common Stock into which each share of
Preferred Stock could be converted on the record date for the vote or consent of
stockholders 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 Preferred Stock shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of the corporation and shall
vote with holders of the Common Stock upon the election of directors and upon
any other matter submitted to a vote of stockholders, except those matters
required by law to be submitted to a class vote. Fractional votes shall not,
however, be permitted and any fractional voting rights resulting from the above
formula (after aggregating all shares of Common Stock into which shares of
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half rounded upward to one).
-10-
<PAGE>
(b) Board of Directors. Notwithstanding the foregoing, the holders of
------------------
Series A Preferred Stock and the holders of Common Stock, voting together as a
single class, shall have the right to elect one (1) member of the corporation's
Board of Directors, the holders of Series B Preferred Stock, voting as a
separate class, shall have the right to elect two (2) members of the
corporation's Board of Directors and the holders of Series C Preferred Stock,
voting as a separate class, shall have the right to elect one (1) member of the
corporation's Board of Directors. The holders of a majority of Preferred Stock
and Common Stock, voting together as a single class, shall have the right to
elect directors to fill any remaining seats. Notwithstanding any Bylaw
provisions to the contrary, the stockholders entitled to elect a particular
director shall be entitled to remove such director or to fill a vacancy in the
seat formerly held by such director, all in accordance with the applicable
provisions under Delaware law.
5. Residual Rights. All rights accruing to the outstanding shares of
---------------
capital stock not expressly provided for to the contrary herein shall be vested
in the Common Stock.
6. Protective Provisions. So long as any Series C Preferred Stock shall be
---------------------
outstanding, the corporation shall not, without first obtaining the approval of
the holders of a majority of the outstanding Series C Preferred Stock, make any
change to the liquidation preference of the Series C Preferred Stock, as
provided in Article IV(2)(a) of this Certificate. So long as any Preferred Stock
shall be outstanding, the corporation shall not without first obtaining the
approval of the holders of at least two-thirds of the outstanding Preferred
Stock voting together as a single class:
(a) Change Rights. Materially and adversely alter or change the rights,
-------------
preferences or privileges of the Preferred Stock;
(b) Change Number. Change the aggregate number of authorized shares of
-------------
Preferred Stock or Common Stock;
(c) Create New Shares. Create a new class or series of shares having
-----------------
rights, preferences or privileges superior to or on a parity with any
outstanding series of Preferred Stock;
(d) Merger; Asset Sale. Effect a liquidation and/or a merger with
------------------
another entity, or sale of all or substantially all of the assets of the
corporation;
(e) Board of Directors. Change the authorized number of directors; or
------------------
(f) Redemption. Repurchase any of the corporation's common stock,
----------
except from employees or consultants to the corporation or pursuant to the
corporation's right of first refusal.
FIVE The corporation is to have perpetual existence.
SIX In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
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<PAGE>
SEVEN The election of directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
EIGHT 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.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
NINE Subject to Section 6 of Article Four above, the corporation
reserves the right to amend, alter, change or repeal any provision contained in
this Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation.
-12-
<PAGE>
IN WITNESS WHEREOF, the corporation has caused this Certificate to be
signed by its President, and attested by its Secretary, this 23rd day of August,
1999.
CONWAY-STUART MEDICAL, INC.
/s/ Stuart Edwards
------------------------------------
Stuart Edwards, President
ATTEST:
/s/ David J. Saul
- ----------------------------------
David J. Saul, Assistant Secretary
-13-
<PAGE>
CERTIFICATE OF AMENDMENT
OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CURON MEDICAL, INC.
John W. Morgan and David J. Saul certify that:
1. They are the President and Assistant Secretary, respectively, of Curon
Medical, Inc., a Delaware corporation.
2. The first paragraph of Article 4 of the Amended and Restated
Certificate of Incorporation of the corporation shall be amended in its entirety
to read as follows:
"FOUR 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 48,300,000
shares. 30,000,000 shares shall be Common Stock with a par value of $0.001 per
share. 18,300,000 shares shall be Preferred Stock, 2,100,000 of which are
designated Series A Preferred Stock with a par value of $0.001 per share,
5,200,000 of which are designated Series B Preferred Stock with a par value of
$0.001 per share, and 11,000,000 of which are designated Series C Preferred
Stock with a par value of $0.001 per share."
3. The foregoing Certificate of Amendment of the Amended and Restated
Certificate of Incorporation has been duly approved by the Board of Directors
and by the required vote of stockholders in accordance with Section 242 of the
Delaware General Corporation Law.
IN WITNESS WHEREOF, the corporation has caused this Certificate to be
signed by its President, and attested by its Secretary, this 19th day of May,
2000.
CURON MEDICAL, INC.
/s/ John W. Morgan
_____________________________
John W. Morgan, President
ATTEST:
/s/ David J. Saul
______________________________________
David J. Saul, Assistant Secretary
<PAGE>
Exhibit 3.2
BYLAWS
OF
CONWAY-STUART MEDICAL, INC.
<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......................................... -2-
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............................... -3-
2.8 VOTING.................................................. -3-
2.9 WAIVER OF NOTICE........................................ -3-
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. -4-
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS................................................ -4-
2.12 PROXIES................................................. -5-
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE................... -5-
ARTICLE III DIRECTORS..................................................... -5-
3.1 POWERS.................................................. -5-
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 FIRST MEETINGS.......................................... -7-
3.7 REGULAR MEETINGS........................................ -8-
3.8 SPECIAL MEETINGS; NOTICE................................ -8-
3.9 QUORUM.................................................. -8-
3.10 WAIVER OF NOTICE........................................ -8-
3.11 ADJOURNED MEETING; NOTICE............................... -9-
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING....... -9-
3.13 FEES AND COMPENSATION OF DIRECTORS...................... -9-
3.14 APPROVAL OF LOANS TO OFFICERS........................... -9-
3.15 REMOVAL OF DIRECTORS.................................... -9-
ARTICLE IV COMMITTEES..................................................... -10-
4.1 COMMITTEES OF DIRECTORS................................. -10-
4.2 COMMITTEE MINUTES....................................... -10-
</TABLE>
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<TABLE>
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Page
----
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4.3 MEETINGS AND ACTION OF COMMITTEES....................... -10-
ARTICLE V OFFICERS........................................................ -11-
5.1 OFFICERS................................................ -11-
5.2 ELECTION OF OFFICERS.................................... -11-
5.3 SUBORDINATE OFFICERS.................................... -11-
5.4 REMOVAL AND RESIGNATION OF OFFICERS..................... -11-
5.5 VACANCIES IN OFFICES.................................... -12-
5.6 CHAIRMAN OF THE BOARD................................... -12-
5.7 PRESIDENT............................................... -12-
5.8 VICE PRESIDENT.......................................... -12-
5.9 SECRETARY............................................... -12-
5.10 TREASURER............................................... -13-
5.11 ASSISTANT SECRETARY..................................... -13-
5.12 ASSISTANT TREASURER..................................... -13-
5.13 AUTHORITY AND DUTIES OF OFFICERS........................ -14-
ARTICLE VI INDEMNITY...................................................... -14-
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS............... -14-
6.2 INDEMNIFICATION OF OTHERS............................... -14-
6.3 INSURANCE............................................... -14-
ARTICLE VII RECORDS AND REPORTS........................................... -15-
7.1 MAINTENANCE AND INSPECTION OF RECORDS................... -15-
7.2 INSPECTION BY DIRECTORS................................. -15-
7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................ -16-
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.......... -16-
ARTICLE VIII GENERAL MATTERS.............................................. -16-
8.1 CHECKS.................................................. -16-
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS........ -16-
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.................. -17-
8.4 SPECIAL DESIGNATION ON CERTIFICATES..................... -17-
8.5 LOST CERTIFICATES....................................... -17-
8.6 CONSTRUCTION; DEFINITIONS............................... -18-
8.7 DIVIDENDS............................................... -18-
8.8 FISCAL YEAR............................................. -18-
8.9 SEAL.................................................... -18-
8.10 TRANSFER OF STOCK....................................... -18-
8.11 STOCK TRANSFER AGREEMENTS............................... -19-
8.12 REGISTERED STOCKHOLDERS................................. -19-
ARTICLE IX AMENDMENTS..................................................... -19-
</TABLE>
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----
<S> <C>
ARTICLE X DISSOLUTION..................................................... -19-
ARTICLE XI CUSTODIAN...................................................... -20-
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES............. -20-
11.2 DUTIES OF CUSTODIAN..................................... -21-
</TABLE>
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<PAGE>
BYLAWS
------
OF
--
CONWAY-STUART MEDICAL, INC.
---------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
I.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 Corporation Trust Center.
I.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
------------------------
II.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.
II.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of May in each year at 12:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected and any
other proper business may be transacted.
<PAGE>
II.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called, at any time for
any purpose or purposes, by the board of directors or by such person or persons
as may be authorized by the certificate of incorporation or the bylaws.
II.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.
II.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.
II.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 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.
Subject to the provisions of the Delaware general corporation laws in
respect of the vote that shall be required for a specified action, the
certificate of incorporation or bylaws of any corporation authorized to issue
stock may specify the number of shares and/or the amount of other securities
having voting power the holders of which shall be present or represented by
proxy at any meeting in order to constitute a quorum for, and the votes that
shall be necessary for, the transaction of any business, but in no event shall a
quorum consist of less than one-third of the shares entitled to vote at the
meeting. In the absence of such specification in the certificate of
incorporation or bylaws of the corporation, (i) a majority of the shares
entitled to vote, present in person or represented by proxy, shall constitute a
quorum at a meeting of stockholders; (ii) the affirmative vote of the majority
of shares present in person or represented by proxy at the meeting and entitled
to vote on the subject
-2-
<PAGE>
matter shall be the act of the stockholders; and, (iii) where a separate vote by
class is required, the affirmative vote of the majority of shares of such class
present in person or represented by proxy at the meeting shall be the act of
such class.
II.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.
II.8 VOTING
------
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).
Except as provided in the last paragraph of this Section 2.8, or 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.
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, a stockholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of votes which such stockholder normally is entitled to cast). Each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected by him, and he may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them, as he may see fit.
II.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
-3-
<PAGE>
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.
II.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any
action required by this chapter to be taken at any annual or special meeting of
stockholders of a 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.
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.
II.11 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:
(i) 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.
(ii) The record date for determining stockholders entitled
to express 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 expressed.
-4-
<PAGE>
(iii) 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.
II.12 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 him 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(c) of the General Corporation Law of Delaware.
II.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
III.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
-5-
<PAGE>
managed and all corporate powers shall be exercised by or under the direction of
the board of directors.
III.2 NUMBER OF DIRECTORS
-------------------
The number of directors of the corporation shall be not less than one
(1) nor more than seven (7). The exact number of directors shall be one (1)
until changed, within the limits specified above, by a bylaw amending this
Section 3.2, duly adopted by the board of directors or by the stockholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
certificate of incorporation or by an amendment to this bylaw duly adopted by
the vote or written consent of the holders of a majority of the stock issued and
outstanding and entitled to vote or by resolution of a majority of the board of
directors.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
III.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 successor is elected and qualified or
until his earlier resignation or removal.
Elections of directors need not be by written ballot.
III.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to 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:
(i) 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.
(ii) 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
-6-
<PAGE>
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.
III.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.
III.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
-7-
<PAGE>
III.7 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.
III.8 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 (2) 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.
III.9 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.
III.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 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.
-8-
<PAGE>
III.11 ADJOURNED MEETING; NOTICE
-------------------------
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.
III.12 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.
III.13 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.
III.14 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.
III.15 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.
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.
ARTICLE IV
COMMITTEES
----------
IV.1 COMMITTEES OF DIRECTORS
-----------------------
-9-
<PAGE>
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 he or
they 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 (i) 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 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), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) 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.
IV.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
IV.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 Article III of these bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.7 (regular
meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum),
Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of
adjournment), and Section 3.12 (action without a meeting), with such changes in
the context of those bylaws 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 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
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<PAGE>
directors may adopt rules for the government of any committee not inconsistent
with the provisions of these bylaws.
ARTICLE V
OFFICERS
--------
V.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, 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.
V.2 ELECTION 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 chosen by the board of directors, subject to the rights, if
any, of an officer under any contract of employment.
V.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower 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.
V.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
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.
V.5 VACANCIES IN OFFICES
--------------------
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<PAGE>
Any vacancy occurring in any office of the corporation shall be filled
by the board of directors.
V.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
V.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 there be such an officer,
the president shall be the chief executive officer of the corporation and 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
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. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
V.8 VICE PRESIDENT
--------------
In the absence or disability of the 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.
V.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, whether regular or special (and, if special, how
authorized and the notice given), 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
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<PAGE>
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 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.
V.10 TREASURER
---------
The treasurer 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 treasurer shall deposit all money and other valuables in the name
and to the credit of the corporation with such depositaries as may be designated
by the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his transactions as
treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
V.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
V.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
V.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
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<PAGE>
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
INDEMNITY
---------
VI.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 (i) who is or was
a director or officer of the corporation, (ii) 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 (iii) 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.
VI.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the 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 (i) who is or was an employee or
agent of the corporation, (ii) 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 (iii) 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.
VI.3 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 and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the
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<PAGE>
power to indemnify him against such liability under the provisions of the
General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
VII.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office 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.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
VII.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 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
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<PAGE>
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.
VII.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.
VII.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors 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 such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
---------------
VIII.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.
VIII.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.
VIII.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
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<PAGE>
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 president or vice-president, and by the treasurer
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 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.
VIII.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.
VIII.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 theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the
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<PAGE>
corporation may require the owner of the lost, stolen or destroyed certificate,
or his 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.
VIII.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.
VIII.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
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.
VIII.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.
VIII.9 SEAL
----
Every corporation created under this chapter shall have power to have a
corporate seal, which may be altered at pleasure, and use the same by causing it
or a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.
VIII.10TRANSFER 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.
VIII.11STOCK TRANSFER AGREEMENTS
-------------------------
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<PAGE>
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.
VIII.12REGISTERED 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 original or other 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.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
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<PAGE>
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
XI.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is
threatened with irreparable injury because the directors are so divided
respecting the management of the affairs of the corporation that the required
vote for action by the board of directors cannot be obtained and the
stockholders are unable to terminate this division; or
(iii) the corporation has abandoned its business and has
failed within a reasonable time to take steps to dissolve, liquidate or
distribute its assets.
XI.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
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<PAGE>
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
CONWAY-STUART MEDICAL, INC.
Adoption by Incorporator
------------------------
The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of Conway-Stuart Medical, Inc. hereby adopts the
foregoing bylaws, comprising twenty-one pages, as the Bylaws of the corporation.
Executed this 1st day of May 1997.
/s/ David J. Saul
---------------------------------
David J. Saul, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected,
qualified, and acting Secretary of Conway-Stuart Medical, Inc. and that the
foregoing Bylaws, comprising twenty-one pages, were adopted as the Bylaws of the
corporation on May 1, 1997, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 1st day of May 1997.
/s/ J. Casey McGlynn
------------------------------
J. Casey McGlynn, Secretary
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<PAGE>
Exhibit 10.2
CONWAY-STUART MEDICAL, INC.
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this 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 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 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) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means a Committee appointed by the Board of Directors
---------
in accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Conway-Stuart Medical, Inc., a Delaware
-------
corporation.
(g) "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any Director of the Company whether
compensated for such services or not. If the Company registers any class of any
equity security pursuant to the Exchange Act, the term Consultant shall
thereafter not include Directors who are not compensated for their services or
are paid only a Director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent or Subsidiary
is not interrupted or terminated. Continuous Status as an Employee or Consultant
shall not be considered interrupted in the case of (i) any leave of absence
approved by the Company or (ii) transfers between locations of the Company or
between the Company, its Parent, any Subsidiary, or any successor. A leave of
absence approved by the Company shall include sick leave, military leave, or any
other personal leave approved by an authorized representative of the Company.
For purposes of Incentive Stock Options, no such leave may exceed 90 days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract, including Company policies. If reemployment upon
<PAGE>
expiration of a leave of absence approved by the Company is not so guaranteed,
on the 91st day of such leave any Incentive Stock Option held by the Optionee
shall cease to be treated as an Incentive Stock Option and shall be treated for
tax purposes as a Nonstatutory Stock Option.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Employee" means any person, including Officers and Directors,
--------
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 to constitute
"employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" means, as of any date, the 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 Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; 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.
(m) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(o) "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.
(p) "Option" means a stock option granted pursuant to the Plan.
------
(q) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(r) "Optionee" means an Employee or Consultant who receives an Option
--------
or Stock Purchase Right.
-2-
<PAGE>
(s) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(t) "Plan" means this 1997 Stock Plan.
----
(u) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(v) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(w) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(x) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(y) "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 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 4,700,000 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an option
exchange program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, and the original purchaser of such Shares did not
receive any benefits of ownership of such Shares, such Shares shall become
available for future grant under the Plan. For purposes of the preceding
sentence, voting rights shall not be considered a benefit of Share ownership.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a Committee appointed by the Board.
(b) Plan Procedure After the Date, if any, upon Which the Company
-------------------------------------------------------------
becomes Subject to the Exchange Act.
- -----------------------------------
(i) Multiple Administrative Bodies. If permitted by Rule
------------------------------
16b-3, the Plan may be administered by different bodies with respect to
Directors, Officers and Employees who are neither Directors nor Officers.
-3-
<PAGE>
(ii) Administration With Respect to Directors and Officers.
-----------------------------------------------------
With respect to grants of Options and Stock Purchase Rights to Employees who are
also Officers or Directors of the Company, the Plan shall be administered by (A)
the Board if the Board may administer the Plan in compliance with the rules
under Rule 16b-3 promulgated under the Exchange Act or any successor thereto
("Rule 16b-3") relating to the disinterested administration of employee benefit
plans under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made, or (B) a Committee designated by the Board to
administer the Plan, which Committee shall be constituted to comply with the
rules under Rule 16b-3 relating to the disinterested administration of employee
benefit plans under which Section 16(b) exempt discretionary grants and awards
of equity securities are to be made. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the Committee and thereafter directly administer the
Plan, all to the extent permitted by the rules under Rule 16b-3 relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made.
(iii) Administration With Respect to Other Employees and
--------------------------------------------------
Consultants. With respect to grants of Options and Stock Purchase Rights to
- -----------
Employees or Consultants who are neither Directors nor Officers of the Company,
the Plan shall be administered by (A) the Board or (B) a Committee designated by
the Board, which committee shall be constituted in such a manner as to satisfy
the legal requirements relating to the administration of incentive stock option
plans, if any, of applicable corporate and securities laws, of the Code, and of
any applicable stock exchange (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(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 upon which the Common
Stock is listed, 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(l) 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;
-4-
<PAGE>
(iv) to determine the number of Shares 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 of any award
granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(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 has declined since the date the Option was granted; and
(ix) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if otherwise eligible, be granted additional Options
or Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
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. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuation of his or her
employment or consulting relationship 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.
(d) Upon the Company or a successor corporation issuing any class of
common equity securities required to be registered under Section 12 of the
Exchange Act or upon the Plan being assumed by a corporation having a class of
common equity securities required to be registered
-5-
<PAGE>
under Section 12 of the Exchange Act, the following limitations shall apply to
grants of Options and Stock Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options and Stock Purchase Rights to purchase more than 75% of the
Shares reserved for issuance under the Plan.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 12.
(iii) If an Option or Stock Purchase Right is cancelled in
the same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 12), the cancelled Option or
Stock Purchase Right shall be counted against the limit set forth in subsection
(i) above. For this purpose, if the exercise price of an Option or Stock
Purchase Right is reduced, such reduction will be treated as a cancellation of
the Option or Stock Purchase Right and the grant of a new Option or Stock
Purchase Right.
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
stockholders of the Company, as described in Section 18 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 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. In the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, 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, 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 Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant
of such Option, 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,
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
-6-
<PAGE>
(A) granted to a person who, at the time of grant of
such Option, 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, 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 any other person, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(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). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (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, 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) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
a 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 (6) any combination of the foregoing methods of payment. 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.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan, but in no case at a rate of less than 20% per year over five (5)
years from the date the Option is granted.
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, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) hereof. 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, receive dividends or any other rights
as a stockholder shall exist with respect to the Optioned Stock, notwithstanding
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 shall be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 12 hereof.
-7-
<PAGE>
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 Employment or Consulting Relationship. In the
----------------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee or
Consultant (but not in the event of an Optionee's change of status from Employee
to Consultant (in which case an Employee's Incentive Stock Option shall
automatically convert to a Nonstatutory Stock Option on the date three (3)
months and one day following such change of status) or from Consultant to
Employee), such Optionee may, but only within such period of time as is
determined by the Administrator, of at least thirty (30) days, with such
determination in the case of an Incentive Stock Option 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 the
Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event of termination of an
----------------------
Optionee's Continuous Status as an Employee or Consultant as a result of his or
her disability, the Optionee may, but only within twelve (12) months from the
date of such termination (and 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.
If such disability is not a "disability" as such term is defined in Section
22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive
Stock Option shall automatically cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option on
the day three months and one day following such termination. To the extent that
the Optionee was not entitled to exercise the Option at the date of termination,
or if the Optionee does not exercise such Option to the extent so entitled
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant) 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 that the Optionee was entitled to exercise the Option on the date of
death. If, at the time of death, the Optionee was not entitled to exercise his
or her entire Option, the Shares covered by the unexercisable portion of the
Option shall immediately revert to the Plan. If, after the Optionee's death, the
Optionee's estate or a person who acquires the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
-8-
<PAGE>
(f) 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.
10. 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 and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
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 makes the determination to grant the Stock Purchase
Right. 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 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, but in no case at a rate of less than 20% per year
over five years from the date of purchase.
(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 Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall 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. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or
-9-
<PAGE>
Stock Purchase Right, and the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Stock Purchase Right, 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 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.
The 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 Administrator 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 shall
terminate immediately prior to the consummation of such proposed action.
(c) Merger. In the event of a merger of the Company with or into
------
another corporation, each outstanding Option or Stock Purchase Right may be
assumed or an equivalent option or right may be substituted by such successor
corporation or a parent or subsidiary of such successor corporation. If, in such
event, an Option or Stock Purchase Right is not assumed or substituted, the
Option or Stock Purchase Right shall terminate as of the date of the closing of
the merger. For the purposes of this paragraph, the Option or Stock Purchase
Right shall be considered assumed if, following the merger, the Option or Stock
Purchase Right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger, the consideration (whether stock, cash, or other securities or
property) received in the merger by holders of Common Stock for each Share held
on the effective date of the transaction (and if the holders are offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares). If such consideration received in the
merger is 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 the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, 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 merger.
13. 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 Administrator. Notice
of the determination shall be given to each Employee or Consultant to
-10-
<PAGE>
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which 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 Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options or Stock Purchase Rights
already granted, and such Options and Stock Purchase Rights 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 Administrator, which
agreement must be in writing and signed by the Optionee and the Company.
15. 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 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 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 any of the aforementioned relevant
provisions of law.
16. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall 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.
17. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Administrator shall approve from time to
time.
-11-
<PAGE>
18. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange upon which the Common Stock is listed.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually 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 acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-12-
<PAGE>
EXHIBIT 10.3
CURON MEDICAL, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock Purchase
Plan of Curon Medical, 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 through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall 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" shall mean the Board of Directors of the Company or any
-----
committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean Curon Medical, Inc., a Delaware Corporation
-------
and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
------------
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
---------------
Offering Period.
<PAGE>
(i) "Exercise Date" shall mean the first Trading Day on or after May
-------------
1st and November 1st of each year.
(j) "Fair Market Value" shall mean, as of any date, the 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 Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the date of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable;
(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
Board; or
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately twenty-
----------------
four (24) months during which an option granted pursuant to the Plan may be
exercised, commencing on the first Trading Day on or after May 1st and November
1st of each year and terminating on the first Trading Day on or after the May
1st and November 1st Offering Period commencement date approximately twenty-four
months later; provided, however, that the first Offering Period under the Plan
shall commence with the first Trading Day on or after the date on which the
Securities and Exchange Commission declares the Company's Registration Statement
effective and ending on the first Trading Day on or after May 1, 2002. The
duration and timing of Offering Periods may be changed pursuant to Section 4 of
this Plan.
(l) "Plan" shall mean this 2000 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six month period
---------------
commencing on one Exercise Date and ending with the next Exercise Date, except
that the first Purchase Period of any Offering Period shall commence on the
Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
--------------
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
-2-
<PAGE>
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean 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.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
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 such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares 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 consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1st and November 1st each year, or on such other
date as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the first Trading Day on or after
May 1, 2002. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without stockholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount not exceeding fifteen percent (15%) of the
Compensation which he or she receives on each pay day during the Offering
Period; provided, however, that should a pay day occur on an Exercise Date, a
participant shall have the payroll deductions made on such day applied to his or
her account under the new Offering Period or Purchase Period, as the case may
be.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Company may, in its discretion, limit the nature and/or
number of participation rate changes during any Offering Period, and may
establish such other conditions or limitations as it deems appropriate for Plan
administration. The change in rate shall be effective with the first full
payroll period following five (5) business days after the Company's receipt of
the new subscription agreement unless the Company elects to process a given
change in participation more quickly. A participant's subscription agreement
shall remain in effect for successive Offering Periods unless terminated as
provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than
5,000 shares of the Company's Common
-4-
<PAGE>
Stock (subject to any adjustment pursuant to Section 19), and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. The Board may, for future Offering Periods, increase or
decrease, in its absolute discretion, the maximum number of shares of the
Company's Common Stock an Employee may purchase during each Purchase Period of
such Offering Period. Exercise of the option shall occur as provided in Section
8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof.
The option shall expire on the last day of the Offering Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; 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
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise 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 Enrollment Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Exercise Date, the Board may in
its sole discretion (x) provide that the Company shall make a pro rata
allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise 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
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise 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 Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment 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
stockholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
-5-
<PAGE>
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 400,000 shares, plus an annual increase to be added on the first day
of the Company's fiscal year, beginning in 2001, equal to the lesser of (i)
500,000 shares, (ii) 1.5% of the outstanding shares of Common Stock on the last
day of the immediately preceding fiscal year, or (iii) an amount determined by
the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
-6-
<PAGE>
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. 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
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 payroll deductions 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 hereof) 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 from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions 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 payroll deductions.
18. Reports. Individual accounts shall be maintained for each
-------
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
-7-
<PAGE>
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action
-------------------------
by the stockholders of the Company, the Reserves (including the number of shares
automatically added annually to the Plan pursuant to Section 13(a)(i)), the
maximum number of shares each participant may purchase each Purchase Period
(pursuant to Section 7), as well as the price per share and the number of shares
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 of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of 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) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of
--------------------
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the option, any
Purchase Periods then in progress shall be shortened by setting a new Exercise
Date (the "New Exercise Date") and any Offering Periods then in progress shall
end on the New Exercise Date. The New Exercise Date shall be before the date of
the Company's proposed sale or merger. The Board shall notify each participant
in writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised automatically
on the New Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 10 hereof.
-8-
<PAGE>
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain stockholder approval in such a manner
and to such a degree as required.
(b) Without stockholder 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.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering Period
ends on a new Exercise Date, including an Offering Period underway at the time
of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
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 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
-9-
<PAGE>
thereto shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, 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. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period.
-10-
<PAGE>
EXHIBIT A
---------
CURON MEDICAL, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date:___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the Curon Medical,
Inc. 2000 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock Purchase
Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1% to 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares.
I hereby agree to notify the Company in writing within 30 days after the
------------------------------------------------------------------------
date of any disposition of my shares 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
<PAGE>
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
sale or early disposition of Common Stock by me. If I dispose of such
shares at any time after the 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 income only at the time of such disposition,
and that such income will be taxed as ordinary 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, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)_____________________________________________________
(First) (Middle) (Last)
____________________ ___________________________________
Relationship
___________________________________
(Address)
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ____________________________________
Signature of Employee
____________________________________
Spouse's Signature (If beneficiary
other than spouse)
-2-
<PAGE>
EXHIBIT B
---------
CURON MEDICAL, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Curon Medical,
Inc. 2000 Employee Stock Purchase Plan which began on ____________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:____________________________
<PAGE>
Exhibit 10.4
CONWAY-STUART MEDICAL, INC.
SERIES C PREFERRED STOCK
PURCHASE AGREEMENT
August 30, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Shares........................................ 1
1.1 Sale of Shares............................................ 1
1.2 Closing................................................... 1
2. Representations and Warranties of the Company...................... 1
2.1 Organization, Good Standing and Qualification............. 1
2.2 Capitalization............................................ 2
2.3 Subsidiaries.............................................. 2
2.4 Authorization............................................. 2
2.5 Valid Issuance of Preferred and Common Stock.............. 3
2.6 Governmental Consents..................................... 3
2.7 Litigation................................................ 3
2.8 Proprietary Information and Inventions Agreements......... 4
2.9 Patents and Trademarks.................................... 4
2.10 Compliance with Other Instruments......................... 4
2.11 Agreements; Action........................................ 4
2.12 Disclosure................................................ 5
2.13 Registration Rights....................................... 5
2.14 Title to Property and Assets.............................. 5
2.15 Minute Books.............................................. 6
2.16 Section 83(b) Elections................................... 6
2.17 Financial Statements...................................... 6
2.18 Liabilities............................................... 6
2.19 Changes................................................... 6
2.20 Tax Returns, Payments and Elections....................... 7
2.21 Insurance................................................. 8
2.22 Labor Agreements and Actions.............................. 8
2.23 Employees................................................. 8
2.24 Real Property Holding Corporation......................... 8
2.25 Investment Company Act.................................... 8
2.26 Permits................................................... 9
2.27 Environmental and Safety Laws............................. 9
2.28 Food, Drug and Cosmetic Act............................... 9
2.29 Year 2000................................................. 9
2.30 Qualified Small Business Stock............................ 9
3. Representations and Warranties of the Investors.................... 10
3.1 Authorization............................................. 10
3.2 Purchase Entirely for Own Account......................... 10
3.3 No Public Market.......................................... 10
3.4 Disclosure of Information................................. 10
3.5 Investment Experience..................................... 10
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3.6 Restricted Securities..................................... 10
3.7 Further Limitations on Disposition........................ 11
3.8 Legends................................................... 11
4. Conditions of Investor's Obligations at the Closing................ 11
4.1 Representations and Warranties Correct.................... 11
4.2 Covenants................................................. 11
4.3 Election of Directors..................................... 11
4.4 Amended Certificate....................................... 11
4.5 Stockholder Rights Agreement.............................. 12
4.6 Opinion of Company's Counsel.............................. 12
4.7 Compliance Certificate.................................... 12
4.8 Material Adverse Event.................................... 12
4.9 Proceedings and Documents................................. 12
4.10 Operating Plan............................................ 12
4.11 Generator Production Plan................................. 12
4.12 Minimum Investment........................................ 12
5. Conditions of the Company's Obligations at the Closing............. 12
5.1 Representations and Warranties............................ 12
5.2 Payment of Purchase Price................................. 12
5.3 Amended Certificate....................................... 13
5.4 Qualifications, Legal Investment.......................... 13
5.5 Stockholder Rights Agreement.............................. 13
6. Covenants of the Company........................................... 13
6.1 Market Standoff Agreements................................ 13
6.2 Board Meetings............................................ 13
6.3 Assignment of Repurchase Rights and Right of First Refusal 13
6.4 Qualified Small Business Stock............................ 13
6.5 Proprietary Information and Inventions Agreement.......... 14
6.6 Changes to Series C Liquidation Preference................ 14
6.7 Termination of Covenants.................................. 14
7. Miscellaneous...................................................... 14
7.1 Successors and Assigns.................................... 14
7.2 Survival.................................................. 14
7.3 Governing Law............................................. 14
7.4 Counterparts.............................................. 14
7.5 Titles and Subtitles...................................... 14
7.6 Notices................................................... 14
7.7 Finder's Fee.............................................. 15
7.8 Amendments and Waivers.................................... 15
7.9 California Corporate Securities Law....................... 15
7.10 Expenses.................................................. 15
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
7.11 Severability.............................................. 15
7.12 Aggregation of Stock...................................... 16
7.13 Entire Agreement.......................................... 16
EXHIBITS
</TABLE>
A Schedule of Investors
B Amended and Restated Certificate of Incorporation
C Schedule of Exceptions
D Amended and Restated Stockholder Rights Agreement
E Opinion of Company Counsel
-iii-
<PAGE>
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made
as of the 30th day of August 1999, by and between Conway-Stuart Medical, Inc., a
Delaware corporation, located at 735 Palomar Avenue, Sunnyvale, CA, 94086 (the
"Company"), and the investors listed on Exhibit A hereto, each of which is
---------
herein referred to as an "Investor."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Shares.
---------------------------
1.1 Sale of Shares.
--------------
(a) The Company shall adopt and file with the Secretary of State
of Delaware on or before the Closing (as defined below) an Amended and Restated
Certificate of Incorporation in the form attached hereto as Exhibit B (the
---------
"Amended Certificate") which provides for the creation and issuance
of 10,500,000 shares of Series C Preferred Stock.
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees to purchase and the Company agrees to sell and issue to each
Investor, that number of shares of the Company's Series C Preferred Stock, up to
a total of 10,333,333 shares, set forth opposite such Investor's name in
Exhibit A hereto at the purchase price of $1.50 per share.
- ---------
(c) The up to 10,333,333 shares of Series C Preferred Stock sold
to the Investors pursuant to this Agreement are hereinafter referred to as the
"Shares." The total amount of Common Stock and other securities issuable upon
conversion of the Shares is hereinafter referred to as the "Conversion Stock."
The Shares and the Conversion Stock are hereinafter collectively referred to as
the "Securities."
1.2 Closing. The purchase and sale of the Shares shall take place at
-------
the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California at 1:00 p.m., on August 30, 1999, or at such other time and place as
the Company and Investors mutually agree upon (which time and place are
designated as the "Closing"). At the Closing the Company shall deliver to each
Investor a certificate representing the Shares which such Investor is purchasing
against delivery to the Company by such Investor of a check, wire transfer or
cancellation of indebtedness in the aggregate amount of the purchase price
therefor payable to the Company's order.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Investor that, as of the Closing and except as
set forth on a Schedule of Exceptions attached hereto as Exhibit C, which
---------
exceptions shall be deemed to be representations and warranties as if made
hereunder:
2.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now
<PAGE>
conducted and as proposed to be conducted. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on its business,
properties or financial condition or prospects.
2.2 Capitalization. Immediately prior to the Closing, the authorized
--------------
capital of the Company consists, or will consist, of:
(a) 17,800,000 shares of Preferred Stock with a par value of
$0.001 (the "Preferred Stock"), of which 2,100,000 shares have been designated
Series A Preferred Stock, 5,200,000 shares have been designated Series B
- -------- --------
Preferred Stock and 10,500,000 shares have been designated Series C Preferred
Stock. Immediately prior to the Closing, the Company has issued and outstanding
1,871,000 shares of Series A Preferred Stock, 5,132,744 shares of Series B
Preferred Stock and warrants for the purchase of 210,000 shares of Series A
Preferred Stock. Up to 10,500,000 shares of Series C Preferred Stock will be
sold pursuant to this Agreement. The rights, preferences, privileges and
restrictions of the Shares will be as stated in the Amended Certificate.
(b) 30,000,000 shares of Common Stock (the "Common Stock"), of
which 4,970,139 shares and warrants for the purchase of 64,000 shares are issued
and outstanding.
(c) 4,700,000 shares of Common Stock reserved for issuance
pursuant to the Company's 1997 Stock Option Plan, under which no options have
been exercised and options exercisable for up to 1,998,000 shares of Common
Stock are issued and outstanding.
(d) Except as provided herein and except for (i) the conversion
privileges of the Preferred Stock and (ii) the right of first offer provided in
the Amended and Restated Stockholder Rights Agreement, the form of which is
attached hereto as Exhibit D (the "Rights Agreement"), there are no other
---------
outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association,
joint venture, partnership or other business entity.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Rights Agreement (collectively
the "Financing Documents"), the performance of all obligations of the Company
hereunder and thereunder and the authorization, issuance (or reservation for
issuance) and delivery of the Shares being sold hereunder and the Conversion
Stock has been taken or will be taken prior to the Closing, and the Financing
Documents constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
federal or state laws affecting the rights of creditors and the effect of rules
of law governing specific performance, injunctive relief or other equitable
remedies.
-2-
<PAGE>
2.5 Valid Issuance of Preferred and Common Stock.
--------------------------------------------
(a) The Securities, when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein and
therein, (i) will be duly and validly issued, fully paid and nonassessable, (ii)
will not be subject to any preemptive rights or liens, claims or encumbrances
other than restrictions on transfer imposed pursuant hereto or any agreement
required hereunder or under applicable federal or state securities laws, and
(iii) based in part upon the representations of the Investors in this Agreement,
will be issued in compliance with all applicable federal and state securities
laws. The Conversion Stock has been duly and validly reserved for issuance and,
upon issuance in accordance with the terms of the Amended Certificate, shall be
duly and validly issued, fully paid and nonassessable, and issued in compliance
with all applicable securities laws, as presently in effect, of the United
States and each of the states whose securities laws govern the issuance of any
of the Shares hereunder.
(b) The outstanding shares of Common Stock and Preferred Stock
are all duly and validly authorized and issued, fully paid and nonassessable,
and were issued in compliance with all applicable federal and state securities
laws.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for filings pursuant to any
state or federal securities laws.
2.7 Litigation. There is no action, suit, proceeding or investigation
----------
pending or currently threatened against the Company which questions the validity
of the Financing Documents, or the right of the Company to enter into each such
agreement, or to consummate the transactions contemplated thereby, or which
might result, either individually or in the aggregate, in any material adverse
change in the assets, condition, affairs or prospects of the Company,
financially or otherwise, or any material change in the current equity ownership
of the Company, nor is the Company aware that there is any basis for the
foregoing. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to the Company) involving the prior
employment of any of the Company's employees, the use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of the prior employment of the Company's employees, or their obligations under
any agreements with prior employers. The Company is not a party to, nor subject
to the provisions of, any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
2.8 Proprietary Information and Inventions Agreements. As of the date
-------------------------------------------------
of the Closing, each current and former employee, consultant and officer of the
Company will have executed a Proprietary Information and Inventions Agreement.
-3-
<PAGE>
2.9 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted without any conflict
with or infringement of the rights of others. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. The Company has not received any communications alleging
that the Company has violated or, by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights
or trade secrets or other proprietary rights of any other person or entity. The
Company is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to promote
the interests of the Company or that would conflict with the Company's business
as proposed to be conducted. Neither the execution nor delivery of the Financing
Documents, nor the carrying on of the Company's business by the employees of the
Company, nor the conduct of the Company's business as proposed, will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company.
2.10 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provisions of its Amended Certificate or Bylaws or
of any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound or, to its knowledge, of any provision of federal
or state statute, rule or regulation applicable to the Company. The execution,
delivery and performance of the Financing Documents, and the consummation of the
transactions contemplated hereby and thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.
2.11 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby, there
are no material agreements, understandings or proposed transactions between the
Company and any of its officers, directors, affiliates, or any affiliates
thereof.
(b) There are no agreements, understandings, instruments,
contracts or proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound which involve (i) obligations of,
or payments to the Company in excess of
-4-
<PAGE>
$25,000, or (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from the Company.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or
incurred any other liabilities individually in excess of $25,000 or in excess of
$50,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than in the ordinary course of
business.
(d) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Amended Certificate or Bylaws, which materially adversely affects its business
as now conducted or as proposed to be conducted, its properties or its financial
condition.
(e) The Company has not engaged in the past twelve (12) months
in any discussion (i) with any representative of any person regarding the
consolidation or merger of the Company with or into any such person, (ii) with
any corporation, partnership, association or other business entity or any
individual regarding the sale, conveyance or disposition of all or substantially
all of the assets of the Company, or a transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of, or (iii) regarding any other form of liquidation,
dissolution or winding up of the Company.
2.12 Disclosure. The Company has fully provided each Investor with all
----------
the information which such Investor has requested for deciding whether to
purchase the Shares and all information which the Company believes is reasonably
necessary to enable such Investor to make such decision, including the Company's
current Business Plan. Neither the Financing Documents, nor any other statements
or certificates made or delivered in connection herewith, including the
Company's current Business Plan, contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.
2.13 Registration Rights. Except as provided in the Rights Agreement,
-------------------
the Company has not granted or agreed to grant any registration rights,
including piggyback rights, to any person or entity.
2.14 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not impair the Company's ownership or use of such property or assets. With
respect to the property and assets it leases, the Company is in compliance with
such leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances.
-5-
<PAGE>
2.15 Minute Books. The minute books of the Company contains a complete
------------
and correct summary of all meetings of directors and stockholders since the time
of incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
2.16 Section 83(b) Elections. To the best of the Company's knowledge,
-----------------------
all elections and notices required by Section 83(b) of the Internal Revenue
Code, as amended (the "Code") and any analogous provisions of applicable state
tax laws have been timely filed by all individuals who have purchased shares of
the Company's Common Stock.
2.17 Financial Statements. The Company has made available to each
--------------------
Investor its unaudited financial statements (balance sheet, statement of
operations and cash flow) for the period of inception through the year ended as
of December 31, 1998 and its unaudited financial statements (balance sheet,
statement of operations, cash flow and related footnotes) for January 1, 1999
through June 30, 1999 (the "Financial Statements"). The Financial Statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and with each
other, except that the Financial Statements may not contain all footnotes
required by generally accepted accounting principles. The Financial Statements
fairly present the financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject, in the case of
unaudited financial statements, to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to the date of the Financial Statements, not to
exceed $25,000, and (ii) obligations under contracts and commitments incurred in
the ordinary course of business, not to exceed $25,000, and not required under
generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company.
2.18 Liabilities. The Company has no material liabilities and, to its
-----------
knowledge, knows of no material contingent liabilities not disclosed in the
Financial Statements, except current liabilities incurred in the ordinary course
of business subsequent to the date of the Financial Statements which have not
been, either in any individual case or in the aggregate, materially adverse.
2.19 Changes. Since June 30, 1999, there has not been:
-------
(a) any change in the assets, liabilities, condition (financial
or otherwise), affairs, earnings, business, operations or prospects of the
Company from that reflected in the Financial Statements, except changes in the
ordinary course of business and consistent with past practice which have not
been, either in any case or in the aggregate, materially adverse to the Company;
(b) any change, except in the ordinary course of business, in
the contingent obligations of the Company by way of guaranty or any assurance of
performance or payment, endorsement, indemnity, warranty or otherwise, which
obligation is individually in excess of $25,000 or in excess of $50,000 in the
aggregate;
-6-
<PAGE>
(c) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties or business of the
Company;
(d) any waiver by the Company of a valuable right or of a
material debt owed to it;
(e) any material loan made by the Company to its employees,
officers or directors other than advances of expenses made in the ordinary
course of business and consistent with past practice;
(f) any material increase (or agreement or commitment to
materially increase) in the compensation of any of the Company's executive
employees, officers or directors;
(g) any declaration or payment of any dividend or other
distribution of the assets of the Company or any direct or indirect redemption,
purchase or acquisition of any of the Company's securities other than
repurchases of Common Stock from terminated employees, consultants, officers and
directors pursuant to written agreements;
(h) any debt, obligation or liability incurred, assumed or
guaranteed by the Company, except those for immaterial amounts or for current
liabilities incurred in the ordinary course of business;
(i) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(j) any change in any material agreement to which the Company is
a party or by which it is bound which materially and adversely affects the
business, assets, liabilities, financial condition, operations or prospects of
the Company, including compensation agreements with the Company's employees; or
(k) any other event or condition of any character which has or,
to the Company's knowledge, will likely in the future, materially and adversely
affect the Company's business, prospects, condition, affairs, operations,
properties or assets.
2.20 Tax Returns, Payments and Elections. The Company has timely filed
-----------------------------------
all tax returns and reports as required by law. These returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other assessments due, except those contested by it in good faith that are
listed in the Schedule of Exceptions.
2.21 Insurance. The Company maintains in full force and effect fire
---------
and casualty insurance policies, with coverage in sufficient amounts to allow it
to replace any of its properties that might be damaged or destroyed.
-7-
<PAGE>
2.22 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the best of the
Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the best of the Company's
knowledge, threatened, that could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the Company
(as such business is presently conducted and as it is proposed to be conducted),
nor is the Company aware of any labor organization activity involving its
employees. The Company is not aware that any officer or key employee, or that
any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. The employment of each officer and employee
of the Company is terminable at the will of the Company.
2.23 Employees. The Company has no collective bargaining agreements
---------
with any of its employees. There is no labor union organizing activity pending
or, to the Company's knowledge, threatened with respect to the Company. No
employee has any agreement or contract, written or verbal, regarding his
employment. To the Company's knowledge, no employee of the Company, nor any
consultant with whom the Company has contracted, is in violation of any term of
any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company because of the nature of the business to be conducted
by the Company; and to the Company's knowledge, the continued employment by the
Company of its present employees, and the performance of the Company's with its
independent contractors, will not result in any such violation. The Company has
not received any notice alleging that any such violation has occurred. No
employee of the Company has been granted the right to continued employment by
the Company or to any material compensation following termination of employment
with the Company. The Company is not aware that any officer or key employee, or
that any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any officer, key employee or group of key employees.
2.24 Real Property Holding Corporation. The Company is not a real
---------------------------------
property holding corporation within the meaning of Code Section 897(c)(2) and
any regulations promulgated thereunder.
2.25 Investment Company Act. The Company is not an "investment
----------------------
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
2.26 Permits. The Company has all franchises, permits, licenses, and
-------
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the
-8-
<PAGE>
conduct of its business as planned to be conducted. The Company is not in
default in any material respect under any of such franchises, permits, licenses,
or other similar authority.
2.27 Environmental and Safety Laws. To the best of its knowledge, the
-----------------------------
Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.
2.28 Food, Drug and Cosmetic Act. To the best of its knowledge, the
---------------------------
Company is in compliance with the rules and regulations of the Federal Food,
Drug and Cosmetic Act, as amended, and any other applicable federal or state
law, regulation or statute related thereto.
2.29 Year 2000. To the best of its knowledge, (i) the cost to the
---------
Company to complete any reprogramming required to permit the proper functioning,
in and following the year 2000, of the Company's software products, devices and
programs, whether currently in use or under development, and the computer
systems and equipment containing embedded microchips used in the Company's
business, and (ii) the reasonably foreseeable consequences for year 2000 to the
Company (including, without limitation, reprogramming errors, the performance of
software products or services provided by the Company and the failure of others'
systems or equipment) will not have a material adverse effect on the Company's
business.
2.30 Qualified Small Business Stock.
------------------------------
(a) As of and immediately following the Closing Date, the Shares
will meet each of the requirements for qualification as "qualified small
business stock" set forth in Section 1202(c) of the Internal Revenue Code of
1986, as amended (the "Code"), including without limitation the following: (i)
the Company will be a domestic C corporation, (ii) the Company will not have
made any purchases of its own stock described in Code Section 1202(c)(3)(B)
during the one-year period preceding the Closing, and (iii) the Company's (and
any predecessor's) aggregate gross assets, as defined by Code Section
1202(d)(2), at no time between inception and through the Closing Date have
exceeded or will exceed $50 million, taking into account the assets of any
corporations required to be aggregated with the Company in accordance with Code
Section 1202(d)(3).
(b) As of the Closing Date, at least 80% (by value) of the
assets of the Company are used by it in the active conduct of one or more
qualified trades or businesses, as defined by Code Section 1202(e)(3), and the
Company is an eligible corporation, as defined by Code Section 1202(e)(4).
3. Representations and Warranties of the Investors. Each Investor hereby
-----------------------------------------------
severally and not jointly represents and warrants that:
3.1 Authorization. This Agreement constitutes its valid and legally
-------------
binding obligation, enforceable in accordance with its terms, subject to the
effect of applicable bankruptcy,
-9-
<PAGE>
insolvency, reorganization, moratorium or other similar federal or state laws
affecting the rights of creditors and the effect of rules of law governing
specific performance, injunctive relief or other equitable remedies.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
each Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Shares will be acquired for investment for such Investor's
own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, each Investor further represents that
such Investor does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participation to such person or to
any third person, with respect to any of the Securities. Each Investor
represents that it has full power and authority to enter into this Agreement.
3.3 No Public Market. The Investor understands that no public market
----------------
now exists for any of the securities issued by the Company and that it is
uncertain whether a public market will ever exist for the Shares or the
Underlying Stock.
3.4 Disclosure of Information. Each Investor believes it has received
-------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Shares. Each Investor further represents that it has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the offering of the Shares. The foregoing, however, does
not limit or modify the representations and warranties of the Company in
Section 2 of this Agreement, nor the right of the Investors to rely thereon.
- ---------
3.5 Investment Experience. Each Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it is
able to fend for itself, and bear the economic risk of the complete loss of its
investment and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Shares. If other than an individual, Investor also represents that it has
not been organized for the purpose of acquiring the Shares.
3.6 Restricted Securities. Each Investor understands that the Shares
---------------------
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act") only in certain limited
circumstances. In this connection, each Investor represents that it is familiar
with Rule 144, as presently in effect, and understands the resale limitations
--------
imposed thereby and by the Act.
3.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, each Investor further agrees not to make
any disposition of all or any portion of the Shares (or the Conversion Stock)
except in compliance with the Rights Agreement.
-10-
<PAGE>
3.8 Legends. It is understood that the certificates evidencing the
-------
Shares (and the Conversion Stock) may bear a legend in substantially the
following form:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT."
(b) Any legend required by the law of the State of California or
any other applicable state.
4. Conditions of Investor's Obligations at the Closing. The obligations
---------------------------------------------------
of each Investor under Section 1.1(b) of this Agreement are subject to the
fulfillment of each of the following conditions, the waiver of which shall not
be effective against any Investor who does not consent in writing thereto:
4.1 Representations and Warranties Correct. The representations and
--------------------------------------
warranties made in Section 2 hereof shall be true and correct when made, and
---------
shall be true and correct on the Closing Date.
4.2 Covenants. All covenants, agreements and conditions contained in
---------
this Agreement to be performed by the Company on or prior to the Closing Date
shall have been performed or complied with in all respects.
4.3 Election of Directors. The members of the Board of Directors as
---------------------
of the Closing shall be selected as set out in the Amended Certificate.
Additionally, the Bylaws shall provide for an authorized number of four to seven
directors, fixed at four directors. Immediately after the Closing the Board
shall consist of the following individuals: Tom Winter and Alan Kaganov, who
shall be the Series B Preferred Stock representatives, David Fann, who shall be
the Series C Preferred Stock representative and Stuart Edwards, who shall be the
designee of the holders of Series A Preferred Stock and Common Stock. Two Board
seats shall remain open, to be filled by a new Chief Executive Officer and an
outside independent director.
4.4 Amended Certificate. The Amended Certificate, attached hereto as
-------------------
Exhibit B, shall have been filed with the Secretary of State of the State of
- ---------
Delaware.
4.5 Stockholder Rights Agreement. The Company and the Investors
----------------------------
shall have entered into the Rights Agreement attached hereto as Exhibit D.
---------
4.6 Opinion of Company's Counsel. At the Closing the Investors shall
----------------------------
have received from Wilson Sonsini Goodrich & Rosati, counsel to the Company, an
opinion in substantially the form attached hereto as Exhibit E.
---------
-11-
<PAGE>
4.7 Compliance Certificate. The Company shall have delivered to the
----------------------
Investors a certificate, executed by the President of the Company, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
Sections 4.1 and 4.2 of this Agreement.
4.8 Material Adverse Event. No event that has or could be reasonably
----------------------
expected to have a material adverse affect on the Company's business, prospects,
financial condition, or results of operations shall have occurred after the date
of this Agreement.
4.9 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Investors and their special counsel,
and the Investors and their special counsel shall have received all such
counterpart originals or certified or other copies of such documents as they may
reasonably request.
4.10 Operating Plan. The Company shall have completed a year 2000
--------------
Operating Plan satisfactory to the Investors.
4.11 Generator Production Plan. The Company shall have completed to
-------------------------
the satisfaction of the Company's Board of Directors and Excelsior Private
Equity Fund II, Inc. ("Excelsior") a Generator Production Plan that includes
cash requirements.
4.12 Minimum Investment. The Company shall have on the date hereof
------------------
accepted and received at least $12,500,000 in investments from Investors
pursuant to the terms of this Agreement.
5. Conditions of the Company's Obligations at the Closing. The
------------------------------------------------------
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions,
the waiver of which shall not be effective unless consented to in writing by the
Company:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of each Investor contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of such Closing.
5.2 Payment of Purchase Price. All of the Investors shall have
-------------------------
delivered the purchase price specified in Section 1.1(b).
5.3 Amended Certificate. The Amended Certificate shall have been
-------------------
accepted for filing by the Delaware Secretary of State.
5.4 Qualifications, Legal Investment. All authorizations, approvals,
--------------------------------
or permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the lawful
sale and issuance of the Shares pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closing. No stop order or other
order
-12-
<PAGE>
enjoining the sale of the Shares or the proposed issuance of the Underlying
Stock shall have been issued and no proceedings for such purpose shall be
pending or, to the knowledge of the Company, threatened by the Securities and
Exchange Commission, the California Commissioner of Corporations, or any
commissioner of corporations or similar officer of any other state having
jurisdiction over this transaction. At the time of the Closing, the sale and
issuance of the Shares and the proposed issuance of the Underlying Stock shall
be legally permitted by all laws and regulations to which the Investors and the
Company are subject.
5.5 Stockholder Rights Agreement. The Company, each Investor, and
----------------------------
the requisite holders of Preferred Stock shall have entered into the Rights
Agreement.
6. Covenants of the Company. The Company hereby covenants to each
------------------------
Investor that:
6.1 Market Standoff Agreements. The Company shall ensure that all
--------------------------
current and future stockholders execute a Market Standoff Agreement or are bound
by the provisions of a Market Standoff Agreement pursuant to which such holders
will agree, if so requested by the Company or any underwriter's representative
in connection with the first public offering of the Company's Common, not to
sell or otherwise transfer any securities of the Company during a period of up
to 180 days following the effective date of the applicable registration
statement.
6.2 Board Meetings. Except as otherwise agreed by a majority of the
--------------
Directors, the Board of Directors shall meet quarterly. The Company shall
reimburse outside directors for all reasonable out-of-pocket travel and expenses
incurred in attending meetings of the Board or any Board committees.
6.3 Assignment of Repurchase Rights and Right of First Refusal. If
----------------------------------------------------------
the Company elects not to exercise its repurchase rights or right of first
refusal with respect to the Company's Common Stock, to the extent these rights
are assignable, it will assign these rights pro-rata to all Major Investors, as
defined in the Rights Agreement.
6.4 Qualified Small Business Stock. The Company shall use
------------------------------
commercially reasonable efforts to ensure that the Shares meet each of the
requirements for qualification as qualified small business stock, as set forth
in Section 1202(c) of the Code.
6.5 Proprietary Information and Inventions Agreement. The Company
------------------------------------------------
shall require all employees and consultants to execute and deliver a Proprietary
Information and Inventions Agreement in the form delivered to counsel for the
Investors.
6.6 Changes to Series C Liquidation Preference. So long as any
------------------------------------------
Series C Preferred Stock shall be outstanding, the corporation shall not,
without first obtaining the approval of the holders of a majority of the
outstanding Series C Preferred Stock, which, in any event, shall include the
affirmative vote of those Series C Preferred shares held by Excelsior, make any
change to the liquidation preference of the Series C Preferred Stock, as
provided in Article IV(2)(a) of the Amended Certificate.
-13-
<PAGE>
6.7 Termination of Covenants. The covenants set forth in this
------------------------
Section 6 shall terminate and be of no further force or effect upon the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the firm commitment underwritten offering of its
securities to the general public which results in the conversion of the
Preferred Stock into Common Stock in accordance with the Company's Certificate
of Incorporation as in effect at the time of the offering.
7. Miscellaneous.
-------------
7.1 Successors and Assigns. 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. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
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.
7.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any Investor
and the closing of the transactions contemplated hereby.
7.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
7.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery or facsimile to the party to be
notified or upon deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified at the
address indicated for such party in Exhibit A or, in the case of the Company, on
---------
the first page of this Agreement, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.
7.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible. The Company agrees to indemnify
and hold harmless each Investor from any liability
-14-
<PAGE>
for any commission or compensation in the nature of a finders' fee (and the
costs and expenses of defending against such liability or asserted liability)
for which the Company or any of its officers, employees or representatives is
responsible.
7.8 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of at least two-thirds
of the Securities. Any amendment or waiver effected in accordance with this
Section shall be binding upon each holder of any securities purchased under this
Agreement at the time outstanding (including securities into which such
securities are convertible), each future holder of all such securities, and the
Company.
7.9 California Corporate Securities Law. THE SALE OF THE SECURITIES
-----------------------------------
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
FROM SUCH QUALIFICATION BEING AVAILABLE.
7.10 Expenses. Upon the Closing, the Company shall reimburse the
--------
reasonable fees and expenses of two counsel for the Investors (one counsel to
new Investors and one counsel to those who were also prior Investors) as well as
any consulting and intellectual property reviews, provided that such expenses
shall be reimbursed up to an aggregate of $25,000 (which amount includes up to
$5,000 allocated to counsel for prior Investors).
7.11 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Aggregation of Stock. All Shares held or acquired by affiliated
--------------------
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
7.13 Entire Agreement. This Agreement, together with all exhibits
----------------
attached hereto, constitutes the entire agreement between the parties hereto
pertaining to the subject matter hereof, and any and all other written or oral
agreements existing between the parties hereto are expressly canceled.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Conway-Stuart Medical, Inc.
By: /s/ Stuart D. Edwards
-------------------------------
Title: CEO
----------------------------
<PAGE>
EXCELSIOR PRIVATE EQUITY FUND II, INC.
By: /s/ David I. Fann
-----------------------------------
Name: David I. Fann
---------------------------------
Title: President & CEO
--------------------------------
<PAGE>
ONSET ENTERPRISE ASSOCIATES III, L.P.
By Managing Director
OEA III Management LLC
The General Partner of ONSET Enterprise
Associates III, L.P.
By: /s/ Thomas E. Winter
---------------------------------------
Thomas E. Winter
<PAGE>
U.S. VENTURE PARTNERS V, L.P.
USVP V INTERNATIONAL V, L.P.
2180 ASSOCIATES FUND V, L.P.
USVP V ENTREPRENEUR PARTNERS, L.P.
By Presidio Management Group V, L.L.C.
Its General Partner
By: /s/ Irwin Federman
---------------------------------------
Irwin Federman
Managing Member
<PAGE>
/s/ Alan L. Kaganov
---------------------------------------
Alan L. Kaganov
<PAGE>
/s/ Leslie Bottorff
----------------------------------------
Leslie Bottorff
<PAGE>
/s/ David B. Musket
-----------------------------------------
David B. Musket
<PAGE>
By: /s/ Jordan M. Stitzer
--------------------------------------
Print Name: Jordan M. Stitzer
------------------------------
Title: Vice President
-----------------------------------
<PAGE>
EXHIBIT A
---------
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Investors Number of Shares Purchase Price
<S> <C> <C>
Excelsior Private Equity Fund II, Inc. 4,000,000 $6,000,000.00
114 W. 47/th/ Street
New York, NY 10036-1532
Attn: David Fann
ONSET Enterprise Associates III, L.P./1/ 1,666,667 2,500,000.50
2490 Sand Hill Road
Menlo Park, CA 94025
Attn: Thomas E. Winter
U. S. Venture Partners V, L.P./2/ 2,400,000 3,600,000.00
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Attn: Alan L. Kaganov
USVP V International, L.P./3/ 133,333 199,999.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Attn: Alan L. Kaganov
2180 Associates Fund V, L.P./4/ 74,667 112,000.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Attn: Alan L. Kaganov
</TABLE>
_______________
/1/ Of the amount purchased, 267,850 shares are issues upon conversion of
the principal and interest owing on a promissory note issued to Onset Enterprise
Associates III, L.P.
/2/ Of the amount purchased, 241,065 shares are issues upon conversion of
the principal and interest owing on a promissory note issued to U.S. Venture
Partners V, L.P.
/3/ Of the amount purchased, 13,392 shares are issues upon conversion of
the principal and interest owing on a promissory note issued to USVP V
International, L.P.
/4/ Of the amount purchased, 7,499 shares are issues upon conversion of the
principal and interest owing on a promissory note issued to 2180 Associates Fund
V, L.P.
<PAGE>
<TABLE>
<S> <C> <C>
USVP V Entrepreneur Partners, L.P./5/ 58,667 88,000.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Attn: Alan L. Kaganov
Alan L. Kaganov 33,333 49,999.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Leslie Bottorff 33,333 49,999.50
2490 Sand Hill Road
Menlo Park, CA 94025
David B. Musket 100,000 0.00/6/
125 Cambridgepark Drive, 1st. Flr.
Cambridge, MA 02140
Travelers Insurance Co. 1,333,333 1,999,999.50
One Tower Square
Nine Plaza Building
Hartford, CT 06183
Attn: John Britt
Total: 9,833,333 $14,599,999.50
</TABLE>
_______________
/5/ Of the amount purchased, 5,892 shares are issues upon conversion of the
principal and interest owing on a promissory note issued to USVP V Entrepreneur
Partners, L.P.
/6/ As partial consideration for Placement Agent fees.
-2-
<PAGE>
Exhibit 10.5
AMENDED AND RESTATED
STOCKHOLDER RIGHTS AGREEMENT
This Amended and Restated Stockholder Rights Agreement (the "Agreement") is
entered into as of August 30, 1999, by and among Conway-Stuart Medical, Inc., a
Delaware corporation (the "Company"), and the parties listed on Schedule A
----------
hereto (the "Stockholders"). This Agreement amends and restates the Stockholder
Rights Agreement executed in conjunction with the sale and purchase of the
Company's Series B Preferred Stock on December 10, 1998 (the "Prior Agreement").
This Agreement is being executed in conjunction with the Company's Series C
Preferred Stock Purchase Agreement of even date herewith (the "Series C Purchase
Agreement").
In consideration of the mutual covenants set forth herein, the parties
agree as follows:
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.
"Common Holder" shall mean Stuart Edwards or David Utley, M.D., or
-------------
their transferees, successor or assigns intended to be bound pursuant to the
terms of this Agreement.
"Common Stock" shall mean the Company's Common Stock, par value
------------
$0.001, and shares of Common Stock issued or issuable upon conversion of the
Company's Preferred Stock.
"Co-Sale Shares" shall mean shares of the Company's Common Stock now
--------------
owned or subsequently acquired by a Common Holder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Holder" shall mean any holder of outstanding Registrable Securities.
------
"Initiating Holders" shall mean any Holder or Holders of not less than
------------------
forty percent (40%) of the then outstanding Registrable Securities.
"Major Holder" shall mean any holder of more than 250,000 shares of
------------
Registrable Securities, not including shares of Series A Preferred Stock.
"Preferred Holder" shall mean a holder of shares of the Company's (i)
----------------
Preferred Stock and (ii) Common Stock issued or issuable upon conversion of the
Company's Preferred Stock.
"Registrable Securities" means (i) shares of Common Stock issued or
----------------------
issuable pursuant to the conversion of the Shares and (ii) shares of Common
Stock issued as a dividend or other distribution with respect to, or in exchange
or in replacement of, the Shares, excluding in all cases, however, any
Registrable Securities sold by a holder (y) pursuant to a registration statement
<PAGE>
under this Agreement or (z) in a transaction in which his rights under this
Agreement are not transferred, including a transaction pursuant to a
registration statement under this Agreement.
The number of shares of "Registrable Securities then outstanding"
---------------------------------------
shall be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities which are, Registrable Securities.
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 by the Commission.
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 4.1 and 4.2 hereof and all expenses incurred
in complying with Section 4.9 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of a single special
counsel for the Holders, blue sky fees and expenses, and the expense of any
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 and Selling Expenses).
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legend set forth in Section 6.1 hereof.
"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 affect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
----------------
commissions applicable to the sale of Registrable Securities.
"Shares" shall mean the Series A Preferred Stock, Series B Preferred
------
Stock and Series C Preferred Stock of the Company held by the Investors listed
on Schedule A.
-----------
2. Rights of First Refusal.
-----------------------
2.1 Restrictions on Transfer of Shares. All shares of capital stock
----------------------------------
of the Company now or hereafter owned by the Common Holders and all shares of
the capital stock and other securities of the Company or any successor received
by each Common Holder or his or her personal representatives, heirs, successors,
or assigns, as distributions on, splits or reverse splits of, in exchange for or
otherwise with respect to, such capital stock (the "Stock") shall not be sold,
except upon satisfaction of the conditions specified in this Section 2, and any
sale of the Stock other than in accordance with the terms hereof, is void and
transfers no right, title or interest in or to said Stock, or any of it, whether
now owned or hereafter acquired, to the purported buyer.
2.2 Transfer During Lifetime to Members of Family or Partners of a
--------------------------------------------------------------
Partnership. A Common Holder may be permitted to transfer during his or her
- -----------
lifetime all or a part of the Stock
-2-
<PAGE>
by gift or to or for the benefit of his or her spouse, children or other issue
or to a trust for his or their benefit or, if the Common Holder is a partnership
or a corporation, by distribution to its partners or shareholders, respectively;
provided, however, that before such transfer is consummated, the transferee
shall first agree in writing to assume and be bound by the terms and provisions
of this Section 2.
2.3 Offer. Each Common Holder or any transferee bound hereby may sell
-----
any of the shares of Stock which may now or hereafter be owned by such Common
Holder, only if such Common Holder (the "Offeror"), shall have given to the
Company and the Major Holders a right of first refusal in accordance with the
following terms and conditions:
(a) Notice of Offer. The Offeror shall first give written notice
---------------
(the "Offeror's Notice") by certified or registered mail to the Company, of the
proposed sale, giving the name and address of the proposed purchaser(s), the
number of shares of stock proposed to be sold (the "Offered Stock"), and the
terms and conditions of the proposed sale, accompanied by an offer to the
Company and the Major Holders to sell the Offered Stock at the price and on the
terms stated in the notice.
(b) Company's Option. Within twenty (20) days from and after the
----------------
date of receipt of such notice by the Company (the "Company Record Date"), the
Company shall have the option to purchase all or any portion of the Offered
Stock at the price and upon the terms and conditions specified in the Offeror's
Notice. Within such twenty (20) day period, the Company shall give notice to the
Offeror, by certified or registered mail, of the number of shares it desires to
purchase and shall transmit the Offeror's Notice to the Major Holders and give
notice (the "Company Notice") to the Major Holders of the number of shares
available for purchase by such Major Holders, if any shares remain available
once the Company has exercised its purchase option.
(c) Major Holders' Option. Within ten (10) days from and after
---------------------
the date of receipt of the Company Notice, the Major Holders shall have the
option to purchase all or any portion of the Offered Stock not elected to be
purchased by the Company at the price and upon the terms and conditions
specified in the Offeror's Notice and subject to the pro rata calculation set
forth below. Within such ten (10) day period, the Major Holders shall give
notice to the Offeror, by certified or registered mail, of the number of shares
they desire to purchase.
(d) Pro Rata Calculation. Each Major Holder shall have the right
--------------------
to purchase that number of shares of Offered Stock equal to the product obtained
by multiplying the aggregate number of shares of Offered Stock less the number
of shares purchased by the Company pursuant to Subsection 2.3(b) by a fraction
(A) the numerator of which is the sum of (x) the number of shares of Common
Stock owned by such Major Holder, plus (y) the number of shares of Common Stock
issuable upon conversion of the Preferred Stock owned by such Major Holder at
the time of the Offeror's Notice; and (B) the denominator of which is the sum of
(a) the total number of shares of Common Stock owned by all Major Holders at the
time of the Offeror's Notice, plus (b) the number of shares of Common Stock
issuable upon conversion of Preferred Stock owned by all Major Holders
outstanding at the time of the Offeror's Notice.
-3-
<PAGE>
(e) Offeror's Rights. If the total number of shares of stock
----------------
accepted by the Company and the Major Holders does not equal the number of
shares of Offered Stock, then the Offeror shall, subject to the provisions of
Section 5 below, be free to sell that portion of the Offered Stock not being
purchased by the Company or the Major Holders pursuant to this Section 2 to the
proposed purchaser, but only in accordance with the terms and conditions stated
in the original notice, and the purchaser shall take such shares of the Offered
Stock free of the provisions of this Agreement; provided, however, that in the
event the Offeror or any affiliate or associate (as defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended) of the Offeror obtains direct
or indirect beneficial ownership of all or any portion of such Offered Stock
during the period in which this Agreement is in effect, then such shares shall,
at the time such shares are reacquired by the Offeror or any affiliate or
associate thereof, be once again subject to the provisions of this Agreement.
(f) Closing. Within sixty (60) days after the Company Record
-------
Date, the purchase and sale of any shares of Offered Stock which the Company and
the Major Holders are to purchase pursuant to the foregoing provisions shall be
closed at the principal office of the Company. The purchase price for Offered
Stock may be paid in cash in an amount equal to the present value of any
payments to be made over a period of time according to the terms of the offer,
or, if the terms specified in such offer state that payment is to be made in
property, in an amount equal to the fair market value of such property, as
conclusively determined in good faith by the Board of Directors of the Company
on the date of receipt of such offer. For purposes of any computation made
pursuant to the foregoing sentence, the present value of any amount to be paid
in the future shall be determined by discounting such amount to present value
using an interest rate of ten percent (10%). Notwithstanding the failure of the
selling Common Holder to deliver any certificate evidencing all or any portion
of the shares of Stock purchased pursuant hereto, upon tender by the Company or
the Major Holders of the purchase price for any such shares of Stock in
accordance with the terms of this Agreement, such shares of Stock and the
certificates representing same shall forthwith and without further action be
deemed to be transferred to the Company and the Major Holders, as the case may
be.
3. Right of First Refusal on Company Issuances.
-------------------------------------------
3.1 Right of First Refusal. The Company hereby grants to each Major
----------------------
Holder the right of first refusal to purchase, pro rata, all (or any part) of
New Securities (as defined in this Section 3.1) that the Company may, from time
to time propose to sell and issue. Such Major Holder's pro rata share, for
purposes of this right of first refusal, is the ratio of the number of shares of
Common Stock then owned or issuable upon conversion of the Preferred Stock of
the Company then owned by such Major Holder to the total number of shares of
Common Stock outstanding immediately prior to the issuance of the New
Securities, assuming full conversion of all outstanding shares of Preferred
Stock of the Company and exercise of all outstanding rights, options and
warrants to acquire, directly or indirectly, Common Stock of the Company. This
right of first refusal shall be subject to the following provisions:
(a) "New Securities" shall mean any capital stock of the
--------------
Company, whether now authorized or not, and rights, options, or warrants to
purchase said capital stock, and
-4-
<PAGE>
securities of any type whatsoever that are, or may become, convertible into said
capital stock; provided, however, that "New Securities" does not include (i)
securities issued pursuant to the acquisition of another corporation by the
Company by merger, purchase of substantially all of the assets, or other
reorganization whereby the Company owns more than fifty percent (50%) of the
voting power of such corporation (provided that such acquisition by merger,
purchase of substantially all of the assets, or other reorganization is approved
pursuant to the Company's then-current Certificate of Incorporation); (ii) up to
4,700,000 shares (as presently constituted) of the Company's Common Stock (or
related options) issued to employees, officers, directors, consultants or
advisers of the Company pursuant to any employee stock offering, plan, or
arrangement approved by the Board of Directors; (iii) shares of the Company's
Common Stock or Preferred Stock issued in connection with any stock split, stock
dividend, or similar recapitalization by the Company; (iv) securities issued in
connection with equipment or debt financing or leases (including securities
issued in consideration of guarantees of such financing or leases) which are
approved by the Company's Board of Directors; (v) securities issued to vendors,
customers or coventurers or to other persons in similar commercial or corporate
partnering situations with the Company if such issuance is approved by the Board
of Directors; or (vi) warrants for the purchase of shares of the Company's
Common Stock or Preferred Stock which are currently outstanding or warrants to
lending or leasing institutions which are issued in the future pursuant to a
plan, agreement or arrangement approved by the Company's Board of Directors.
(b) In the event that the Company proposes to undertake an
issuance of New Securities, it shall give each Major Holder written notice of
its intention, describing the type of New Securities, the price, and the general
terms upon which the Company proposes to issue the same. Each Major Holder shall
have fifteen (15) days from the date of mailing of any such notice to agree to
purchase its pro rata share of such New Securities, in whole or in part, for the
price and upon the general terms specified in the notice by giving written
notice to the Company and stating therein the quantity of New Securities to be
purchased. Each Major Holder shall have a right of over allotment such that if
any Major Holder fails to exercise its right hereunder to purchase its full pro
rata portion of New Securities, the Company shall so notify the other Major
Holders who are purchasing their full pro rata portion, and such fully-
exercising Major Holders may purchase that portion of the Shares not subscribed
for on a pro rata basis, within five (5) days from the date of such notice.
(c) In the event that Major Holders fail to exercise in full the
right of first refusal within said fifteen (15) day period (plus five (5) day
period, if applicable) the Company shall have sixty (60) days thereafter to sell
or enter into an agreement providing for the closing of the sale of the New
Securities respecting which the Major Holders' rights were not exercised at a
price and upon general terms no more favorable to the purchasers thereon than
specified in the Company's notice. In the event the Company has not sold the New
Securities within such sixty (60) day period, the Company shall not thereafter
issue or sell any New Securities, without first offering such securities to the
Major Holders in the manner provided above.
(d) The right of first refusal granted under this Agreement
shall not apply to and shall expire upon the closing of the first firmly
underwritten public offering of Common Stock of the Company that is pursuant to
a registration statement filed with, and declared effective by, the
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<PAGE>
Commission under the Securities Act, covering the offer and sale of Common Stock
to the public at a per share price (prior to underwriter commissions and
expenses) of at least five dollars ($5.00) (as shares are presently constituted)
and at an aggregate offering price (before deduction for underwriter commissions
and expenses) of not less than fifteen million dollars ($15,000,000) (a
"Qualified IPO").
(e) This right of first refusal is assignable only to an
affiliate of a Holder or in connection with a sale or transfer of Registrable
Securities where the assignee holds sufficient Registrable Securities to qualify
as a Major Holder after such transfer.
4. Registration Rights.
-------------------
4.1 Requested Registration. Prior to such time as the Company has
----------------------
effected three (3) registrations pursuant to this Section 4.1 and such
registrations have been declared or ordered effective, if the Company shall
receive from Initiating Holders a written request that the Company effect any
registration (other than a registration on Form S-3 or any related form of
registration statement) with respect to Registrable Securities representing at
least twenty percent (20%) of the outstanding Registrable Securities (or any
lesser percentage if the anticipated aggregate offering price to the public is
at least five million dollars ($5,000,000)), the Company will:
(a) promptly give written notice of the proposed registration to
all other Holders; and
(b) as soon as practicable but in any event within ninety (90)
days, use its diligent 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) 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 given within fifteen (15) days after
receipt of such written notice from the Company; provided that the Company shall
not be obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 4.1:
(i) 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;
(ii) Prior to the earlier of three (3) years after the date
of this Agreement or six (6) months following closing of the first underwritten
public offering of Common Stock of the Company for its own account pursuant to a
registration statement filed under to the Securities Act; or
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<PAGE>
(iii) If at the time of the request to register Registrable
Securities the Company in good faith gives notice within thirty (30) days of
such request that it is engaged or has fixed plans to engage within sixty (60)
days of the time of the request in an initial firmly underwritten registered
public offering; provided, however, such notice may not be given more than once
in any six (6) month period.
Subject to the foregoing clauses (i) through (iii) and to Section 4.1(d),
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 of the Initiating Holders.
(c) Underwriting. If the Initiating Holders intend to distribute
------------
the Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 4.1 and the Company shall include such information in the written notice
referred to in Section 4.1(a). The right of any Holder to registration pursuant
to Section 4.1 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent requested (unless otherwise mutually agreed by a
majority in interest of the Holders and such Holder) to the extent provided
herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders with the
approval of the Company, which approval shall not be unreasonably withheld.
Notwithstanding any other provision of this Section 4.1, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten and so advises the Initiating Holders in writing, then the
Initiating Holders shall so advise all Holders (except those Holders who have
indicated to the Company their decision not to distribute any of their
Registrable Securities through such underwriting) 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 owned by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration.
If any Holder disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Initiating Holders. The Registrable Securities and/or other securities
so withdrawn from such underwriting shall also be withdrawn from such
registration; provided, however, that, if by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used above in determining the
underwriter limitation; and, provided further that in the event that the
withdrawal of a Holder, and the subsequent inclusion of additional Registrable
Securities by other Holders, results in the offering of Shares representing less
than twenty percent (20%) of the Registrable Securities (or any lesser
percentage if the anticipated aggregate offering price to the public is less
than five million dollars
-7-
<PAGE>
($5,000,000)), the Company shall no longer be required to effect such
registration pursuant to this Section 4.1.
If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account or the
account of others in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.
(d) Delay of Registration. If the Company shall furnish to the
---------------------
Initiating Holders a certificate signed by the President of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be filed on or before the date filing would be
required and it is therefore essential to defer the filing of such registration
statement, then the Company may direct that such request for registration be
delayed for a period not in excess of ninety (90) days, such right to delay a
request to be exercised by the Company not more than once in any one-year
period.
4.2 Company Registration.
--------------------
(a) If at any time or from time to time, the Company shall
determine to register any of its Common Stock, for its own account or for the
account of others (other than the Holders), other than a registration relating
solely to employee benefit plans or a registration relating solely to a
Commission Rule 145 transaction or a registration on any registration form which
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable
Securities, the Company will:
(i) promptly give to each Holder written notice thereof
(which shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) subject to Section 4.2, below, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within ten (10) days
after receipt of such written notice from the Company, by any Holder or Holders.
(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 a part of the written notice given
pursuant to Section 4.2(a)(i). In such event the right of any Holder to
registration pursuant to Section 4.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
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 underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 4.2, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may limit the number of
Registrable Securities and shares of Common Stock to be included in the
registration and
-8-
<PAGE>
underwriting to (i) in the case of the first underwritten public offering of the
securities of the Company, any amount or no amount, as the underwriter may
determine, or (ii) in the case of any registration subsequent to the first
underwritten public offering of the securities of the Company, to not less than
thirty percent (30%) of the total securities covered by the registration. The
Company shall so advise all Holders (except those Holders who have indicated to
the Company their decision not to distribute any of their Registrable Securities
through such underwriting), and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities owned by the Holders at the time of filing the
registration statement.
No Registrable Securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration. 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
underwriter. The securities so withdrawn from such underwriting shall also be
withdrawn from such registration; provided, however, that, if by the withdrawal
of such securities a greater number of Registrable Securities held by other
Holders may be included in such registration (up to the maximum of any
limitation imposed by the underwriters), then the Company shall offer to all
Holders who have included Registrable Securities in the registration the right
to include additional Registrable Securities in the same proportion used above
in determining the underwriter limitation.
4.3 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration pursuant to Section 4.1, Section 4.2 or Section
4.9 hereunder shall be borne by the Company. All Selling Expenses incurred in
connection with any registrations hereunder, shall be borne by the Holders of
the Registrable Securities so registered pro-rata on the basis of the number of
shares so registered. The Company shall not, however, be required to pay for
expenses of any registration proceeding begun pursuant to Section 4.1, the
request of which has been subsequently withdrawn by the Initiating Holders
(unless the withdrawal is based upon material adverse information concerning the
Company of which the Initiating Holders were not aware at the time of such
request or unless the Holders of a majority of Registrable Securities agree to
forfeit their right to one requested registration pursuant to Section 4.1 in
which event such right shall be forfeited by all Holders), in which case such
expenses shall be borne by the holders of Registrable Securities requesting such
registration in proportion to the number of shares for which registration was
requested.
4.4 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 4,
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) Keep such registration, qualification or compliance
effective for a period of one hundred twenty (120) days or until the Holder or
Holders have completed the distribution described in the registration statement
relating thereto, whichever first occurs.
-9-
<PAGE>
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Use its best efforts to furnish, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, (i) an opinion, dated as of such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and (ii)
a letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering addressed to the underwriters.
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<PAGE>
4.5 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its
officers, directors, partners and legal counsel, and each person controlling
such Holder within the meaning of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 4, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other similar document (including any related registration
statement, notification or the like) 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 not misleading in the light of the circumstances under
which they were made, or (ii) any violation by the Company of any federal, state
or common law rule or regulation applicable to the Company in connection with
any such registration, qualification or compliance, and will reimburse each such
Holder, each of its officers, directors, partners and legal counsel, and each
person controlling such Holder, for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, as incurred, 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 based upon written information furnished to the Company by an
instrument duly executed by such Holder and stated to be specifically for use
therein or written information furnished by the Holder to the Company in
response to a request by the Company stating specifically that such information
will be used by the Company 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 legal counsel and independent accountant of the
Company, each person who controls the Company within the meaning of the
Securities Act, and each other such Holder, each of its officers, directors, and
partners and each person controlling such Holder within the meaning 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 similar 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 in the
light of the circumstances under which they were made, and will reimburse the
Company, such Holders, such directors, officers, persons, or control persons for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action, as
incurred, 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 or written information furnished by the Holder to
the Company in response to a request by the Company stating specifically that
such information will be used by the Company therein; provided, however, that
the obligations of such Holders hereunder shall be limited to an amount equal to
the net proceeds to each such Holder of Registrable Securities sold as
contemplated herein.
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<PAGE>
(c) Each party entitled to indemnification under this Section
4.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has received written notice 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 by the Indemnified Party (whose approval shall not
unreasonably be withheld). The Indemnified Party may participate in such defense
at such party's expense; provided, however, that the Indemnifying Party shall
bear the expense of such defense of the Indemnified Party if representation of
both parties by the same counsel would be inappropriate due to actual or
potential conflicts of interest. The failure of any Indemnified Party to give
notice within a reasonable period of time as provided herein shall relieve the
Indemnifying Party of its obligations under this Section 4.5 only to the extent
that such failure to give notice shall materially adversely prejudice the
Indemnifying Party in the defense of any such claim or any such litigation. 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 the indemnification provided for paragraphs (a) through
(c) of this Section 4.5 is unavailable or insufficient to hold harmless an
Indemnified Party under such paragraphs in respect of any losses, claims,
damages or liabilities or actions in respect thereof referred to therein, then
each Indemnifying Party shall in lieu of indemnifying such Indemnified Party
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, liabilities or actions in such proportion as
appropriate to reflect the relative fault of the Company, on the one hand, and
the underwriters and the Holder of such Registrable Securities, on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or actions as well as any other relevant equitable
considerations, including the failure to give any notice under paragraph (c).
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact relates to
information supplied by the Company, on the one hand, or the underwriters or the
Holders of such Registrable Securities, on the other, and to the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and each of the Holders agrees
that it would not be just and equitable if contributions pursuant to this
paragraph were determined by pro rata allocation (even if all of the Holders of
such Registrable Securities were treated as one entity for such purpose) or by
any other method of allocation which did not take account of the equitable
considerations referred to above in this paragraph. The amount paid or payable
by an Indemnified Party as a result of the losses, claims, damages, liabilities
or action in respect thereof, referred to above in this paragraph, shall be
deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this paragraph, no Holder shall be
required to contribute any amount in excess of the lesser of (i) the proportion
that the public offering price of shares sold by such Holder under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not to exceed the proceeds received by
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<PAGE>
such Holder for the sale of Registrable Securities covered by such registration
statement and (ii) the amount of any damages which they would have otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission. No person guilty of fraudulent misrepresentations (within the meaning
of Section 11(f) of the Securities Act), shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company and Holders under this
Section 4.5 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 4, and otherwise.
4.6 Information by Holder. Each Holder including securities of the
---------------------
Company in any registration shall furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder 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 4.
4.7 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:
(a) Use its best efforts to facilitate the sale of the
Restricted Securities to the public, without registration under the Securities
Act, pursuant to Rule 144 under the Securities Act, provided that this shall not
require the Company to file reports under the Securities Act and the Exchange
Act at anytime prior to the Company's being otherwise required to file such
reports.
(b) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act at all times
after ninety (90) days after the effective date of the first registration under
the Securities Act filed by the Company for an offering of its securities to the
general public;
(c) 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);
(d) So long as a Holder owns any Restricted Securities to
furnish to the Holder 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
so filed by the Company as such Holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
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<PAGE>
4.8 "Market Stand-off" Agreement. Each Holder agrees not to sell or
---------------------------
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company held by it for a period not to exceed one hundred eighty (180) days
following the effective date of a registration statement of the Company filed
under the Securities Act if so requested by the Company and underwriter of
Common Stock (or other securities) of the Company, provided that:
(a) such agreement shall apply only to the first underwritten
registered public offering of the Company; and
(b) all officers, directors and 5% stockholders of the Company
enter into similar agreements. The Company may impose stop-transfer instructions
with respect to the shares (or securities) subject to the foregoing restriction
until the end of such period.
4.9 Form S-3. The Company shall use its best efforts to qualify for
--------
registration on Form S-3 and to that end the Company shall register (whether or
not required by law to do so) its Common Stock under the Exchange Act within
twelve (12) months following the effective date of the first registration of any
securities of the Company on Form S-1. After the Company has qualified for the
use of Form S-3, in addition to the rights contained in the foregoing provisions
of this Section 4, the Holders of Registrable Securities shall have the right to
request registrations on Form S-3 thereafter under this Section 4.9 (such
requests shall be in a writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended method of disposition
of such shares by such Holder or Holders), provided that the Company shall not
be required to effect a registration pursuant to this Section 4.9 unless the
Holder or Holders requesting registration propose to dispose of shares of
Registrable Securities which they reasonably anticipate will have an aggregate
disposition price (before deduction of underwriting discounts and expenses of
sale) of at least one million five hundred thousand dollars ($1,500,000),
provided further that the Company shall not be required to effect a registration
pursuant to this Section 4.9 if at the time of the request for a registration on
Form S-3 the Company in good faith gives notice within thirty (30) days of such
request that it is engaged or has fixed plans to engage within sixty (60) days
of the time of the request in a firmly underwritten registered public offering
(but such notice may not be given more than once in any six (6) month period),
provided further that the Company shall not be required to effect more than one
registration pursuant to this Section 4.9 in any twelve (12) month period.
The Company shall give notice to all Holders of Registrable Securities of
the receipt of a request for registration pursuant to this Section 4.9 and shall
provide a reasonable opportunity for other Holders to participate in the
registration. Subject to the foregoing, the Company will use its best efforts to
effect promptly the registration of all shares of Registrable Securities on Form
S-3, as the case may be, to the extent requested by the Holder or Holders
thereof for purposes of disposition.
4.10 Transfer of Registration Rights. Except as otherwise provided
-------------------------------
herein, the rights contained in this Section 4 may be assigned or otherwise
conveyed to a transferee or assignee of Registrable Securities, who shall be
considered a "Holder" for purposes of this Section 4, provided that (i) such
transfer is effected in accordance with applicable federal and state securities
laws, (ii) such transferee or assignee becomes a party to this Agreement or
agrees in writing to be subject to the terms hereof to the same extent as if he
were an original purchaser hereunder and
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<PAGE>
(iii) such transferee or assignee (A) is a wholly owned subsidiary or
constituent partner (including limited partners) or affiliate of the
transferring Holder, or (B) acquires at least 20% of the Registrable Securities
(as shares are presently constituted) originally held by the transferring Holder
and, provided further, that the Company is given written notice by such Holder
at the time of or within a reasonable time after said transfer, stating the name
and address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned. For the purposes
of determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together and with the partnership; provided that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices or taking any action under this Section
4.
4.11 Certain Limitations in Connection with Future Grants of
-------------------------------------------------------
Registration Rights. From and after the date of this Agreement, the Company
- -------------------
shall not, without the prior written consent of the Holders of at least a two-
thirds of the outstanding Registrable Securities, enter into any agreement with
any person or persons providing for the granting to such holder of registration
rights superior to those granted to Holders pursuant to this Section 4, or of
registration rights which might cause a reduction in the number of shares
includable by the Holders in any offering pursuant to Section 4.1 or in any
offering subject to Section 4.2.
4.12 Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 4.
4.13 Amendment of Registration Rights. The registration rights
--------------------------------
provided in this Section may be amended with the written consent of the Company
and the holders of a two-thirds of the outstanding Registrable Securities. Any
amendment effected in accordance with this Section 4.14 shall be binding upon
each Holder and the Company.
5. Co-Sale Agreement.
-----------------
5.1 Notice. If any Common Holder proposes to sell Common Stock in one
------
or more related transactions (a "Selling Common Holder"), then such Selling
Common Holder shall promptly give written notice (the "Co-Sale Notice") to the
Major Holders at least twenty (20) days prior to the proposed closing of such
sale. The Co-Sale Notice shall describe in reasonable detail the proposed sale
including, without limitation, the number of Co-Sale Shares to be sold, the
nature of such sale, the consideration to be paid, and the name and address of
each prospective purchaser.
5.2 Participation. The Major Holders shall have the right,
-------------
exercisable upon written notice to the Selling Common Holder within ten (10)
days after receipt of the Co-Sale Notice, to participate in such sale on the
same terms and conditions specified in the Co-Sale Notice. To the extent any
Major Holder exercises such right of participation in accordance with the terms
-15-
<PAGE>
and conditions set forth below, the number of Co-Sale Shares that the Selling
Common Holder may sell in the transaction shall be correspondingly reduced.
5.3 Pro Rata Calculation. Each Major Holder may sell all or any part
--------------------
of that number of shares of Common Stock equal to the product obtained by
multiplying the aggregate number of Co-Sale Shares covered by the Co-Sale Notice
by a fraction (i) the numerator of which is the sum of (A) the number of shares
of Common Stock owned by such Major Holder, plus (B) the number of shares of
Common Stock issuable upon conversion of Preferred Stock owned by such Major
Holder at the time of the sale; plus (C) the number of shares of Common Stock
issuable upon exercise of outstanding options or warrants held by such Major
Holder or the time of the sale; and (ii) the denominator of which is the total
number of shares of Common Stock held by the Major Holders and the Selling
Common Holder, including the number of shares of Common Stock issuable upon
conversion of the shares of Preferred Stock then owned by such Major Holders.
5.4 Delivery. Each Major Holder shall effect such Major Holder's
--------
participation in the sale by promptly delivering to the Selling Common Holder
one or more certificates, properly endorsed for transfer, which represent:
(a) the number of shares of Common Stock which such Major Holder
elects to sell; or
(b) that number of shares of Preferred Stock which is
convertible into the number of shares of Common Stock which such Major Holder
elects to sell; provided, however, that if the prospective purchaser objects to
the delivery of Preferred Stock in lieu of Common Stock, such Major Holder shall
convert such Preferred Stock into Common Stock and deliver Common Stock as
provided in Subsection 5.4(a) above. The Company agrees to make any such
conversion concurrent with the actual transfer of such shares to the purchaser.
5.5 Proceeds. The Selling Common Holder shall remit to each Major
--------
Holder that portion of the sale proceeds to which such Major Holder is entitled
by reason of such Major Holder's participation in such sale. To the extent that
any prospective purchaser or purchasers prohibits such assignment or otherwise
refuses to purchase shares or other securities from the Major Holders exercising
their rights of Co-Sale hereunder, the Selling Common Holder shall not sell to
such prospective purchaser or purchasers any Co-Sale Shares unless and until,
simultaneously with such sale, the Selling Common Holder shall purchase from the
Major Holders exercising their rights of co-sale hereunder all shares of Common
Stock or Preferred Stock (on an as-converted basis) as to which the Major
Holders have exercised their rights of co-sale hereunder on the same terms and
conditions as such selling Common Holder's shares are to be sold.
5.6 Non-Exclusive Rights. The exercise or non-exercise of any Major
--------------------
Holder's rights hereunder to participate in one or more sales of Co-Sale Shares
made by any Selling Common Holder shall not adversely affect such Major Holder's
right to participate in subsequent sales of Co-Sale Shares as provided in this
Agreement.
-16-
<PAGE>
5.7 Sales by Selling Common Holders. To the extent that the Major
-------------------------------
Holders elect not to participate in the sale of the Co-Sale Shares subject to
the Co-Sale Notice, either by failure to deliver the written notice to a Selling
Common Holder within the period set forth in Subsection 5.2 above, or by
delivery of a notice electing not to participate or to participate in part only,
the Selling Common Holder may, not later than sixty (60) days following delivery
to the Major Holders of the Co-Sale Notice, enter into an agreement providing
for the closing of the sale of the Co-Sale Shares covered by the Co-Sale Notice
within thirty (30) days of such agreement on terms and conditions not more
favorable to the purchaser than those described in the Co-Sale Notice. Any
proposed sale on terms and conditions more favorable than those described in the
Co-Sale Notice, as well as any subsequent proposed sale of any of the Co-Sale
Shares by any Selling Common Holder, shall again be subject to the co-sale
rights of the Major Holders and shall require compliance by any Selling Common
Holder with the procedures described in this Section 5.
5.8 Exempt Transfers.
----------------
(a) The provisions of Subsections 5.1 through 5.7 shall not
apply to (A) any pledge of Co-Sale Shares made pursuant to a bona fide loan
transaction that creates a mere security interest; (B) any transfer to the
ancestors, descendants or spouse of the Common Holder or to trusts for the
benefit of the Common Holders or (C) any bona fide gift. All such Co-Sale Shares
sold or transferred under the above clauses shall remain "Co-Sale Shares"
hereunder, and any such pledgee, transferee or donee shall be treated as a
"Common Holder" for purposes of this Agreement.
(b) The provisions of Subsections 5.1 to 5.7 shall not apply to
the sale of any Co-Sale Shares (A) to the public pursuant to a registration
statement filed with, and declared effective by, the SEC under the Securities
Act, where the shares of Series C Preferred Stock have converted to Common Stock
or (B) to the Company pursuant to the repurchase provisions of any stock
restriction agreements between the Company and any Common Holder.
5.9 Prohibited Sales. Any attempt by a Selling Common Holder to sell
----------------
Co-Sale Shares in violation of this Section 5 shall be void and the Company
agrees it will not effect such a sale nor will it treat any alleged purchaser as
the holder of such shares without the written consent of all of the Major
Holders.
6. Restrictive Legends and Restrictions on Transfer.
------------------------------------------------
6.1 Restrictive Legends.
-------------------
(a) Each certificate representing shares of Common Stock and
Preferred Stock or any other securities issued in respect of such Common Stock
and Preferred Stock upon any stock split, stock dividend, recapitalization,
merger, consolidation, or similar event, shall (unless otherwise permitted by
the provisions of Section 6.2 be stamped or otherwise imprinted with legends in
substantially the following form (in addition to any legend required under
applicable state securities laws) now or hereafter owned by the Common Holders
or Preferred Holders shall be endorsed with the following legends:
-17-
<PAGE>
THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
OF A CERTAIN STOCKHOLDER RIGHTS AGREEMENT BY AND BETWEEN THE
CORPORATION AND CERTAIN STOCKHOLDERS OF THE CORPORATION. COPIES OF
SUCH AGREEMENT MAY BE OBTAINED UPON REQUEST TO THE SECRETARY OF THE
CORPORATION.
THE SALE AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAW OF ANY STATE OR
OTHER JURISDICTION. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE DISTRIBUTION
THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR
TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT
AS TO THESE SECURITIES AND SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN
COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION OR THERE IS AN OPINION OF COUNSEL OR OTHER EVIDENCE,
SATISFACTORY TO THE CORPORATION THAT AN EXEMPTION THEREFROM IS
AVAILABLE AND THAT SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN
COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION.
(b) Each Common Holder and Preferred Holder agrees that the
Company may instruct its transfer agent to impose transfer restrictions on the
shares represented by certificates bearing the legends referred to in Section
6.1(a) above to enforce the provisions of this Agreement and the Company to
promptly do so.
6.2 Permitted Transfers. The Company shall be obligated to reissue
-------------------
promptly certificates without the second legend set forth in Section 6.1(a) at
the request of any Holder thereof if the holder shall have obtained an opinion
of counsel (which counsel may be counsel to the Company) reasonably acceptable
to the Company to the effect that the securities proposed to be disposed of may
lawfully be so disposed of without registration, qualification or legend. Any
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.
6.3 Notice of Proposed Transfers.
----------------------------
(a) In addition to the rights of co-sale under Section 5, prior
to any proposed transfer of any Restricted Securities, unless there is in effect
a registration statement under the Securities Act covering the proposed
transfer, the Holder or Common Holder thereof shall give written notice (the
"Notice") to the Company of such Holder's or Common Holder's intention to make
such transfer. If reasonably requested by the Company prior to the transfer
being effected, the Holder or Common Holder shall provide to the Company a
written opinion of legal counsel who
-18-
<PAGE>
shall be reasonably satisfactory to the Company, addressed to the Company
and reasonably satisfactory in form and substance to the Company's counsel, to
the effect that the proposed transfer of the Restricted Securities may be
effected without registration under the Securities Act. It is agreed that the
Company will not require opinions of counsel for transactions made pursuant to
Rule 144 under the Securities Act except in unusual circumstances.
Notwithstanding the foregoing provisions of this paragraph, no such registration
statement or opinion of counsel shall be necessary for a transfer by a holder
which is (i) a partnership to its partners or retired partners in accordance
with partnership interests, (ii) a corporation to its shareholders, officers or
directors, affiliated entities or persons or (iii) an individual to a family
member or trust for the benefit of such Holder, Common Holder or a family
member, provided the transferee will be subject to the terms of this Section 6.3
to the same extent as if he were an original Holder or Common Holder hereunder.
Each certificate evidencing the Restricted Securities so transferred shall bear
the appropriate restrictive legends set forth in Section 6.1, except that such
certificate shall not bear the second restrictive legend set forth in Section
6.1(a) if in the opinion of counsel for the Company such legend is not required
in order to establish compliance with any provisions of the securities laws.
(b) Each Holder and Common 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
described in this Section.
7. Information Rights.
------------------
7.1 Financial Information. The Company will furnish the following
---------------------
information to each Major Holder:
(a) within twenty (20) days after the end of each monthly and
quarterly accounting period in each fiscal year,
(i) unaudited statements of income and of cash flow of the
Company for such monthly or quarterly period and for the period from the
beginning of such fiscal year to the end of such monthly period, which
statements will be prepared in accordance with United States generally accepted
accounting principles, consistently and uniformly applied and
(ii) balance sheets of the Company as of the end of such
monthly or quarterly period, which statements will be prepared in accordance
with United States generally accepted accounting principles, consistently and
uniformly applied.
(b) not less than thirty (30) days prior to the end of each
fiscal year, annual consolidated budgets prepared on a monthly basis for the
Company for the succeeding fiscal year, as approved by the Board of Directors
(displaying anticipated statements of income and cash flow and balance sheets
and containing a brief description by the Chief Executive Officer of the
Company's plans for the subsequent year);
(c) within ninety (90) days after the end of each fiscal year,
statements of income and retained earnings and cash flows of the Company for
such fiscal year, and a balance
-19-
<PAGE>
sheet of the Company as of the end of such fiscal year, which statements shall
be prepared in accordance with United States generally accepted accounting
principles, consistently and uniformly applied, and accompanied by the
unqualified opinion of an accounting firm of recognized national standing.
7.2 Inspection Rights; Management Rights. The Company shall
------------------------------------
permit each Major Holder, its attorney, or its other representative to visit and
inspect the Company's properties, to examine the Company's books of account and
other records, to make copies or extracts therefrom and to discuss the Company's
affairs, finances and accounts with its officers, management employees and
independent accountants, all at such reasonable times and as often as such Major
Holder may reasonably request.
7.3 Assignment of Rights to Information. The rights granted pursuant
-----------------------------------
to Sections 7.1 and 7.2 may not be assigned or otherwise conveyed by any Major
Holder or by any subsequent transferee of any such rights without the written
consent of the Company, which consent shall not be unreasonably withheld;
provided that the Company may refuse such written consent if the proposed
transferee is a competitor of the Company as determined by the Company's Board
of Directors; and provided further, that no such written consent shall be
required if the transfer is made to a party who is not a competitor of the
Company and who is a parent, subsidiary, affiliate, partner, shareholder,
officer or director or group member of any Major Holder.
7.4 Confidentiality. Each Major Holder agrees that it will keep
---------------
confidential and will not disclose or divulge any confidential, proprietary or
secret information which such Major Holder may obtain from the Company, and
which the Company has prominently marked "confidential", "proprietary" or
"secret" or has otherwise identified as being such, pursuant to financial
statements, reports and other materials submitted by the Company as required
hereunder, or pursuant to visitation or inspection rights granted hereunder
unless such information is or becomes known to the Major Holder from a source
other than the Company or is or becomes publicly known, or unless the Company
gives its written consent to the Major Holder's release of such information,
except that no such written consent shall be required (and Major Holder shall be
free to release such information) if such information is to be provided to an
Major Holder's counsel or accountant, or to an officer, director or general or
limited partner of an Major Holder or to employees of, or consultants to, an
Major Holder on a "need to know" basis, provided that the Major Holder shall
inform the recipient of the confidential nature of such information, and shall
instruct the recipient to treat the information as confidential.
8. Voting and Other Covenants.
--------------------------
8.1 Agreement to Vote. Each of the Preferred Holders and Common
-----------------
Holders (and their permitted assigns) hereby agrees to vote all shares of the
Company's stock now or hereafter owned by it, whether beneficially or otherwise,
at any regular or special meeting of stockholders of the Company, or, in lieu of
any such meeting, to give their written consent, as provided in this Section 8.
-20-
<PAGE>
8.2 Election of Directors. During the term of this Agreement, the
---------------------
Preferred Holders and Common Holders agree that they shall vote all of their
respective shares of the Company's Preferred Stock or Common Stock, whether
beneficially or otherwise (the "Shares") in the following manner to elect
members to the Company's Board of Directors, as follows: (1) the Company's Chief
Executive Officer, (2) two people, who shall initially be Tom Winter and Alan
Kaganov, who shall be determined by a vote of the holders of a majority of the
Series B Preferred Stock, (3) one person, who shall initially be Stuart Edwards,
who shall be determined by a vote of the holders of a majority of the Series A
Preferred Stock and Common Stock, voting together as a single class, on an as-
converted basis, (4) one person, who shall initially be David Fann, who shall be
determined by a vote of the holders of a majority of the Series C Preferred
Stock and (5) any additional seats shall be filled with people who shall be
outside independent directors (designated "At-Large directors"). Any At-Large
director shall be a nominee that is mutually acceptable to a majority in
interest of the holders of Common Stock and majority in interest of the holders
of Preferred Stock. Any vote taken to remove any director elected pursuant to
this Section 8, or to fill any vacancy created by the resignation of a director
elected pursuant to this Section 8, shall also be subject to the provisions of
this Section 8.
8.3 Successors in Interest. The provisions of Sections 8.1 and 8.2
----------------------
shall be binding upon the successors in interest of any of the Preferred Holders
and Common Holders. The Company shall not permit the transfer of any shares of
stock held by the Preferred Holders or Common Holders its books unless and until
the person to whom such security is transferred shall have executed a written
agreement pursuant to which such person becomes subject to the provisions of
this Section 8 and agrees to be bound by all the provisions hereof.
9. Miscellaneous.
-------------
9.1 Waiver of Right of First Refusal. Major Holders under the Prior
--------------------------------
Agreement hereby agree to waive their right of first refusal contained in
Section 3, above, in conjunction with the issuance of the Series C Preferred
Stock to which this Agreement relates.
9.2 Conditions to Exercise of Rights. Exercise of the Holders' rights
--------------------------------
under this Agreement shall be subject to and conditioned upon, and each Holder
and the Company shall use its or his best efforts to assist each Holder in,
compliance with applicable laws.
9.3 Repurchase Agreement. This Agreement is subject to, and shall in
--------------------
no manner limit the right of the Company to repurchase securities from a Founder
at cost pursuant to any stock restriction agreement or other agreement between
the Company and the Founder.
9.4 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California.
9.5 Amendment. Any provision may be amended and the observance
---------
thereof may waived (either generally or in a particular instance), only by the
written consent of the Company and Holders holding more than two-thirds in
interest of the Registrable Securities which are issued or issuable in respect
of Preferred Stock of the Company; provided, however, any amendment or waiver
-21-
<PAGE>
of any provisions of Sections 2, 5 or 8 also requires the written consent of the
Common Holders holding more than fifty percent (50%) in interest of the Common
Stock held by Common Holders. Any amendment or waiver effected in accordance
with this paragraph shall be binding upon each Holder, Common Holder, its
successors and assigns, heirs, executors and the Company.
9.6 Assignment of Rights. This Agreement and the rights and
--------------------
obligations of the parties hereunder shall inure to benefit of and be binding
upon, their respective successors, assigns and legal representatives. The
provisions of Section 4.5 shall also inure to the benefit of each Indemnified
Party.
9.7 Term.
----
(a) Sections 2, 3, 5, 7 and 8 of this Agreement shall terminate
upon the earlier of (i) the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the Company and/or selling stockholders to the public at a per share
price of not less than $5.00 (as adjusted for stock splits, reverse stock splits
and the like effected alter the date of this Agreement) and resulting in
aggregate net proceeds to the Company or the selling stockholders (after
deducting underwriters' discounts and expenses relating to the issuance) of not
less than $15,000,000, and (ii) the closing of the Company's sale of all or
substantially all of its assets or the acquisition of the Company by another
entity by means of merger or consolidation resulting in the exchange of the
outstanding shares of the Company's capital stock for securities or
consideration issued, or caused to be issued, by the acquiring entity or its
subsidiary.
(b) No Holder shall be entitled to exercise any rights provided
for in Section 4 of this Agreement after five (5) years following a firm
commitment offering of the type described in Section 9.6(a)(i).
9.8 Notices. Unless otherwise stated herein, all notices required or
-------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery to the party to be notified or five days after deposit in
the United States mail, by registered or certified mail, postage prepaid, or
otherwise delivered by hand, facsimile or messenger and properly addressed to
the party to be notified as set forth on the signature page hereof or at such
other address as such party may designate by ten (10) days' advance written
notice to the other parties hereto.
9.9 Severability. In the event one or more of the provisions of this
------------
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
9.10 Attorney Fees. In the event that any dispute among the parties to
-------------
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and
-22-
<PAGE>
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.
9.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one instrument.
9.12 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties relative to the specific subject matter hereof. Any previous
agreement among the parties relative to the specific subject matter hereof is
superseded by this Agreement.
-23-
<PAGE>
The foregoing Stockholder's Rights Agreement is hereby executed as of the
date first above written.
Company:
CONWAY-STUART MEDICAL, INC.
By: /s/ Stuart D. Edwards
-----------------------------------
Title: CEO
--------------------------------
<PAGE>
Preferred Holder:
EXCELSIOR PRIVATE EQUITY FUND II, INC.
By: /s/ David I. Fann
---------------------------------
Name: David I. Fann
-------------------------------
Title: President and CEO
------------------------------
ONSET ENTERPRISE ASSOCIATES III, L.P.
By Managing Director
OEA III Management LLC
The General Partner of ONSET
Enterprise Associates III, L.P.
By: /s/ Thomas E. Winter
---------------------------------
Thomas E. Winter
U.S. VENTURE PARTNERS V, L.P.
USVP V INTERNATIONAL, L.P.
2180 ASSOCIATES FUND V, L.P.
USVP V ENTREPRENEUR PARTNERS, L.P.
By Presidio Management Group V, L.L.C.
Its General Partner
By: /s/ Irwin Federman
---------------------------------
Irwin Federman
Managing Member
/s/ Leslie Bottorff
------------------------------------
Leslie Bottorff
/s/ Alan L. Kaganov
------------------------------------
Alan L. Kaganov
<PAGE>
CMCA Profit sharing Plan, fbo Roger
Winkle
By:
-----------------------------------
Title:
--------------------------------
Geoffrey O. Hartzler, Trustee of the
Geoffrey O. Hartzler Revocable Trust
dated 1-8-97, as amended
By:
-----------------------------------
Title:
--------------------------------
Adam Ventures, L.P.
By:
-----------------------------------
Title:
--------------------------------
Steven M. Schwartz and Paula Mae
Schwartz JTWROS
By:
-----------------------------------
Title:
--------------------------------
G.B.P. Partners, Ltd., a Colo. Ltd.
Partnership George. Pentz, General
Partner
By:
-----------------------------------
Title:
--------------------------------
Cowen & Co. Custodian, FBO David B.
Musket SEP IRA
By: /s/ David Musket
-----------------------------------
Title:
--------------------------------
<PAGE>
R. Winkle & H. Mead & M. Ruder & E.
Anderson & N. Smith & B. Benedick TTEE
CARD MED PSP fbo Edward Anderson
By:___________________________________
Title:________________________________
Gerald Berner Tr. and Harriet R.
Berner Tr. of Family Trust dated
10-7-81
By:___________________________________
Title:________________________________
______________________________________
Michael Franz, M.D.
______________________________________
Gregory A. Hartzler
Joseph P. Ilvento and Judy C. Dean
Pension Trust for Staff
By:___________________________________
Title:________________________________
______________________________________
Ronald G. Lax
______________________________________
Christian H. Lundquist
______________________________________
R. Hardwin Mead
______________________________________
Philip E. Oyer
<PAGE>
--------------------------------------
Zachary H. Shafran
William N. Starling, Jr. and Dana
Gregory Starling, Trustees of the
Starling Family Trust, U/D/T August
By:
-----------------------------------
Title:
--------------------------------
--------------------------------------
Jack D. Utley
/s/ David B. Musket
--------------------------------------
David B. Musket
WS Investment Company 98A
By:
-----------------------------------
Title:
--------------------------------
--------------------------------------
Bruce A. Benedick
--------------------------------------
Frank H. Montgomery
--------------------------------------
Robert M. Stoesser
<PAGE>
Joanne J. Chambers Trustee of the
1994 Joanne J. Chambers Trust
By:___________________________________
Title:________________________________
Orval M. & Ruth B. Eshelman, Family
Trust
By:___________________________________
Title:________________________________
The Rex and Leanor Lindsay Family
Trust dated
2/7/77
By:___________________________________
Title:________________________________
Trustee, WSGR Retirement Plan, fbo
J. Casey McGlynn
By:___________________________________
Title:________________________________
Raymond James & Associates, Inc.
Cust fbo Philip E. Oyer IRA
By:___________________________________
Title:________________________________
Terrence J. Rose, Trustee Terrence &
Trudy Rose 1979 Living Trust Dtd
5/14/79
By:___________________________________
Title:________________________________
<PAGE>
______________________________________
Henry C. Stockman
______________________________________
William F. Stoesser
______________________________________
Philip R. McCowan
Robert D. McCulloch and Kathleen M.
McCulloch, or their successor(s) of
the R.D. McCulloch and K.M. McCulloch
Family Trust Agreement, dtd 11/19/97
By:___________________________________
Title:________________________________
______________________________________
Bryce Winkle
______________________________________
Harold C. Hohbach
______________________________________
Marilyn A. Hohbach
______________________________________
Brooke Winkle
______________________________________
Douglas P. Zipes and M. Joan Zipes
______________________________________
Joel M. Harris
<PAGE>
Somnus Medical Technologies, Inc.
By:
-----------------------------------
Title:
--------------------------------
Common Holder:
/s/ Stuart D. Edwards
--------------------------------------
Stuart D. Edwards
--------------------------------------
David Utley, M.D.
<PAGE>
THE TRAVELERS INSURANCE COMPANY
By: /s/ Jordan M. Stitzer
-----------------------------------
Print Name: Jordan M. Stitzer
---------------------------
Title: Vice President
--------------------------------
<PAGE>
SCHEDULE A
----------
SCHEDULE OF STOCKHOLDERS
COMMON HOLDERS
Stuart D. Edwards
David Utley, M.D.
PREFERRED HOLDERS
CMCA Profit sharing Plan, fbo Roger Winkle
Geoffrey O. Hartzler, Trustee of the Geoffrey O.
Hartzler Revocable Trust dated 1-8-97, as amended
Adam Ventures, L.P.
Steven M. Schwartz and Paula Mae Schwartz
JTWROS
G.B.P. Partners, Ltd., a Colo. Ltd. Partnership George
B. Pentz, General Partner
Cowen & Co. Custodian, FBO David B. Musket SEP
IRA
R. Winkle & H. Mead & M. Ruder & E. Anderson
& N. Smith & B. Benedick TTEE CARD MED PSP
fbo Edward Anderson
Gerald Berner Tr. and Harriet R. Berner Tr. of
Family Trust dated 10-7-81
Michael Franz, M.D.
Gregory A. Hartzler
Joseph P. Ilvento and Judy C. Dean Pension Trust for
Staff
Ronald G. Lax
Christian H. Lundquist
<PAGE>
R. Hardwin Mead
Philip E. Oyer
Zachary H. Shafran
William N. Starling, Jr. and Dana Gregory Starling,
Trustees of the Starling Family Trust, U/D/T August
Jack D. Utley
David B. Musket
WS Investment Company 98A
Bruce A. Benedick
Frank H. Montgomery
Robert M. Stoesser
Joanne J. Chambers Trustee of the 1994 Joanne J.
Chambers Trust
Orval M. & Ruth B. Eshelman, Family Trust
The Rex and Leanor Lindsay Family Trust dated 2/7/77
Trustee, WSGR Retirement Plan, fbo J. Casey
McGlynn
Raymond James & Associates, Inc. Cust fbo Philip
E. Oyer IRA
Terrence J. Rose, Trustee Terrence & Trudy Rose
1979 Living Trust Dtd 5/14/79
Henry C. Stockman
William F. Stoesser
Philip R. McCowan
<PAGE>
Robert D. McCulloch and Kathleen M. McCulloch,or
their successor(s) of the R.D. McCulloch and K.M.
McCulloch Family Trust Agreement, dtd 11/19/97
Bryce Winkle
Harold C. Hohbach
Marilyn A. Hohbach
Brooke Winkle
Douglas P. Zipes and M. Joan Zipes
Joel M. Harris
Onset Enterprise Associates III, L.P.
U.S. Venture Partners V, L.P.
USVP V International, L.P.
2180 Associates Fund V, L.P.
USVP V Entrepreneur Partners, L.P.
Alan L. Kaganov
Somnus Medical Technologies, Inc.
Excelsior Private Equity Fund II, Inc.
Leslie Bottorff
[Travelers Insurance Co.]
<PAGE>
EXHIBIT 10.6
BLDG: Palomar 3
OWNER: 500
PROP: 273
UNIT: 2
TENANT: 27305
LEASE AGREEMENT
THIS LEASE, made this 27th day of August, 1997 between JOHN ARRILLAGA, Trustee,
---- ------ -- ------------------------
or his Successor Trustee, UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) as
- --------------------------------------------------------------------------------
amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated
- ---------------------------------------------------------------------------
7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter
- --------------------------------------------------
called Landlord and FAROUDJA LABORATORIES, INC., a California corporation,
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hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A",
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
A portion of that certain 20,000(plus or minus sign) square foot, one-story
building located at 733 Palomar Avenue, Sunnyvale, California 94086, consisting
of approximately 10,000(plus or minus sign) square feet of space. Said Premises
is more particularly shown within the area outlined in Red on Exhibit A attached
---------
hereto. The entire parcel, of which the Premises is a part, is shown within the
area outlined in Green on Exhibit A attached. The Premises shall be improved as
---------
shown on Exhibit B to be attached hereto, and is leased on an "as-is" basis, in
---------
its present condition, and in the configuration as shown in Red on Exhibit B to
---------
be attached hereto.
The word "Premises" as used throughout this lease is hereby defined to include
the nonexclusive use of landscaped areas, sidewalks and driveways in front of or
adjacent the Premises, and the nonexclusive use of the area directly underneath
or over such sidewalks and driveways. The gross leaseable area of the building
shall be measured from outside of exterior walls to outside of exterior walls,
and shall include any atriums, covered entrances or egresses and covered loading
areas.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
-------
office, light manufacturing, research and development, and storage and other
- ----------------------------------------------------------------------------
uses necessary for Tenant to conduct Tenant's business, provided that such uses
- -------------------------------------------------------------------------------
shall be in accordance with all applicable governmental laws and ordinances,
- ----------------------------------------------------------------------------
and for no other purpose. Tenant shall not do or permit to be done in or about
the Promises nor bring or keep or permit to be brought or kept in or about the
Premises anything which is prohibited by or will in any way increase the
existing rate of (or otherwise affect) fire or any insurance covering the
Premises or any part thereof, or any of its contents, or will cause a
cancellation of any insurance covering the Premises or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises which will in any way obstruct or interfere with the rights
of other tenants or occupants of the Premises or neighboring premises or injure
or annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. No sale by auction shall be
permitted on the Premises. Tenant shall not place any loads upon the floors,
walls, or ceiling which endanger the structure, or place any harmful fluids or
other materials in the drainage system of the building, or overload existing
electrical or other mechanical systems. No waste materials or refuse shall be
dumped upon or permitted to remain upon any part of the Premises or outside of
the building in which the Premises are a part, except in trash containers placed
inside exterior enclosures designated by Landlord for that purpose or inside of
the building proper where designated by Landlord. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain outside the
Premises. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door partition or wall which may appear unsightly from
outside the Premises, No loudspeaker or other device, system or apparatus which
can be heard outside the Premises shall be used in or at the Premises without
the prior written consent of Landlord, Tenant shall not commit or suffer to be
committed any waste in or upon the Premises. Tenant shall indemnify, defend and
hold Landlord harmless against any loss, expense, damage, reasonable attorneys'
fees, or liability arising out of failure of Tenant to comply with any
applicable law. Tenant shall comply with any covenant, condition, or restriction
("CC&R's") affecting the Premises. The provisions of this paragraph are for the
benefit of Landlord only and shall not be construed to be for the benefit of any
tenant or occupant of the Premises.
2. TERM*
A. The term of the Lease shall be for a period of FIVE (5) years ELEVEN (11)
---- - ------ --
months TWENTY SIX (26) days (unless sooner terminated as hereinafter provided)
------ --- --
and subject to Paragraphs 2B and 3 shall commence on the 6th day of October,
--- -------
1997 and end on the 30th day of September, 2003.
-- ---- ---------------
B. Possession of the Premises shall be deemed tendered and the term of the
Lease shall commence when the first of the following occurs;
(a) One day after a Certificate of Occupancy is granted by the proper
government agency, or, if the governmental agency having jurisdiction over the
area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification by Landlord's
architect or contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(c) When the Tenant Improvements have been substantially completed for
------------------------------------------------------------------
Tenant's use and occupancy, in accordance and compliance with Exhibit B of this
- -------------------------------------------------------------------------------
Lease Agreement; or
- -------------------
(d) As otherwise agreed in writing.
* It is agreed in the event said Lease commences on a date other than the first
day of the month the term of the Lease will be extended to account for the
number of days in the partial month. The Basic Rent during the resulting
partial month will be pro-rated (for the number of days in the partial month)
at the Basic Rent rate scheduled for he projected commencement date as shown
in Paragraph 39.
Initials: /s/ M.H.
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Initials: /s/ J.A.
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page 1 of 8
<PAGE>
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver
possession said premises to Tenant at the commencement of said term, as
hereinbefore specified, this Lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby: nor shall Landlord or Landlord's agents be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlord's delivery
of possession, as specified in Paragraph 2B, above. The above is, however,
subject to the provision that the period of delay of delivery of the Premises
shall not exceed 30 days from the commencement date herein (except those delays
--
caused by Acts of God, strikes, war, utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this Lease.
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may
----------
designate without deduction, offset, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of ONE
---
MILLION FOUR HUNDRED NINETEEN THOUSAND SIXTEEN AND 13/100 Dollars
- ---------------------------------------------------------
($1,419,016.13) in lawful money of the United States of America payable as
------------
follows:
See Paragraph 39 for Basic Rent Schedule
B. Time for Payment. Full monthly rent is due in advance on the first day of
----------------
each calendar month, in the event that the term of this Lease commences on a
date other than the first day of a calendar month, on the date of commencement
of the term hereof Tenant shall pay to Landlord as rent for the period from
such date of commencement to the first day of the next succeeding calendar month
that proportion of the monthly rent hereunder which the number of days between
such date of commencement and the first day of the next succeeding calendar
month bears to thirty (30). In the event that the tram of this Lease for any
reason ends on a date other than the last day of a calendar month, on the first
day of the (last calendar month of the term hereto, Tenant shall pay to Landlord
as rent for the period from said first day of said last calendar month to and
including the last day of the term hereof that proportion of the monthly rent
hereunder which the number of days between said first day of said last calendar
month and the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant
-----------
is in default in the payment of rental as set forth in this Paragraph 4 when
due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten(10)
days. Said late charge shall equal ten percent (10%) of each rental payment so
in default.
D. Additional Rent. Beginning with the commencement date of the term of this
---------------
Lease, Tenant shall pay to Landlord or to Landlord's designated agent in
addition to the Basic Rent and as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in Paragraph 9, and
(b) All insurance premiums relating to the Premises, as set forth in
Paragraph 12, and
(c) All charges, costs and expenses, Which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including reasonable attorneys' fees and legal expenses, that may accrue thereto
in the event of Tenants failure to pay such amounts, and all damages, reasonable
costs and expenses which Landlord may incur by reason of default of Tenant or
failure on Tenant's failure to comply with the terms of this Lease. in the event
of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights
and remedies with respect thereto as Landlord has for nonpayment of rent
The Additional Rent due hereunder shall be paid to Landlord or Landlord's
agent (i) within five days for taxes and insurance and within thirty days for
all other Additional Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's, prorate
share of an amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimate amount shall
be reconciled within 120 days of the end of each calendar year or more
frequently if Landlord elects to do so at Landlord's sole and absolute
discretion as compared to Landlord's actual expenditure for said Additional Rent
items, with Tenant paying to Landlord, upon demand, any amount of actual
expenses expended by Landlord in excess of said estimated amount, or Landlord
crediting to Tenant (providing Tenant is not in default in the performance of
any of the terms, covenants and conditions of this Lease) any amount of
estimated payments made by Tenant in excess of Landlord's actual expenditures
for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph shall
survive the expiration or other termination of the term of this Lease, and if
the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
E. Fixed Management Fee. Beginning with the Commencement Date of the Term of
--------------------
this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee ("Management Fee") equal to 2%
of the Basic Rent due for each month during the Lease Term.
F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and
--------------------------------------------
all payments hereunder for Additional Rent shall be paid to Landlord at the
office of Landlord at Peery/Arrillaqa, File 1504, Box 60000, San Francisco,
-----------------------------------------------------
CA 94160 or to such other person or to such other place as Landlord may from
- --------
time to time designate in writing.
* G. Security Deposit. Concurrently with Tenant's execution of this Lease,
----------------
Tenant shall deposit with Landlord the sum of: FORTY TWO THOUSAND AND NO/100
-----------------------------
Dollars ($42,000.00). Said sum shall be held by Landlord as a Security Deposit
---------
for the faithful performance by Tenant of all of the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the term
hereof. If Tenant defaults with respect to any provision of this Lease,
including, but not limited to the provisions relating to the payment of rent and
any of the monetary sums due herewith, Landlord may (but shall not be required
to) use, apply or retain all of any part of this Security Deposit for the
payment of any other amount which Landlord may spend by reason of Tenant's
default or to compensate Landlord for
* $21,000.00 Cash due upon Lease execution.
$21,000.00 Promissory Note due October 1, 1998.
Initials: /s/ M.H.
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Initials: /s/ J.A.
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page 2 of 8
<PAGE>
any other loss or damage which Landlord may suffer by reason of Tenant's
default, if any portion of said Deposit is so used or applied, Tenant shall,
within ten (10) days after written demand therefor, deposit cash with Landlord
in the amount sufficient to restore the Security Deposit to its original amount
Tenants failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep this Security Deposit separate from its general
kinds, and Tenant shall not be entitled to interest on such Deposit. If Tenant
fully and faithfully performs every provision of this Lease to be performed by
it, the Security Deposit or any balance thereof shall be returned to Tenant (or
at Landlord's option, to the last assignee of Tenants interest hereunder) at the
expiration of the Lease term and after Tenant has vacated the Premises. In the
event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Deposit to Landlord's successor in interest whereupon Tenant
agrees to release Landlord from liability for the return off such Deposit or the
accounting therefor.
5. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or
nonconforming acoustical ceiling tiles replaced; all windows washed; the
airconditioning and heating systems serviced by a reputable and licensed service
firm and in good operating condition and repair; the plumbing and electrical
systems and lighting in good order and repair, including replacement of any
burned out or broken light bulbs or ballasts; the lawn and shrubs in good
condition including the replacement of any dead or damaged plantings; the
sidewalk, driveways and parking areas in good order, condition and repair;
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except moveable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord within
thirty (30) days before the end of the term of this Lease whether Landlord
desires to have the Premises or any part or parts thereof restored to their
condition and configuration as when the Premises were delivered to Tenant and if
Landlord shall so desire, then Tenant shall restore said Premises or such part
or parts thereof before the end of this Lease at Tenants sole cost and expense.
Tenant, on or before the end of the term or sooner termination of this Lease,
shall remove all of Tenant's personal property and trade fixtures from the
Premises, and all property not so removed on or before the end of the term or
sooner termination of this Lease shall be deemed abandoned by Tenant and title
to same shall thereupon pass to Landlord without compensation to Tenant Landlord
may, upon termination of this Lease, remove all moveable furniture and equipment
so abandoned by Tenant, at Tenants sole cost, and repair any damage caused by
such removal at Tenant's sole cost. If the Premises be not surrendered at the
end of the term or sooner termination of this Lease, Tenant shall indemnity
Landlord against loss or liability resulting from the delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by any
succeeding tenant founded on such delay. Nothing contained herein shall be
construed as an extension of the term hereof or as a consent of Landlord to any
holding over by Tenant The voluntary or other surrender of this Lease or the
Premises by Tenant or a mutual cancellation of this Lease shall not work as a
merger and, at the option of Landlord, shall either terminate all or any
existing subleases or subtenancies or operate as an assignment to Landlord of
all or any such subleases or subtenancies,
6. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant (such consent not to be
unreasonably withheld), but at the cost of Tenant, and any addition to, or
alteration of, the Premises, except moveable furniture and trade fixtures, shall
at once become a part of the Premises and belong to Landlord. Landlord reserves
the right to approve all contractors and mechanics proposed by Tenant to make
such alterations and additions. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All heating, lighting,
electrical, air conditioning, floor to ceiling partitioning, drapery, carpeting,
and floor installations made by Tenant, together with all property that has
become an integral part of the Premises, shall not be deemed trade fixtures.
Tenant agrees that it will not proceed to make such alteration or additions,
without having obtained consent from Landlord to do so, ant until live (5) days
from the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material supplier for payment
for Tenants improvements. Tenant will at all limes permit such notices to be
posted and to remain posted until the completion of work. Tenant shall, if
required by Landlord, secure at Tenants own cost and expense, a completion and
lien indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises for
work claimed to have been done for, or materials claimed to have been furnished
to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10)
days after the filing thereof, at the cost and expense of Tenant, any exceptions
to the foregoing must be made in writing and executed by both Landlord and
Tenant.
7. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition. Tenant's
maintenance and repair responsibilities herein referred to include, but are not
limited to janitorization, plumbing systems within the non-common areas of the
Premises (such as water and drain lines, sinks), electrical systems within the
non-common Premises (such as water and drain lines, sinks electrical systems
within the non-common areas of the Premises (such as outlets, lighting fixtures,
lamps, bulbs, tubes, ballasts), heating and airconditioning controls within the
non-common areas of the Premises (such as mixing boxes, thermostats, time
clocks, supply and return grill(s), all interior improvements within the
premises including but not limited to: wall coverings, window coverings,
acoustical ceilings, vinyl tile, carpeting, partitioning, doors(both interior
and exterior, including closing mechanisms, latches, locks), and all other
interior improvements of any nature whatsoever. Tenant agrees to provide carpet
shields under all rolling chairs or to otherwise be responsible for wear and
tear of the carpet caused by such rolling chairs if such wear and tear exceeds
that caused by normal foot traffic in surrounding areas. Areas of excessive wear
shall be replaced at Tenant's sole expense upon Lease termination.
8.
9. TAXES
A. As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord, or if Landlord so directs, directly to the Tax
Collector, all Real Property Taxes relating to the Premises. In the event the
Premises leased hereunder consist of only a portion of the entire tax parcel,
Tenant shall pay to Landlord Tenant's proportionate share of such real estate
taxes allocated to the leased Premises by square footage or other reasonable
basis as calculated and determined by Landlord. (ii) the tax billing pertains
100% to the leased Premises, and Landlord chooses to have Tenant pay said real
estate taxes directly to the Tax Collector, then in such event it shall be the
responsibility of Tenant to obtain the tax and assessment bills and pay, prior
to delinquency, the applicable real property taxes and assessments pertaining to
the leased Premises, and failure to receive a bill lot taxes and/or assessments
shall not provide a basis for cancellation of or nonresponsibility for payment
of penalties for nonpayment or late payment by Tenant. The term "Real Property
Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest required to pay
any general or special assessments for public improvements and any increases
resulting from reassessments caused by any change in ownership of the Premises)
now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct or indirect power to tax or levy assessments,
which are levied or assessed against, or with respect to the value, occupancy or
use of, all or any portion of the Premises (as now constructed or as may at any
time hereafter be constructed, altered, or otherwise changed) or Landlord's
interest therein; any improvements located within the Premises (regardless of
ownership); the fixtures, equipment and-other proof Landlord, real or personal,
that are an integral part of and located in the Premises; or parking areas,
public utilities, or energy within the Premises (ii) all charges, levies or fees
imposed by reason of environmental regulation or other governmental control of
the Premises; and (iii) all costs and fees (including
Initials: /s/ M.H.
----------
Initials: /s/ J.A.
----------
page 3 of 8
<PAGE>
reasonable attorney's fees) incurred by Landlord in reasonably contesting any
Real Property Tax and in negotiating with public authorities as to any Real
Property Tax. If at any time during the term of this Lease the taxation or
assessment of the Premises prevailing as of the commencement date of the Lease
shall be altered so that In lieu of or in addition to any Real Property Tax
described above there shall be levied, assessed or imposed (whether by reason of
a change in the method of taxation or assessment, creation of a new tax or
charge, or any other cause) an alternate or additional lax or charge (I) on the
value, use or occupancy of the Premises or Landlord's interest therein or (ii)
on or measured by the gross receipts, income or rentals from the Premises, on
Landlord's business of leasing the Premises or computed in any manner with
respect to the operation of the Premises, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real Property
Taxes" for purposes of this Lease. If any Real Property Tax is based upon
property or rents unrelated to the Premises, then only that part of such Real
Property Tax that is fairly allocable to the Premises shall be included within
the meaning of the term "Real Property Taxes", Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources.
B. Taxes on Tenant's Property Tenant shall be liable for and shall pay ten
days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises, if any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based on such increased assessment, which Landlord shall have the right to
do regardless of the validity thereof, but only under proper protest if
requested by Tenant, Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event
Tenant shall have the right, in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to recover the
amount of such taxes so paid under protest, and any amount so recovered shall
belong to Tenant.
10. LIABILITY INSURANCE Tenant, at Tenants expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with combined single limit coverage of not less than Two Million Dollars
($2,000,000), per occurrence for bodily injury and property damage occurring in,
on or about the Premises, including parking and landscaped areas. Such insurance
shall be primary and noncontributory as respects any insurance carried by
Landlord. This policy or policies effecting such insurance shall name Landlord
as additional insureds, and shall insure any liability of Landlord contingent or
otherwise; as respects acts or omissions of Tenant, its agent, employees or
invitees or otherwise by any conduct or transactions of any of said persons in
or about or concerning the Premises, including any failure of Tenant to observe
or perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the Stale of California; and shall
provide that the insurance affected thereby shall not be canceled, except upon
thirty (30) days' prior written notice to Landlord. A certificate of insurance
of said policy shall be delivered to Landlord. If during the term of this Lease.
in the considered Opinion of Landlord's Lender, insurance advisor, or counsel,
the amount, of insurance described in this Paragraph 10 is not adequate, Tenant
agrees to increase said coverage to such reasonable amount as Landlord's Lender,
insurance advisor, or counsel shall deem adequate.
11. TENANT' PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any of
such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with all
laws.
12. PROPERTY INSURANCE Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenants
proportionate share (allocated to the leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (excluding routine maintenance and repairs-and
incidental damage or destruction caused by accidents or vandalism for which
Tenant is responsible under Paragraph 7) in the amount of the full replacement
value thereof, providing protection against those perils included within the
classification of "all risks" insurance and flood and/or earthquake insurance,
if available, plus a policy of rental income insurance in the amount of one
hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as
Additional Rent if such insurance cost is increased due to Tenant's use of the
Premises, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Premises.
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing pasty, from any liability for loss
or damage caused by are or any of the extended coverage casualties included in
the releasing party's insurance policies, irrespective of the cause of such fire
or casualty; provided, however, that if the insurance policy of either releasing
party prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited, the insured
parties affected shall promptly notify the other party thereof.
13. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises by or from any
cause whatsoever, including, without limitation, gas, fire, oil, electricity or
leakage of any character from the roof, walls, basement or other portion of the
Premises but excluding, however, the willful misconduct or negligence of
Landlord, its agents, servants, employees, invitees, or contractors of which
negligence Landlord has knowledge and reasonable time to correct. Except as to
injury to persons or damage to property to the extent arising from the willful
misconduct or the negligence of Landlord, its agents, servants, employees,
invitees, or contractors. Tenant shall hold Landlord harmless from and defend
Landlord against any and all expenses, including reasonable attorneys' fees, in
connection therewith, arising out of any injury to or death of any person or
damage to or destruction of property occurring in, on or about the Premises, or
any part thereof, from any cause whatsoever (excluding, however, on-site
Hazardous Materials clean up expenses that are not related to Tenant's Hazardous
Materials Activities as defined in Paragraph 49B).
14. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant whether Landlord be a party
thereto or not that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall, at its
sole cost and expense, comply with any and all requirements pertaining to said
Premises of any insurance organization or company, necessary for the mainte-
nance of reasonable fire and public liability insurance covering requirements
pertaining to said Premises of any insurance organization or company, necessary
for the maintenance of reasonable fire and public liability insurance covering
the Premises.
15. LIENS Tenant shall keep the Premises free from any liens arising out of
any work performed, materials furnished or obligation incurred by Tenant. In the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonably withheld. As a
condition for granting this consent to any assignment, transfer, or subletting
Landlord shall require Tenant to pay to Landlord, as Additional Rent, all rents
and/or additional consideration due Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred and/or subleased space. Tenant shall, by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice. Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate if no such notice to terminate is given to Tenant within said
thirty(30) day period, Tenant may proceed to locate an acceptable sublessee,
assignee, or other transferee for presentment to Landlord for Landlord's
approval, all in accordance with the terms, covenants, and conditions of this
paragraph 16. If Tenant intends to sublet the entire Premises and landlord
elects to terminate this Lease this Lease shall be terminated on the date
specified in Tenant's notice. If, however, this Lease shall terminate pursuant
to the foregoing with respect to less than all the Premises, the rent, as
defined and reserved hereinabove shall be adjusted on a pro rata basis to the
number of square feet retained by Tenant, and this Lease as so amended shall
continue in full force and effect. In the event Tenant is allowed to assign,
transfer or sublet the whole or any part of the premises, with the prior written
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consent of Landlord, no assignee, transferee or subtenant shall assign or
transfer this Lease, either in whole or in part, or sublet the whole or any part
of the Premises without also having obtained the prior written consent of
Landlord. A consent of Landlord to one assignment, transfer, hypothecation,
subletting, occupation or use by any other person shall not release Tenant from
any of Tenant's obligations hereunder to be deemed to be a consent to any
subsequent similar or dissimilar assignment, transfer, hypothecation,
subletting, occupation or use by any other person. Any such assignment,
transfer, hypothecation, subletting, occupation or use without such consent
shall be void and shall constitute a breach of this Lease by Tenant and shall at
the option of Landlord exercised by written notice to Tenant, terminate this
Lease. The leasehold estate under this Lease shall not nor shall any interest
therein, be assignable for any purpose by operation of law without the written
consent of Landlord. As a condition to its consent, Landlord shall require
Tenant to pay all expenses in connection with the assignment, and Landlord shall
require Tenant's assignee or transferee (or other assignees or transferees) to
assume in writing all of the obligations under this Lease and for Tenant to
remain liable to Landlord under the Lease. Notwithstanding-the above, -in no
event will Landlord consent to a sub-sublease. See Paragraph 46
17. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
18. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies) have the right to enter
the Premises to inspect them; to inform any services to be provided by Landlord
hereunder; to make repairs or provide any services to a contiguous tenant(s); to
submit the Premises to prospective purchasers, mortgagers or tenants; to post
notices of nonresponsibility; and to alter, improve or repair the Premises or
other parts of the building, all without abatement of rent, and may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however that the business of Tenant shall be interfered with to the least extent
that is reasonably practical. Any entry to the Premises by Landlord for the
purposes provided for herein shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into or a detainer of the Premises or
an eviction, actual or constructive, of Tenant from the Premises or any portion
thereof.
19. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option.
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action,
Within thirty (30) days after court approval of the assumption of this Lease,
the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under same Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent and other -
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach Substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of Landlord
to refuse to accept an assignment upon commencement of or in connection with a
bankruptcy, liquidation, reorganization or insolvency action or an assignment of
Tenant for the benefit of creditors or other similar act. Nothing contained in
this Lease shall be construed as giving or granting or creating an equity in the
demised Premises to Tenant in no event shall the leasehold estate under this
Lease or any interest therein, be assigned by voluntary or involuntary
bankruptcy proceeding without the prior written consent of Landlord. In no event
shall this Lease or any rights or privileges hereunder be an asset of Tenant
under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or representation made
under this Lease shall constitute a default hereunder by Tenant upon expiration
of the appropriate grace period hereinafter provided. Tenant shall have a period
of five (5) days from the date of written notice from Landlord within which to
cure any default in the payment of rental or adjustment thereto. Tenant shall
have a period of thirty (30) days from the date of written notice from Landlord
within which to cure any other default under this Lease. Upon an uncured default
of this Lease by Tenant, Landlord shall have the following rights and remedies
in addition to any other rights or remedies available to Landlord at law or in
equity:
(a) The rights and remedies provided for by California Civil Code Section
1951.2, including but not limited to, recovery of the worth al 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 rental loss for the same period that Tenant
proves could be reasonably avoided, as computed pursuant to subsection (b) of
said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of
Section 1951.2 of the California Civil Code of the amount of rental loss that
could be reasonably avoided shall be made in the following manner: Landlord and
Tenant shall each select a licensed real estate broker in the business of
renting property of the same type and use as the Premises and in the same
geographic vicinity. Such two real estate brokers shall select a third licensed
real estate broker, and the three licensed real estate brokers so selected shall
determine the amount of the rental loss that could be reasonably avoided from
the balance of the term of this Lease after the time of award. The decision of
the majority of said licensed real estate brokers shall be final and binding
upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section which
allows Landlord to continue the Lease in effect and to enforce all of its rights
and remedies under this Lease, including the right to recover rent as it becomes
due, for so long as Landlord does not terminate Tenant's right to possession;
acts of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law the right and power, to enter the
Premises and remove therefrom all persons and properly, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and apply such proceeds therefrom pursuant to
applicable California law. Landlord, may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its reasonable
sole discretion may deem advisable, with the right to make alterations and
repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to indebtedness other than rent due
hereunder, the reasonable cost of such subletting, including, but not limited
to, reasonable attorneys' fees, and any real estate commissions actually paid,
and the cost of such reasonable alterations and repairs incurred by Landlord and
the amount, if any, by which the rent hereunder for the period of such
subletting(to the extent such period does not exceed the term hereof exceeds the
amount to be paid as rent for the Premises for such period or (ii) at the option
of Landlord, rents received from such subletting shall be applied first to
payment of indebtedness other than rent due hereunder from Tenant to Landlord;
second, to the payment of any costs of such subletting and of such alterations
and repairs; third to payment of rent due and unpaid hereunder; and the residue,
if any, shall be held by Landlord and applied in payment of future rent as the
same becomes due hereunder. If Tenant has been credited with any rent to be
received by such subletting under option (i) and such rent shall not be promptly
paid to Landlord by the subtenant(s), or it such rentals received from such
subletting under option (it) during any month be less than that to be paid
during that month by Tenant hereunder, Tenant shall pay any such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. No taking
possession of the Premises by Landlord, shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention be given
to Tenant. Notwithstanding any such subletting without termination, Landlord may
at any time hereafter elect to terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application by
Landlord, to take possession of the Premises and to apply any rental collected
from the Premises and to exercise all other rights and remedies granted to
Landlord pursuant to subparagraph d above. See Paragraph 47
20. ABANDONMENT Tenant shall not vacate or abandon the-Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate or surrender
said Premises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord. See Paragraph 48
21. DESTRUCTION In the event the Premises are destroyed in whole or in pat from
any cause, except for routine maintenance and repairs and incidental
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damage and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the damage
or destruction, or
(b) Terminate the Lease. (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost)
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense except for any deductible, which is the responsibility of Tenant,
promptly to rebuild or restore the Premises to their condition prior to the
damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in proportion that the area of the Premises rendered
untenantable by such damage bears to the total area of the Premises. If Landlord
initially estimates that the rebuilding or restoration will exceed 180 days or
if Landlord 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 Tenant or because of Acts
of God, acts of public agencies, labor disputes, strikes, fires, freight
embargos, 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 the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in 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 33 1/3% of the replacement cost
thereof, Landlord may elect to terminate this Lease, whether the Premises be
injured or not. Notwithstanding anything to the contrary herein, Landlord may
terminate this Lease in the event of an uninsured event or if insurance proceeds
are insufficient to cover one hundred percent of the rebuilding costs net of the
deductible.
22. EMINENT DOMAIN if all or any part of the Premises shall be taken by any
public quasi-public authority under the power of eminent domain or conveyance in
lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill. shall be and remain
the property of Tenant.
If any action or proceeding is commenced for such taking of the Premises or
any part thereof, or if Landlord is advised in writing by any entity or body
having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, then Landlord shall have the right to terminate
this Lease by giving Tenant written notice thereof within sixty (60) days of the
date of receipt of said written advice, or commencement of said action or
proceeding, or taking conveyance, which termination shall take place as of the
first to occur of the last day of the calendar month next following the month in
which such notice is given or the date on which title to the Premises shall vest
in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant can
no longer reasonably conduct its business, .Tenant shall have the privilege of
terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of the
Premises not so taken or conveyed, and the rent herein shall be apportioned as
of the date of such taking or conveyance so that thereafter the rent to be paid
by Tenant shall be in the ratio that the area of the portion of the Premises not
so taken or conveyed bears to the total area of the Premises prior to such
taking
23. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the
Premises or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any further
liability upon any of the terms, covenants or conditions (express or implied)
herein contained in favor of Tenant, and in such event, insofar as such transfer
is concerned, Tenant agrees to look solely to the responsibility of the
successor in interest of such transferor in and to the Premises and this Lease.
This Lease shall not be affected by any such sale or conveyance, and Tenant
agrees (to attorn to the successor in interest of such transferor, provided
that the transferee assumes all of Landlord's obligations in writing under the
Lease.
24. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through Judicial foreclosure or by exercise Of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
25. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred twenty five (125%) percent of the monthly Basic
Rent required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten
(10) days prior written notice from Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) 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 (it) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be Conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance; and that not more than one month's rent has been paid in
advance.
27. CONSTRUCTION CHANGES It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes
shall affect this Lease or entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant. Landlord does not guarantee The
accuracy of any drawings supplied to Tenant and verification of the accuracy of
such drawings rests with Tenant.
28. RIGHT OF-LANDLORD TO PERFORM All terms, covenants and conditions of is
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder and such failure shall continue for five (5) days after written
notice by Landlord, or shall fail to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
thirty (30) days after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obliged to, make any such payment or perform any such other term or
covenant on Tenant's part to be performed. All sums so paid by Landlord and all
necessary costs of such performance by Landlord together with interest thereon
at the rate of the prime rate of interest per annum as quoted by the Bank of
America from the date of such payment on performance by Landlord, shall be paid
(and Tenant covenants to make such payment) to Landlord On demand by Landlord,
and Landlord shall have (in addition to any other right or remedy of Landlord)
the same rights and remedies in the event of nonpayment by Tenant as in the case
of failure by Tenant in the payment of rent hereunder.
29. ATTORNEYS' FEES
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease, or
because of the breach of any provision of this Lease, of for any other relief
against the other party hereunder, then all costs and expenses, including
reasonable attorney's fees.
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incurred by the prevailing party therein shall be paid by the other party, which
obligation on the part of the other party shall be deemed to have accrued on the
date of the commencement of such action and shall be enforceable whether or not
the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against Tenant
in connection with or arising out of Tenants occupancy hereunder, Tenant shall
pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
30. WAIVER The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
31. NOTICES All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demand, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises of if sent by United Slated certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College
---------------------------------------
Blvd., Suite 101, Santa Clara, CA 95054.
- ---------------------------------------
Each notice, request, demand, advice or designation referred to in this
paragraph shall be deemed received on the date of the personal service or
mailing thereof in the manner herein provided, as the case may be.
32. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a
lease, and this instrument is not effective as a lease or otherwise until its
execution and delivery by both Landlord and Tenant.
33. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than (30) days after written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of bust covering the Premises whose
name and address shall have heretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partner-ship)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the by-
laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms, if Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease. See Paragraph 52
35.
36. LIMITATION OF LIABILITY In consideration of the benefits accruing
hereunder. Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(a) the sole and exclusive remedy shall be against Landlord's interest
in the Premises leased herein;
(b) no partner of Landlord shall be sued or named as a party in any suit
or action (except as may be necessary to secure Jurisdiction of the
partnership);
(c) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(d) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(e) no judgment will be taken against any partner of Landlord;
(f) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(g) no writ of execution will ever by levied against the assets of any
partner of Landlord;
(h) these covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
37. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the glass
of any window, door partition or wall which may appear unsightly from outside
the Premises.
38. MISCELLANEOUS AND GENERAL PROVISIONS
A. Use of Building Name. Tenant shall not, without the written consent of
Landlord, use the name of the building for any purpose other than as the address
of the business conducted by Tenant in the Premises.
Initials: /s/ M.H.
-----------
Initials: /s/ J.A.
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page 7 of 8
<PAGE>
B. Choice of Law; Severability, This Lease shall in all respect be governed
by and construed in accordance with the laws of the State of California. If any
provision of this Lease shall be invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full force
and effect.
C. Definition of Terms. The term "Premises" includes the space leased
hereby and any improvements now or hereafter installed therein or attached
thereto. The term "Landlord" or any pronoun used in place thereof includes the
plural as well as the singular and the succession and assign of Landlord. The
term "Tenant" or any pronoun used in place thereof includes the plural as well
as the singular and individuals, firms, associations, partnerships and corpora-
tions, and their and each of their respective heirs, executors, administrators,
successors and permitted assigns, according to the context hereof, and the
provisions of this Lease shall inure to the benefit of and bind such heirs,
executors, administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and individuals,
firms, associations, partnerships and corporations. Words used in any gender
include other genders. If there be more than one Tenant the obligations of
Tenant hereunder are Joint and several. The paragraph headings of the Lease are
for convenience of reference only and shall have no effect upon the construction
or interpretation of any provision hereof.
D. Time of Essence. Time is of the essence of this Lease and of each and
all of its provisions.
E. Quitclaim. At the expiration or earlier termination of this Lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days
after written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in the
State of California, to remove the cloud or encumbrance created by this Lease
from the real property of which Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This instrument along
with any exhibits and attachments hereto constitutes the entire agreement
between Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
agree hereby that all prior or contemporaneous oral agreements between and
among themselves and their agents or representatives relative to the leasing
of the Premises are merged in or revoked by this agreement.
G. Recording. Neither Landlord nor Tenant shall record this Lease or a
short form memorandum hereof without the consent of the other.
H. Amendments for Financing. Tenant further agrees to execute any
amendments required by a lender to enable Landlord to obtain financing, so long
as Tenant's rights hereunder are not substantially affected.
I. Additional Paragraphs. Paragraphs 39 through 53 are
----------- ------------
added hereto and are included as a part of this lease.
J. Clauses, Plats and Riders. Clauses, plats and riders, if any, signed by
Landlord and Tenant and endorsed or, or affixed to this Lease are a part hereof.
K. Diminution of Light, Air or View. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect his
Lease, entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease
as of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S TRUST FAROUDJA LABORATORIES, INC.
A California corporation
By /s/ JOHN ARRILLAGA By /s/ MICHAEL HOBERG
________________________ _____________________
John Arrillaga, Trustee
Date: 10/10/97 Title VP FINANCE
-------- -----------
RICHARD T. PEERY SEPARATE PROPERTY TRUST Type or Print Name Michael Hoberg
______________
By /s/ RICHARD T. PEERY Date: 10/6/97
--------------------- --------
Richard T. Perry, Trustee
Date: 10/9/97 Initials: /s/ M.H.
_______ -----------
Initials: /s/ J.A.
-----------
page 8 of 8
<PAGE>
Paragraphs 39 through 53 to Lease Agreement dated August 27, 1997, By and
Between the John Arrillaga Survivor's Trust and the Richard T. Peery Separate
Property Trust, as Landlord, and Faroudja Laboratories, Inc., a California
corporation, as Tenant for 10,000 (+/-) Square Feet of Space Located at 733
Palomar Avenue, Sunnyvale, California.
39. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum
----------
of ONE MILLION FOUR HUNDRED NINETEEN THOUSAND SIXTEEN AND 13/100 DOLLARS
($1,419,016.13), shall be payable as follows:
On October 6, 1997, the sum of FIFTEEN THOUSAND FIVE HUNDRED SIXTEEN AND
13/100 DOLLARS ($15,516.13) shall be due, representing the Rental for the period
October 6, 1997 through October 31, 1997.
On November 1, 1997, the sum of EIGHTEEN THOUSAND FIVE HUNDRED AND NO/100
DOLLARS ($18,500.00) shall be due, and a like sum due on the first day of each
month thereafter, through and including September 1, 1998.
On October 1, 1998, the sum of NINETEEN THOUSAND AND NO/100 DOLLARS
($19,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including September 1, 1999.
On October 1, 1999, the sum of NINETEEN THOUSAND FIVE HUNDRED AND NO/100
DOLLARS ($19,500.00) shall be due, and a like sum due on the first day of each
month thereafter, through and including September 1, 2000.
On October 1, 2000, the sum of TWENTY THOUSAND AND NO/100 DOLLARS
($20,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including September 1, 2001.
On October 1, 2001, the sum of TWENTY THOUSAND FIVE HUNDRED AND NO/100
DOLLARS ($20,500.00) shall be due, and a like sum due on the first day of each
month thereafter, through and including September 1, 2002.
On October 1, 2002, the sum of TWENTY ONE THOUSAND AND NO/100 DOLLARS
($21,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including September 1, 2003; or until the entire
aggregate sum of ONE MILLION FOUR HUNDRED NINETEEN THOUSAND SIXTEEN AND 13/100
DOLLARS ($1,419,016.13) has been paid.
40. "AS-IS" BASIS: Subject only to Paragraph 53 and to Landlord making the
-------------
improvements shown on Exhibit B to be attached hereto, it is hereby agreed that
----------
the Premises leased hereunder is leased strictly on an "as-is" basis and in its
present condition, and in the configuration as shown on Exhibit B to be attached
---------
hereto, and by reference made a part hereof. Except as noted herein, it is
specifically agreed between the parties that after Landlord makes the interior
improvements as shown on Exhibit B, Landlord shall not be required to make, nor
---------
be responsible for any cost, in connection with any repair, restoration, and/or
improvement to the Premises in order for this Lease to commence, or thereafter,
throughout the Term of this Lease. Notwithstanding anything to the contrary
within this Lease, Landlord makes no warranty or representation of any kind or
nature whatsoever as to the condition or repair of the Premises, nor as to the
use or occupancy which may be made thereof.
41. RULES AND REGULATIONS AND COMMON AREA: Subject to the terms and conditions
-------------------------------------
of this Lease and such Rules and Regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common with other occupants of the Parcel/Building in which the premises are
located, and their respective employees, invitees and customers, and others
entitled to the use thereof, have the non-exclusive right to use the access
roads, parking areas, and facilities provided and designated by Landlord for the
general use and convenience of the occupants of the Parcel/Building in which the
Premises are located, which areas and facilities are referred to herein as
"Common Area". This right shall terminated upon the
Page 9 Initial: /s/ M.H. /s/ J.A.
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<PAGE>
termination of this Lease. Landlord reserves the right from time to time to make
changes in the shape, size, location, amount and extent of Common Area. Landlord
further reserves the right to promulgate such reasonable rules and regulations
relating to the use of the Common Area, and any part or parts thereof, as
Landlord may deem appropriate for the best interests of the occupants of the
Parcel/Building. Such Rules and Regulations may be amended by Landlord from time
to time, with or without advance notice, and all amendments shall be effective
upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant
for the non-performance by any other tenant or occupant of the Parcel/Building
of any of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in which
the Common Area shall be maintained and the expenditures for such maintenance
shall be at the discretion of Landlord.
42. EXPENSES OF OPERATION. MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF
-------------------------------------------------------------------------
THE PARCEL AND BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional Rent
- ---------------------------------------------------------
and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord
Tenant's proportionate share (calculated on a square footage or other equitable
basis as calculated by landlord) of all expenses of operation, management,
maintenance and repair of the Common Areas of the Parcel including, but not
limited to, license, permit, and inspection fees; security; utility charges
associated with exterior landscaping and lighting (including water and sewer
charges); all charges incurred in the maintenance and replacement of landscaped
areas, lakes, parking lots and paved areas (including repairs, replacement,
resealing and restriping), sidewalks, driveways, maintenance, repair and
replacement of all fixtures and electrical, mechanical and plumbing systems;
supplies, materials, equipment and tools; the cost of capital expenditures which
have the effect of reducing operating expenses, provided, however, that in the
event Landlord makes such capital improvements, Landlord may amortize its
investment in said improvements (together with interest at the rate of fifteen
(15%) percent per annum on the unamortized balance) as an operating expense in
accordance with standard accounting practices, provided, that such amortization
is not at a rate greater than the anticipated savings in the operating expenses.
As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant
shall pay its proportionate share (calculated on a square footage or other
equitable basis as calculated by Landlord) of the cost of operation (including
common utilities), management, maintenance, and repair of the building
(including structural and common areas such as lobbies, restrooms, janitor's
closets, hallways, elevators, mechanical and telephone rooms, stairwells,
entrances, spaces above the ceilings and janitorization of said common areas) in
which the Premises are located. The maintenance items herein referred to
include, but are not limited to, all windows, window frames, plate glass,
glazing, truck doors, main plumbing systems of the building (such as water
drain lines, sinks, toilets, faucets, drains, showers and water fountains), main
electrical systems (such as panels and conduits), heating and airconditioning
systems (such as compressors, fans, air handlers, ducts, boilers, heaters),
structural elements and exterior surfaces of the building; store fronts, roof,
downspouts, building common area interiors (such as wall coverings, window
coverings, floor coverings and partitioning), ceilings, building exterior doors,
skylights (if any), automatic fire extinguishing systems, and elevators (if
any); license, permit and inspection fees; security, supplies, materials,
equipment and tools; the cost of capital expenditures which have the, effect of
reducing operating expenses, provided, however, that in the event Landlord makes
such capital improvements, Landlord may amortize its investment in said
improvements (together with interest at the rate of fifteen (15%) percent per
annum on the unamortized balance) as an operating expense in accordance with
standard accounting practices, provided, that such amortization is not at a rate
greater than the anticipated savings in the operating expenses. Tenant hereby
waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and
Sections 1941 and 1942 of the California Civil Code and under any similar law,
statute or ordinance now or hereafter in effect.
"Additional Rent" as used herein shall not include Landlord's debt repayments;
interest on charges, expenses directly or indirectly incurred by Landlord for
the benefit of any other tenant; cost for the installation of partitioning or
any other tenant improvements; cost of attracting tenants; depreciation;
interest; or executive salaries.
43. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional
-----------------------------------------------------------
Rent and in accordance with Paragraph 4D of this Lease Tenant shall pay its
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the cost of all utility charges such as water, gas,
electricity, (telephone, telex and
Page 10 Initial: /s/ M.H. /s/ J.A.
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<PAGE>
other electronic communications service, if applicable) sewer service, waste
pick-up and any other utilities, materials or services furnished directly to the
building in which the Premises are located, including, without limitation, any
temporary or permanent utility surcharge or other exactions whether or not
hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
Provided that Tenant is not in default in the performance or observance of any
of the terms, covenants or conditions of this Lease to be performed or observed
by it, Landlord shall furnish to the Premises between the hours of 8:00 am and
6:00 pm, Mondays through Fridays (holidays excepted) and subject to the rules
and regulations of the Common Area hereinbefore referred to, reasonable
quantities of water, gas and electricity suitable for the intended use of the
Premises and heat and airconditioning required in Landlord's judgment for the
comfortable use and occupation, of the Premises for such purposes. Tenant agrees
that at all times it will cooperate fully with Landlord and abide by all
regulations and requirements that Landlord may prescribe for the proper
functioning and protection of the building heating, ventilating and
airconditioning systems. Whenever heat generating machines, equipment, or any
other devices (including exhaust fans) are used in the Premises by Tenant which
affect the temperature or otherwise maintained by the airconditioning system,
Landlord shall have the right to install supplementary airconditioning units in
the Premises and the cost thereof, including the cost of installation and the
cost of operation and maintenance thereof, shall be paid by Tenant to Landlord
upon demand by Landlord. Tenant will not, without the written consent of
Landlord, use any apparatus or device in the Premises (including, without
limitation), electronic data processing machines or machines using current in
excess of 110 Volts which will in any way increase the amount of electricity,
gas, water or airconditioning usually furnished or supplied to premises being
used as general office space, or connect with electric current (except through
existing electrical outlets in the Premises), or with gas or water pipes any
apparatus or device for the purposes of using electric current, gas, or water.
If Tenant shall require water, gas, or electric current in excess of that
usually furnished or supplied to premises being used as general office space,
Tenant shall first obtain the written consent of Landlord, which consent shall
not be unreasonably withheld and Landlord may cause an electric current, gas or
water meter to be installed in the Premises in order to measure the amount of
electric current, gas or water consumed for any such excess use. The cost of any
such meter and of the installation, maintenance and repair thereof, all charges
for such excess water, gas and electric current consumed (as shown by such
meters and at the rates then charged by the furnishing public utility); and any
additional expense incurred by Landlord in keeping account Of electric current,
gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay
Landlord therefor promptly upon demand by Landlord.
44. PARKING: Tenant shall have the right to the nonexclusive use of thirty
-------
eight (38) parking spaces in the common parking area of the building. Tenant
agrees that Tenant, Tenant's employees, agents, representatives, and/or invitees
shall not use parking spaces in excess of said 38 parking spaces allocated to
Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion,
to specifically designate the location of Tenant's parking spaces within the
common parking area of the building in the event of a dispute among the tenants
occupying the building referred to herein, in which event Tenant agrees that
Tenant, Tenant's employees, agents, representatives and/or invitees shall not
use any parking spaces other than those parking spaces specifically designated
by Landlord for Tenant's use. Said parking spaces, if specifically designated by
Landlord to Tenant, may be relocated by Landlord at any time, and from time to
time. Landlord reserves the right, at Landlord's sole discretion, to rescind any
specific designation of parking spaces, thereby returning Tenant's parking
spaces to the common parking area. Landlord shall give Tenant written notice of
any change in Tenant's parking spaces. Tenant shall not, at any time, park, or
permit to be parked, any trucks or vehicles adjacent to the loading area so as
to interfere in any way with the use of such areas, nor shall Tenant, at any
time, park or permit the parking of Tenant's trucks and other vehicles or the
trucks and vehicles of Tenant's suppliers or others, in any portion of the
common areas not designated by Landlord for such use by Tenant. Tenant shall not
park nor permit to be parked, any inoperative vehicles or equipment on any
portion of the common parking area or other common areas of the building. Tenant
agrees to assume responsibility for compliance by its employees with the parking
provision, contained herein. If Tenant or its employees park in other than
designated parking areas, then Landlord may charge Tenant, as an additional
charge, and Tenant agrees to pay Ten Dollars ($10.00) per day for
Page 11 Initial: /s/ M.H. /s/ J.A.
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<PAGE>
each day or partial day each such vehicle is parking in any area other than that
designated. Tenant hereby authorizes Landlord, at Tenant's sole expense, to tow
away from the building any vehicle belonging to Tenant or Tenant's employees
parked in violation of these provisions, or to attach violation stickers or
notices to such vehicles. Tenant shall use the parking area for vehicle parking
only and shall not use the parking areas for storage.
45. ASSESSMENT CREDITS: The demised property herein may be subject to a special
------------------
assessment levied by the City of Sunnyvale as part of an Improvement District.
As a part of said special assessment proceedings (if any), additional bonds were
or may be sold and assessments were or may be levied to provide for construction
contingencies and reserve funds. Interest shall be earned on such funds created
for contingencies and on reserve funds which will be credited for the benefit of
said assessment district. To the extent surpluses are created in said district
through unused contingency funds, interest earnings or reserve funds, such
surpluses shall be deemed the property of Landlord. Notwithstanding that such
surpluses may be credited on assessments otherwise due against the Leased
Premises, Tenant shall pay to Landlord, as additional rent if, and at the time
of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment of
$1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord,
pay to Landlord said $200.00 credit as Additional Rent.
46. ASSIGNMENT AND SUBLETTING (CONTINUED):
-------------------------------------
A. Notwithstanding anything stated in Paragraph 16 of this Lease, Landlord
hereby agrees to consent to an assignment or sublease to any parent or
subsidiary corporation, or related corporation which Yves and/or Isabelle
Faroudja (or their heirs) have more than a fifty-one percent (51%) interest in,
provided however, Tenant shall remain liable for 100% of the terms and
conditions and obligations of Tenant under this Lease. Notwithstanding the
above, Tenant shall be required to (a) give Landlord written notice prior to
such assignment or subletting to any party as described above, and (b) execute
Landlord's consent document prepared by Landlord reflecting the assignment or
subletting.
B. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any
reason whatsoever, to terminate the Master Lease prior to the scheduled Master
Lease termination date, then this Sublease (if then still in effect) shall
terminate concurrently with the termination of the Master Lease. Subtenant
expressly acknowledges and agrees that (1) the voluntary termination of the
Master Lease by Landlord and Tenant and the resulting termination of this
Sublease shall not give Subtenant any right or power to make any legal or
equitable claim against Landlord, including without limitation any claim for
interference with contract or interference with prospective economic
advantage, and (2) Subtenant hereby waives any and all rights it may have
under law or at equity against Landlord to challenge such an early termination
of the Sublease, and unconditionally releases and relieves Landlord, and its
officers, directors, employees and agents, from any and all claims, demands,
and/or causes of action whatsoever (collectively, "Claims"), whether such
matters are known or unknown, latent or apparent, suspected or unsuspected,
foreseeable or unforeseeable, which Subtenant may have arising out of or in
connection with any such early termination of this Sublease. Subtenant
knowingly and intentionally waives any and all protection which is or may be
given by Section 1542 of the California Civil Code, which provides as
follows: "A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement
with debtor.
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of and
agreement to this early termination provision, (b) Subtenant's acknowledgment
that, in determining the
Page 12 Initial: /s/ M.H. /s/ J.A.
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<PAGE>
net benefits to be derived by Subtenant under the terms of this Sublease,
Subtenant has anticipated the potential for early termination, and (c)
Subtenant's agreement to the general waiver and release of Claims above.
Initials: ___________ Initials: __________"
Subtenant Tenant
47. BANKRUPTCY AND DEFAULT: Paragraph 19 is modified to provide that with
----------------------
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such non-
monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
48. ABANDONMENT: Paragraph 20 is modified to provide that Tenant shall not be
-----------
in default under the Lease if it leaves all or any part of Premises vacant so
long as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant, (iii) such vacancy does not materially and adversely
affect the validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
49. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
-------------------
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises and the
common areas of the Parcel, which includes the entire parcel of land on which
the Premises are located as shown in Green on Exhibit A attached hereto
----------
(hereinafter collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any material,
waste, chemical, mixture or byproduct which is or hereafter is defined, listed
or designated under Environmental Laws (defined below) as a pollutant, or as a
contaminant, or as a toxic or hazardous substance, waste or material, or any
other unwholesome, hazardous, toxic, biohazardous, or radioactive material,
waste, chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental
Laws" shall mean any applicable Federal, State of California or local government
law (including common law), statute, regulation, rule, ordinance, permit,
license, order, requirement, agreement, or approval, or any determination,
judgment, directive, or order of any executive or judicial authority at any
level of Federal, State of California or local government (whether now existing
or subsequently adopted or promulgated) relating to pollution or the protection
of the environment, ecology, natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild Cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and 'all use, handling, generation, storage,
disposal, treatment, transportation, release, discharge, or emission of any
Hazardous Materials on, in, beneath, to, from, at or about the Property, in
connection with Tenant's use of the Property, or by Tenant or by any of Tenant's
agents, employees, contractors, vendors, invitees, visitors or its future
subtenants or assignees. Tenant agrees that any and all Tenant's Hazardous
Materials Activities shall be conducted in strict, full compliance with
applicable Environmental Laws at Tenant's expense, and shall not result in any
contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous Materials
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<PAGE>
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense: (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation or to require any such
installation); (ii) provide Landlord with a written inventory of such Hazardous
Materials, including an update of same each year upon the anniversary date of
the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each
Anniversary Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether Tenant is in compliance with all applicable
Environmental Laws with respect to Tenant's Hazardous Materials Activities.
Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous Materials
which come to be located at the Property in connection with Tenant's Hazardous
Materials Activities, and (ii) fully comply with and complete all facility
closure requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x) properly
restoring and repairing the Property to the extent damaged by such closure
activities, and (y) obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written concurrence that
closure has been completed in compliance with applicable Environmental Laws.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
such closure activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for width Tenant is liable
under this Lease. Except as may be required of Tenant by applicable
Environmental Laws, Tenant shall not perform any sampling, testing, or drilling
to identify the presence of any Hazardous Materials at the Property, without
Landlord's prior written consent which may be withheld in Landlord's discretion.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
sampling, testing or drilling performed pursuant to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 49 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
49.
Page 14 Initial: /s/ M.H. /s/ J.A.
-----------------
<PAGE>
50. CONSENT: Whenever the consent of one party to the other is required
-------
hereunder, such consent shall not be unreasonably withheld.
51. AUTHORITY TO EXECUTE: The parties executing this Lease Agreement hereby
--------------------
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
52. LANDLORD'S CORPORATE AUTHORITY: If Landlord is a corporation (or
------------------------------
partnership or trust), each individual executing this Lease on behalf of said
corporation (or partnership or trust) represents and warrants that he is duly
authorized to execute this Lease on behalf of said corporation (or partnership
or trust) in accordance with the bylaws of said corporation (or partnership in
accordance with the partnership agreement, or trust in accordance with the trust
indenture) and that this Lease is binding upon said corporation (or partnership
or trust) in accordance with its terms. If Landlord is a corporation, Landlord
shall in thirty (30) days after execution of this Lease deliver to Tenant a
certified copy of the resolution of the Board of Directors of said corporation
authorizing or ratifying the execution of this Lease.
53. PUNCH LIST: In addition to and notwithstanding anything to the contrary in
----------
Paragraphs 5 and 40 of this Lease, Tenant shall have thirty (30) days after the
Commencement Date to provide Landlord with a written "punch list" pertaining to
defects in the Building and in the interior improvements constructed by Landlord
for Tenant. As soon as reasonably possible thereafter, Landlord, or one of
Landlord's representatives (if so approved by Landlord), and Tenant shall
conduct a joint walk-through of the Premises (if Landlord so requires), and
inspect such Tenant Improvements, using their best efforts to agree on the
incomplete or defective construction related to the Tenant Improvements
installed by Landlord. After such inspection has been completed, Landlord shall
prepare, and both parties shall sign, a list of all "punch list" items which the
parties reasonably agree are (i) to be corrected by Landlord (but which shall
exclude any damage or defects caused by Tenant, its employees, agents or parties
Tenant has contracted with to work on the Premises) or (ii) if said defects
and/or damaged item(s) are not material, Landlord may elect, in its sole and
absolute discretion, not to repair such item(s), but to acknowledge in written
feral the defect and/or damaged item(s); in which case, notwithstanding anything
to the contrary in said Lease Paragraph 5 ("Acceptance and Surrender"), Tenant
shall not be responsible upon Lease Termination to repair said item(s) so noted
by Landlord. Landlord shall have thirty (30) days thereafter (or longer if
necessary, provided Landlord is diligently pursuing the completion of the same)
to complete, at Landlord's expense, the "punch list" items without the
Commencement Date of the Lease and Tenant's obligation to pay Rental thereunder
being affected. Notwithstanding the foregoing, a crack in the foundation, or
exterior walls or any other defect in the structure or Building that does not
endanger the structural integrity of the building, or which is not life-
threatening, shall not be considered material, nor shall Landlord be responsible
for repair of same. This Paragraph shall be of no force and effect if Tenant
shall fail to give any such notice to Landlord within thirty (30) days after the
Commencement Date of this Lease.
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Page 15
<PAGE>
[DIAGRAM: FLOOR PLAN OF 733 PALOMAR 3]
<PAGE>
[DIAGRAM: SITE PLAN 733 PALOMAR]
<PAGE>
EXHIBIT 10.7
[Diagram: Floorplan 733 Palomar]
<PAGE>
EXHIBIT B TO "CONSENT TO SUBLEASE"
SUMMARY OF AMOUNTS/CONSIDERATION TO BE PAID BY SUBTENANT
[insert table here]
IF ADDITIONAL SPACE IS NEEDED, PLEASE DUPLICATE AND ATTACH
* IF PAYMENTS ARE REQUIRED OTHER THAN MONTHLY, PLEASE INCLUDE THESE PAYMENTS
AS WELL.
** IF SUBLEASE RENT PAID INCLUDES MISCELLANEOUS EXPENSES, PLEASE IDENTIFY THE $
AMOUNT /PSF OF THE TOTAL RENT PAYMENT ALLOCATED TO BASIC RENT AND EACH
ADDITIONAL EXPENSE ITEM.
IS ANY ADDITIONAL CONSIDERATION (MONETARY AND/OR SERVICES) DUE UNDER THE
SUBLEASE?: YES NO X
___ ___
IF "YES", IDENTIFY TYPE CONSIDERATION AND DOLLAR VALUE ASSIGNED TO SAID
CONSIDERATION:
<TABLE>
<S> <C> <C>
TYPE:___________________ VALUE:$_____________ TENANT: SUBTENANT
FAROUDIA LABORATORIES, INC. CONWAY STUART MEDICAL, INC.
TYPE:___________________ VALUE:$_____________ TENANT: SUBTENANT
By: /s/ Kenneth S. Boschwitz By: /s/ Alistair McLaren
TYPE:___________________ VALUE:$_____________ TENANT: SUBTENANT
Printed: Kenneth S. Boschwitz Printed: Alistair McLaren
TYPE:___________________ VALUE:$_____________ TENANT: SUBTENANT
Title: VP Business Development & Title: Chief Financial Officer
IF ADDITIONAL SPACE IS NEEDED, General Counsel
PLEASE DUPLICATE AND ATTACH
</TABLE>
<PAGE>
BLDG: Palomar 3
OWNER: 500
PROP: 273
UNIT: 2
TENANT: 27307
LEASE AGREEMENT
THIS LEASE, made this 6th day of May , 1998 between JOHN ARRILLAGA, Trustee, or
--- --- -- ---------------------------
his Successor Trustee, UTA Dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) as
- -------------------------------------------------------------------------------
amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated
- -------------------------------------------------------------------------------
7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended -----------------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------- hereinafter
- --------------------------------------------------------------------
called Landlord and CONWAY STUART MEDICAL, INC., a Delaware corporation -------
-----------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ----------------------------------------------------------, hereinafter called
- ----------------------------------------------------------
Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A",
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
A portion of that certain 20,000+ square foot, one-story building located at
735 Palomar Avenue, Sunnyvale, California 94086, consisting of approximately
10,000+ square feet of space. Said Premises is more particularly shown within
the area outlined in Red on Exhibit A attached hereto. The entire parcel, of
---------
which the Premises is a part, is shown within the area outlined in Green on
Exhibit A attached. The premises is leased on an "as-is" basis, in its present
- ---------
condition, and in the configuration as shown in Red on Exhibit B attached
---------
hereto.
The word "Premises" as used throughout this lease is hereby defined to include
the nonexclusive use of landscaped areas, sidewalks and driveways in front of or
adjacent to the Premises, and the nonexclusive use of the area directly
underneath or over such sidewalks and driveways. The gross leaseable area of the
building shall be measured from outside of exterior walls to outside of exterior
walls, and shall include any atriums, covered entrances or egresses and covered
building loading areas.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
-------
office, light manufacturing, research and development, and storage and other
- ----------------------------------------------------------------------------
uses necessary for Tenant to conduct Tenant's business, provided that such uses
- -------------------------------------------------------------------------------
shall be in accordance with all applicable governmental laws and ordinances,
- ----------------------------------------------------------------------------
and for no other purpose. Tenant shall not do or permit to be done in or about
the Promises nor bring or keep or permit to be brought or kept in or about the
Premises anything which is prohibited by or will in any way increase the
existing rate of (or otherwise affect) fire or any insurance covering the
Premises or any part thereof, or any of its contents, or will cause a
cancellation of any insurance covering the Premises or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises which will in any way obstruct or interfere with the rights
of other tenants or occupants of the Premises or neighboring premises or injure
or annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. No sale by auction shall be
permitted on the Premises. Tenant shall not place any loads upon the floors,
wails, or ceiling which endanger the structure, or place any harmful fluids or
other materials in the drainage system of the building, or overload existing
electrical or other mechanical systems. No waste materials or refuse shall be
dumped upon or permitted to remain upon any part of the Premises or outside of
the building in which the Premises are a part, except in trash containers placed
inside exterior enclosures designated by Landlord for that purpose or inside of
the building proper where designated by Landlord. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain outside the
Premises. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door partition or wall which may appear unsightly from
outside the Premises, No loudspeaker or other device, system or apparatus which
can be heard outside the Premises shall be used in or at the Premises without
the prior written consent of Landlord, Tenant shall not commit or suffer to be
committed any waste in or upon the Premises, Tenant shall indemnity, defend and
hold Landlord harmless against any loss, expense, damage, reasonable attorneys'
fees, or liability arising out of failure of Tenant to comply with any
applicable law. Tenant shall comply with any covenant, condition, or restriction
("CC&R's") affecting the Premises. The provisions of this paragraph are for the
benefit of Landlord only and shall not be construed to be for the benefit of any
tenant or occupant of the Premises.
2. TERM*
A. The term of the Lease shall be for a period of THREE (3) years (unless
----- -
sooner terminated as hereinafter provided) and, subject to Paragraphs 2B and 3,
shall commence on the 1st day of June, 1998 and end on the 31st day of May,
--- ---- ---- ---
2001.
- ----
B. Possession of the Premises shall be deemed tendered and the term of the
Lease shall commence on June 1, 1998, or
(a)
(b)
(c)
(d) As otherwise agreed in writing.
*It is agreed in the event said Lease commences on a date other than the
first day of the month the term of the Lease will be extended to account for the
number of days in the partial month. The Basic Rent during the resulting partial
month will be pro-rated (for the number of days in the partial month) at the
Basic Rent rate scheduled for the projected commencement date as shown in
Paragraph 39.
Initials: /s/ S.E.
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Initials: /s/ J.A.
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/s/ R.P.
page 1 of 8
<PAGE>
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver
possession said premises to Tenant at the commencement of said term, as
hereinbefore specific, this Lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby: nor shall Landlord or Landlord's agents be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlord's delivery
of possession, as specified Paragraph 2B, above. The above is, however, subject
to the provision that the period of delay of delivery of the Premises shall not
exceed 30 days from the commencement date herein (except those delays
--
caused by Acts of God, Strikes, war, utilities, governmental bodies, weather,
unavailable materials and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this Lease.
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may
----------
designate without deduction, offset, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of
SEVEN HUNDRED FIFTY SIX THOUSAND AND NO/100 Dollars ($756,000.00) in lawful
- ------------------------------------------- -----------
money of the United States of America payable as follows:
See Paragraph 39 for Basic Rent Schedule
B. Time for Payment. Full monthly rent is due in advance on the first day of
----------------
each calendar month, in the event that the term of this Lease commences on a
date other than the first day of a calendar month, on the date of commencement
of the term hereof Tenant shall pay to Landlord as rent for the period from such
date of commencement to the first day of the next succeeding calendar month that
proportion of the monthly rent hereunder which the number of days between such
date of commencement and the first day of the next succeeding calendar month
bears to thirty (30). In the event that the tram of this Lease for any reason
ends on a date other than the last day of a calendar month, on the first day of
the (last calendar month of the term hereto, Tenant shall pay to Landlord as
rent for the period from said first day of said last calendar month to and
including the last day of the term hereof that proportion of the monthly rent
hereunder which the number of days between said first day of said last calendar
month and the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant
-----------
is in default in the payment of rental as set forth in this Paragraph 4 when
due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten(10)
days. Said late charge shall equal ten percent (10%) of each rental payment so
in default.
D. Additional Rent. Beginning with the commencement date of the term of this
---------------
Lease, Tenant shall pay to Landlord or to Landlord's designated agent in
addition to the Basic Rent and as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in Paragraph 9, and
(b) All insurance premiums relating to the Premises, as set forth in
Paragraph 12, and
(c) All charges, costs and expenses, Which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including reasonable attorneys' fees and legal expenses, that may accrue thereto
in the event of Tenants failure to pay such amounts, and all damages, reasonable
costs and expenses which Landlord may incur by reason of default of Tenant or
failure on Tenant's failure to comply with the terms of this Lease. in the event
of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights
and remedies with respect thereto as Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's
agent (i) within five days for taxes and insurance and within thirty days for
all other Additional Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's, prorate
share of an amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimate amount shall
be reconciled within 120 days of the end of each calendar year or more
frequently if Landlord elects to do so at Landlord's sole and absolute
discretion as compared to Landlord's actual expenditure for said Additional Rent
items, with Tenant paying to Landlord, upon demand, any amount of actual
expenses expended by Landlord in excess of said estimated amount, or Landlord
crediting to Tenant (providing Tenant is not in default in the performance of
any of the terms, covenants and conditions of this Lease) any amount of
estimated payments made by Tenant in excess of Landlord's actual expenditures
for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph shall
survive the expiration or other termination of the term of this Lease, and if
the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
E. Fixed Management Fee. Beginning with the Commencement Date of the Term of
--------------------
this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee ("Management Fee") equal to 3%
of the Basic Rent due for each month during the Lease Term.
F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and
--------------------------------------------
all payments hereunder for Additional Rent shall be paid to Landlord at the
office of Landlord at Peery/Arrillaga, File 1504, Box 60000, San Francisco,
-----------------------------------------------------
CA 94160
- --------
or to such other person or to such other place as Landlord may from time to time
designate in writing.
G. Security Deposit. Concurrently with Tenant's execution of this Lease,
----------------
Tenant shall deposit with Landlord the sum of FORTY FOUR THOUSAND AND NO/100
------------------------------
Dollars ($44,000.00).
---------
Said sum shall be held by Landlord as a Security Deposit for the faithful
performance by Tenant of all of the terms, covenants, and conditions of this
Lease to be kept and performed by Tenant during the term hereof. If Tenant
defaults with respect to any provision of this Lease, including, but not limited
to the provisions relating to the payment of rent and any of the monetary sums
due herewith, Landlord may (but shall not be required to) use, apply or retain
all of any part of this Security Deposit for the payment of any other amount
which Landlord may spend by reason of Tenant's default or to compensate Landlord
for
Initials: /s/ S.E.
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Initials: /s/ J.A.
------------------
/s/ R.P.
page 2 of 8
<PAGE>
any other loss or damage which Landlord may suffer by reason of Tenant's
default, if any portion of said Deposit is so used or applied, Tenant shall,
within ten (10) days after written demand therefor, deposit cash with Landlord
in the amount sufficient to restore the Security Deposit to its original amount
Tenants failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep this Security Deposit separate from its general
kinds, and Tenant shall not be entitled to interest on such Deposit. If Tenant
fully and faithfully performs every provision of this Lease to be performed by
it, the Security Deposit or any balance thereof shall be returned to Tenant (or
at Landlord's option, to the last assignee of Tenants interest hereunder) at the
expiration of the Lease term and after Tenant has vacated the Premises. In the
event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Deposit to Landlord's successor in interest whereupon Tenant
agrees to release Landlord from liability for the return off such Deposit or the
accounting therefor.
5. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or
nonconforming acoustical ceiling tiles replaced; all windows washed; the
airconditioning and heating systems serviced by a reputable and licensed service
firm and in good operating condition and repair; the plumbing and electrical
systems and lighting in good order and repair, including replacement of any
burned out or broken light bulbs or ballasts; the lawn and shrubs in good
condition including the replacement of any dead or damaged plantings; the
sidewalk, driveways and parking areas in good order, condition and repair;
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except moveable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord within
thirty (30) days before the end of the term of this Lease whether Landlord
desires to have the Premises or any part or parts thereof restored to their
condition and configuration as when the Premises were delivered to Tenant and if
Landlord shall so desire, then Tenant shall restore said Premises or such part
or parts thereof before the end of this Lease at Tenants sole cost and expense.
Tenant, on or before the end of the term or sooner termination of this Lease,
shall remove all of Tenant's personal property and trade fixtures from the
Premises, and all property not so removed on or before the end of the term or
sooner termination of this Lease shall be deemed abandoned by Tenant and title
to same shall thereupon pass to Landlord without compensation to Tenant Landlord
may, upon termination of this Lease, remove all moveable furniture and equipment
so abandoned by Tenant, at Tenants sole cost, and repair any damage caused by
such removal at Tenant's sole cost. If the Premises be not surrendered at the
end of the term or sooner termination of this Lease, Tenant shall indemnity
Landlord against loss or liability resulting from the delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by any
succeeding tenant founded on such delay. Nothing contained herein shall be
construed as an extension of the term hereof or as a consent of Landlord to any
holding over by Tenant The voluntary or other surrender of this Lease or the
Premises by Tenant or a mutual cancellation of this Lease shall not work as a
merger and, at the option of Landlord, shall either terminate all or any
existing subleases or subtenancies or operate as an assignment to Landlord of
all or any such subleases or subtenancies,
6. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant (such consent not to be
unreasonably withheld), but at the cost of Tenant, and any addition to, or
alteration of, the Premises, except moveable furniture and trade fixtures, shall
at once become a part of the Premises and belong to Landlord. Landlord reserves
the right to approve all contractors and mechanics proposed by Tenant to make
such alterations and additions. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All heating, lighting,
electrical, air conditioning, floor to ceiling partitioning, drapery, carpeting,
and floor installations made by Tenant, together with all property that has
become an integral part of the Premises, shall not be deemed trade fixtures.
Tenant agrees that it will not proceed to make such alteration or additions,
without having obtained consent from Landlord to do so, ant until live (5) days
from the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material supplier for payment
for Tenants improvements. Tenant will at all limes permit such notices to be
posted and to remain posted until the completion of work. Tenant shall, if
required by Landlord, secure at Tenants own cost and expense, a completion and
lien indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises for
work claimed to have been done for, or materials claimed to have been furnished
to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10)
days after the filing thereof, at the cost and expense of Tenant, any exceptions
to the foregoing must be made in writing and executed by both Landlord and
Tenant.
7. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition. Tenant's
maintenance and repair responsibilities herein referred to include, but are not
limited to janitorization, plumbing systems within the non-common areas of the
Premises (such as water and drain lines, sinks), electrical systems within the
non-common areas of the Premises (such as outlets, lighting fixtures, lamps
bulbs, tubes, ballasts), heating and airconditioning controls within the non-
common areas of the Premises (such as mixing boxes, thermostats, time clocks,
supply and return grill(s), all interior improvements within the premises
including but not limited to: wall coverings, window coverings, acoustical
ceilings, vinyl tile, carpeting, partitioning, doors(both interior and exterior,
including closing mechanisms, latches, locks), and all other interior
improvements of any nature whatsoever. Tenant agrees to provide carpet shields
under all rolling chairs or to otherwise be responsible for wear and tear of the
carpet caused by such rolling chairs if such wear and tear exceeds that caused
by normal foot traffic in surrounding areas. Areas of excessive wear shall be
replaced at Tenant's sole expense upon Lease termination.
8.
9. TAXES
As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant
shall pay to Landlord, or if Landlord so directs, directly to the Tax
Collector, all Real Property Taxes relating to the Premises. In the event the
Premises leased hereunder consist of only a portion of the entire tax parcel,
Tenant shall pay to Landlord Tenant's proportionate share of such real estate
taxes allocated to the leased Premises by square footage or other reasonable
basis as calculated and determined by Landlord. If the tax billing pertains
100% to the leased Premises, and Landlord chooses to have Tenant pay said real
estate taxes directly to the Tax Collector, then in such event it shall be the
responsibility of Tenant to obtain the tax and assessment bills and pay, prior
to delinquency, the applicable real property taxes and assessments pertaining to
the leased Premises, and failure to receive a bill lot taxes and/or assessments
shall not provide a basis for cancellation of or nonresponsibility for payment
of penalties for nonpayment or late payment by Tenant. The term "Real Property
Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest required to pay
any general or special assessments for public improvements and any increases
resulting from reassessments caused by any change in ownership of the Premises)
now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct or indirect power to tax or levy assessments,
which are levied or assessed against, or with respect to the value, occupancy or
use of, all or any portion of the Premises (as now constructed or as may at any
time hereafter be constructed, altered, or otherwise changed) or Landlord's
interest therein; any improvements located within the Premises (regardless of
ownership); the fixtures, equipment and-other proof Landlord, real or personal,
that are an integral part of and located in the Premises; or parking areas,
public utilities, or energy within the Premises (ii) all charges, levies or fees
imposed by reason of environmental regulation or other governmental control of
the Premises; and (iii) all costs and fees (including
Initials: /s/ S.E.
------------------
Initials: /s/ J.A.
------------------
/s/ R.P.
page 3 of 8
<PAGE>
reasonable attorney's fees) incurred by Landlord in reasonably contesting any
Real Property Tax and in negotiating with public authorities as to any Real
Property Tax. If at any time during the term of this Lease the taxation or
assessment of the Premises prevailing as of the commencement date of the Lease
shall be altered so that In lieu of or in addition to any Real Property Tax
described above there shall be levied, assessed or imposed (whether by reason of
a change in the method of taxation or assessment, creation of a new tax or
charge, or any other cause) an alternate or additional lax or charge (i) on the
value, use or occupancy of the Premises or Landlord's interest therein or (ii)
on or measured by the gross receipts, income or rentals from the Premises, on
Landlord's business of leasing the Premises or computed in any manner with
respect to the operation of the Premises, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real Property
Taxes" for purposes of this Lease. If any Real Property Tax is based upon
property or rents unrelated to the Premises, then only that part of such Real
Property Tax that is fairly allocable to the Premises shall be included within
the meaning of the term "Real Property Taxes", Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources.
B. Taxes on Tenant's Property Tenant shall be liable for and shall pay ten
days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises, if any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based on such increased assessment, which Landlord shall have the right to
do regardless of the validity thereof, but only under proper protest if
requested by Tenant, Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event
Tenant shall have the right, in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to recover the
amount of such taxes so paid under protest, and any amount so recovered shall
belong to Tenant.
10. LIABILITY INSURANCE Tenant, at Tenants expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with combined single limit coverage of not less than Two Million Dollars
($2,000,000), per occurrence for bodily injury and property damage occurring in,
on or about the Premises, including parking and landscaped areas. Such insurance
shall be primary and noncontributory as respects any insurance carried by
Landlord. This policy or policies effecting such insurance shall name Landlord
as additional insureds, and shall insure any liability of Landlord contingent or
otherwise; as respects acts or omissions of Tenant, its agent, employees or
invitees or otherwise by any conduct or transactions of any of said persons in
or about or concerning the Premises, including any failure of Tenant to observe
or perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the Stale of California; and shall
provide that the insurance affected thereby shall not be canceled, except upon
thirty (30) days' prior written notice to Landlord. A certificate of insurance
of said policy shall be delivered to Landlord. If during the term of this Lease.
in the considered Opinion of Landlord's Lender, insurance advisor, or counsel,
the amount, of insurance described in this Paragraph 10 is not adequate, Tenant
agrees to increase said coverage to such reasonable amount as Landlord's Lender,
insurance advisor, or counsel shall deem adequate.
11. TENANT' PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any of
such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with all
laws.
12. PROPERTY INSURANCE Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (excluding routine maintenance and repairs-and
incidental damage or destruction caused by accidents or vandalism for which
Tenant is responsible under Paragraph 7) in the amount of the full replacement
value thereof, providing protection against those perils included within the
classification of "all risks" insurance and flood and/or earthquake insurance,
if available, plus a policy of rental income insurance in the amount of one
hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as
Additional Rent if such insurance cost is increased due to Tenant's use of the
Premises, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Premises.
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing pasty, from any liability for loss
or damage caused by are or any of the extended coverage casualties included in
the releasing party's insurance policies, irrespective of the cause of such fire
or casualty; provided, however, that if the insurance policy of either releasing
party prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited, the insured
parties affected shall promptly notify the other party thereof.
13. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises by or from any
cause whatsoever, including, without limitation, gas, fire, oil, electricity or
leakage of any character from the roof, walls, basement or other portion of the
Premises but excluding, however, the willful misconduct or negligence of
Landlord, its agents, servants, employees, invitees, or contractors of which
negligence Landlord has knowledge and reasonable time to correct. Except as to
injury to persons or damage to property to the extent arising from the willful
misconduct or the negligence of Landlord, its agents, servants, employees,
invitees, or contractors, Tenant shall hold Landlord harmless from and defend
Landlord against any and all expenses, including reasonable attorneys' fees, in
connection therewith, arising out of any injury t or death of any person or
damage to or destruction of property occurring in, on or about the Premises, or
any part thereof, from any cause whatsoever.
14. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant whether Landlord be a party
thereto or not that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall, at its
sole cost and expense, comply with any and all requirements pertaining to said
Premises of any insurance organization or company, necessary for the maintenance
of reasonable fire and public liability insurance covering requirements
pertaining to said Premises of any insurance organization or company, necessary
for the maintenance of reasonable fire and public liability insurance covering
the Premises.
15. LIENS Tenant shall keep the Premises free from any liens arising out of any
work performed, materials furnished or obligation incurred by Tenant. In the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or hypothecate
the leasehold estate under this Lease or any interest therein, and shall not
sublet the Premises, or any part thereof, or any right or privilege appurtenant
thereto, or suffer any other person or entity to occupy or use the Premises, or
any portion thereof, without, in each case, the prior written consent of
Landlord which consent will not be unreasonably withheld. As a condition for
granting this consent to any assignment, transfer, or subletting, Landlord shall
require Tenant to pay to Landlord, as Additional Rent, all rents and/or
additional consideration due Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred and/or subleased space. Tenant shall, by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice. Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate if no such notice to terminate is given to Tenant within said
thirty(30) day period, Tenant may proceed to locate an acceptable sublessee,
assignee, or other transferee for presentment to Landlord for Landlord's
approval, all in accordance with the terms, covenants, and conditions of this
paragraph 16. If Tenant intends to sublet the entire Premises and landlord
elects to terminate this Lease this Lease shall be terminated on the date
specified in Tenant's notice. If, however, this Lease shall terminate pursuant
to the foregoing with respect to less than all the Premises, the rent, as
defined and reserved hereinabove shall be adjusted on a pro rata basis to the
number of square feet retained by Tenant, and this Lease as so amended shall
continue in full force and effect. In the event Tenant is allowed to assign,
transfer or sublet the whole or any part of the premises, with the prior written
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consent of Landlord, no assignee, transferee or subtenant shall assign or
transfer this Lease, either in whole or in part, or sublet the whole or any part
of the Premises without also having obtained the prior written consent of
Landlord. A consent of Landlord to one assignment, transfer, hypothecation,
subletting, occupation or use by any other person shall not release Tenant from
any of Tenant's obligations hereunder to be deemed to be a consent to any
subsequent similar or dissimilar assignment, transfer, hypothecation,
subletting, occupation or use by any other person. Any such assignment,
transfer, hypothecation, subletting, occupation or use without such consent
shall be void and shall constitute a breach of this Lease by Tenant and shall at
the option of Landlord exercised by written notice to Tenant, terminate this
Lease. The leasehold estate under this Lease shall not nor shall any interest
therein, be assignable for any purpose by operation of law without the written
consent of landlord transferee (or other assignees or transferees) to assume in
writing all of the obligations under this Lease and for Tenant to remain liable
to Landlord under the Lease Notwithstanding-the above, in no event will Landlord
consent to a sub-sublease.
17. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
18. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies) have the right to enter
the Premises to inspect them; to inform any services to be provided by Landlord
hereunder; to make repairs or provide any services to a contiguous tenant(s); to
submit the Premises to prospective purchasers, mortgagers or tenants; to post
notices of nonresponsibility; and to alter, improve or repair the Premises or
other parts of the building, all without abatement of rent, and may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however that the business of Tenant shall be interfered with to the least extent
that is reasonably practical. Any entry to the Premises by Landlord for the
purposes provided for herein shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into or a detainer of the Premises or
an eviction, actual or constructive, of Tenant from the Premises or any portion
thereof.
19. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option.
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action,
Within thirty (30) days after court approval of the assumption of this Lease,
the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under same Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent and other -
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach Substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of Landlord
to refuse to accept an assignment upon commencement of or in connection with a
bankruptcy, liquidation, reorganization or insolvency action or an assignment of
Tenant for the benefit of creditors or other similar act. Nothing contained in
this Lease shall be construed as giving or granting or creating an equity in the
demised Premises to Tenant in no event shall the leasehold estate under this
Lease or any interest therein, be assigned by voluntary or involuntary
bankruptcy proceeding without the prior written consent of Landlord. In no event
shall this Lease or any rights or privileges hereunder be an asset of Tenant
under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or representation made
under this Lease shall constitute a default hereunder by Tenant upon expiration
of the appropriate grace period hereinafter provided. Tenant shall have a period
of five (5) days from the date of written notice from Landlord within which to
cure any default in the payment of rental or adjustment thereto. Tenant shall
have a period of thirty (30) days from the date of written notice from Landlord
within which to cure any other default under this Lease. Upon an uncured default
of this Lease by Tenant, Landlord shall have the following rights and remedies
in addition to any other rights or remedies available to Landlord at law or in
equity:
(a) The rights and remedies provided for by California Civil Code Section
1951.2, including but not limited to, recovery of the worth al 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 rental loss for the same period that Tenant
proves could be reasonably avoided, as computed pursuant to subsection (b) of
said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of
Section 1951.2 of the California Civil Code of the amount of rental loss that
could be reasonably avoided shall be made in the following manner: Landlord and
Tenant shall each select a licensed real estate broker in the business of
renting property of the same type and use as the Premises and in the same
geographic vicinity. Such two real estate brokers shall select a third licensed
real estate broker, and the three licensed real estate brokers so selected shall
determine the amount of the rental loss that could be reasonably avoided from
the balance of the term of this Lease after the time of award. The decision of
the majority of said licensed real estate brokers shall be final and binding
upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section which
allows Landlord to continue the Lease in effect and to enforce all of its rights
and remedies under this Lease, including the right to recover rent as it becomes
due, for so long as Landlord does not terminate Tenant's right to possession;
acts of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law the right and power, to enter the
Premises and remove therefrom all persons and properly, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and apply such proceeds therefrom pursuant to
applicable California law. Landlord, may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its reasonable
sole discretion may deem advisable, with the right to make alterations and
repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to indebtedness other than rent due
hereunder, the reasonable cost of such subletting, including, but not limited
to, reasonable attorneys' fees, and any real estate commissions actually paid,
and the cost of such reasonable alterations and repairs incurred by Landlord and
the amount, if any, by which the rent hereunder for the period of such
subletting(to the extent such period does not exceed the term hereof exceeds the
amount to be paid as rent for the Premises for such period or (ii) at the option
of Landlord, rents received from such subletting shall be applied first to
payment of indebtedness other than rent due hereunder from Tenant to Landlord;
second, to the payment of any costs of such subletting and of such alterations
and repairs; third to payment of rent due and unpaid hereunder; and the residue,
if any, shall be held by Landlord and applied in payment of future rent as the
same becomes due hereunder. If Tenant has been credited with any rent to be
received by such subletting under option (i) and such rent shall not be promptly
paid to Landlord by the subtenant(s), or it such rentals received from such
subletting under option (it) during any month be less than that to be paid
during that month by Tenant hereunder, Tenant shall pay any such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. No taking
possession of the Premises by Landlord, shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention be given
to Tenant. Notwithstanding any such subletting without termination, Landlord may
at any time hereafter elect to terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application by
Landlord, to take possession of the Premises and to apply any rental collected
from the Premises and to exercise all other rights and remedies granted to
Landlord pursuant to subparagraph d above.
20. ABANDONMENT Tenant shall not vacate or abandon the-Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate or surrender
said Premises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord. See Paragraph 48
21. DESTRUCTION In the event the Premises are destroyed in whole or in pat from
any cause, except for routine maintenance and repairs and incidental
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damage and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the damage
or destruction, or
(b) Terminate the Lease. (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost)
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense except for any deductible, which is the responsibility of Tenant,
promptly to rebuild or restore the Premises to their condition prior to the
damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in proportion that the area of the Premises rendered
untenantable by such damage bears to the total area of the Premises. If Landlord
initially estimates that the rebuilding or restoration will exceed 180 days or
if Landlord 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 Tenant or because of Acts
of God, acts of public agencies, labor disputes, strikes, fires, freight
embargos, 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 the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in 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 33 1/3% of the replacement cost
thereof, Landlord may elect to terminate this Lease, whether the Premises be
injured or not. Notwithstanding anything to the contrary herein, Landlord may
terminate this Lease in the event of an uninsured event or if insurance proceeds
are insufficient to cover one hundred percent of the rebuilding costs net of the
deductible.
22. EMINENT DOMAIN if all or any part of the Premises shall be taken by any
public quasi-public authority under the power of eminent domain or conveyance in
lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill. shall be and remain
the property of Tenant.
If any action or proceeding is commenced for such taking of the Premises or
any part thereof, or if Landlord is advised in writing by any entity or body
having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, then Landlord shall have the right to terminate
this Lease by giving Tenant written notice thereof within sixty (60) days of the
date of receipt of said written advice, or commencement of said action or
proceeding, or taking conveyance, which termination shall take place as of the
first to occur of the last day of the calendar month next following the month in
which such notice is given or the date on which title to the Premises shall vest
in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant can
no longer reasonably conduct its business, Tenant shall have the privilege of
terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of the
Premises not so taken or conveyed, and the rent herein shall be apportioned as
of the date of such taking or conveyance so that thereafter the rent to be paid
by Tenant shall be in the ratio that the area of the portion of the Premises not
so taken or conveyed bears to the total area of the Premises prior to such
taking
23. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the
Premises or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any further
liability upon any of the terms, covenants or conditions (express or implied)
herein contained in favor of Tenant, and in such event, insofar as such transfer
is concerned, Tenant agrees to look solely to the responsibility of the
successor in interest of such transferor in and to the Premises and this Lease.
This Lease shall not be affected by any such sale or conveyance, and Tenant
agrees to attorn to the success in interest of such transferor, provided that
the transferee assumes all of Landlord's obligations in writing under the
Lease.
24. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through Judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
25. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred, twenty five (125%) percent of the monthly Basic
Rent required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten
(10) days prior written notice from Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) 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 (it) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be Conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance; and that not more than one month's rent has been paid in
advance.
27. CONSTRUCTION CHANGES It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes
shall affect this Lease or entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant. Landlord does not guarantee the
accuracy of any drawings supplied to Tenant and verification of the accuracy of
such drawings rests with Tenant.
28. RIGHT OF-LANDLORD TO PERFORM All terms, covenants and conditions of is
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder and such failure shall continue for five (5) days after written
notice by Landlord, or shall fail to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
thirty (30) days after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obliged to, make any such payment or perform any such other term or
covenant on Tenant's part to be performed. All sums so paid by Landlord and all
necessary costs of such performance by Landlord together with interest thereon
at the rate of the prime rate of interest per annum as quoted by the Bank of
America from the date of such payment on performance by Landlord, shall be paid
(and Tenant covenants to make such payment) to Landlord on demand by Landlord,
and Landlord shall have (in addition to any other right or remedy of Landlord)
the same rights and remedies in the event of nonpayment by Tenant as in the case
of failure by Tenant in the payment of rent hereunder.
29. ATTORNEYS' FEES
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease, or
because of the breach of any provision of this Lease, of for any other relief
against the other party hereunder, then all costs and expenses, including
reasonable attorney's fees.
Initials: /s/ S.E.
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Initials: /s/ J.A.
------------------
/s/ R.P.
page 6 of 8
<PAGE>
incurred by the prevailing party therein shall be paid by the other party, which
obligation on the part of the other party shall be deemed to have accrued on the
date of the commencement of such action and shall be enforceable whether or not
the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against Tenant
in connection with or arising out of Tenants occupancy hereunder, Tenant shall
pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
30. WAIVER The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
31. NOTICES All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demand, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises of if sent by United Slated certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College
-------------------------------------
Blvd., Suite 101, Santa Clara, CA 95054.
- ---------------------------------------
Each notice, request, demand, advice or designation referred to in this
paragraph shall be deemed received on the date of the personal service or
mailing thereof in the manner herein provided, as the case may be.
32. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
33. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than (30) days after written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of bust covering the Premises whose
name and address shall have heretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partner-ship)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the by-
laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms, if Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease. See Paragraph 52
35.
36. LIMITATION OF LIABILITY In consideration of the benefits accruing
hereunder. Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(a) the sole and exclusive remedy shall be against Landlord's interest in the
Premises leased herein;
(b) no partner of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure Jurisdiction of the partnership);
(c) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(d) no partner of Landlord shall be required to answer or otherwise plead to
any service of process;
(e) no judgment will be taken against any partner of Landlord;
(f) any judgment taken against any partner of Landlord may be vacated and set
aside at any time without hearing;
(g) no writ of execution will ever by levied against the assets of any partner
of Landlord;
(h) these covenants and agreements are enforceable both by Landlord and also
by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
37. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the glass of
any window, door partition or wall which may appear unsightly from outside the
Premises.
38. MISCELLANEOUS AND GENERAL PROVISIONS
A. Use of Building Name. Tenant shall not, without the written consent of
Landlord, use the name of the building for any purpose other than as the address
of the business conducted by Tenant in the Premises.
Initials: /s/ S.E.
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Initials: /s/ J.A.
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/s/ R.P.
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<PAGE>
B. Choice of Law; Severability, This Lease shall in all respect be governed
by and construed in accordance with the laws of the State of California. If any
provision of this Lease shall be invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full force
and effect.
C. Definition of Terms. The term "Premises" includes the space leased hereby
and any improvements now or hereafter installed therein or attached thereto. The
term "Landlord" or any pronoun used in place thereof includes the plural as well
as the singular and the succession and assign of Landlord. The term "Tenant" or
any pronoun used in place thereof includes the plural as well as the singular
and individuals, firms, associations, partnerships and corporations, and their
and each of their respective heirs, executors, administrators, successors and
permitted assigns, according to the context hereof, and the provisions of this
Lease shall inure to the benefit of and bind such heirs, executors,
administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and individuals,
firms, associations, partnerships and corporations. Words used in any gender
include other genders. If there be more than one Tenant the obligations of
Tenant hereunder are Joint and several. The paragraph headings of the Lease are
for convenience of reference only and shall have no effect upon the construction
or interpretation of any provision hereof.
D. Time of Essence. Time is of the essence of this Lease and of each and all
of its provisions.
E. Quitclaim. At the expiration or earlier termination of this Lease, Tenant
shall execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any quitclaim deed or other document
required by any reputable title company, licensed to operate in the State of
California, to remove the cloud or encumbrance created by this Lease from the
real property of which Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This instrument along with
any exhibits and attachments hereto constitutes the entire agreement between
Landlord and Tenant relative to the Premises and this agreement and the exhibits
and attachments may be altered, amended or revoked only by an instrument in
writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby
that all prior or contemporaneous oral agreements between and among themselves
and their agents or representatives relative to the leasing of the Premises are
merged in or revoked by this agreement
G. Recording. Neither Landlord nor Tenant shall record this Lease or a short
form memorandum hereof without the consent of the other.
H. Amendments for Financing. Tenant further agrees to execute any amendments
required by a lender to enable Landlord to obtain financing, so long as Tenant's
rights hereunder are not substantially affected.
I. Additional Paragraphs. Paragraphs 39 through 51 are added
-- --
hereto and are included as a part of this lease.
J. Clauses, Plats and Riders. Clauses, plats and riders, if any, signed by
Landlord and Tenant and endorsed or, or affixed to this Lease are a part hereof.
K. Diminution of Light, Air or View. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect his
Lease, entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease
as of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S TRUST CONWAY STUART MEDICAL, INC.
A Delaware corporation
By /s/ JOHN ARRILLAGA, TRUSTEE By /s/ STUART D. EDWARDS
- ------------------------------- ------------------------------------
John Arrillaga, Trustee Stuart D. Edwards, President and CEO
Date: 5/15/98 Date 5/15/98
- ------------------------------- ------------------------------------
RICHARD T. PEERY SEPARATE PROPERTY TRUST
By /s/ RICHARD T. PEERY
- -------------------------------
Richard T. Peery, Trustee
Date: 5/15/98
- -------------------------------
Initials: /s/ S.E.
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Initials: /s/ J.A.
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/s/ R.P.
page 8 of 8
<PAGE>
Paragraphs 39 through 51 to Lease Agreement dated May 6, 1998, By and Between
the John Arrillaga Survivor's Trust and the Richard T. Peery Separate Property
Trust, as Landlord, and Conway Stuart Medical, Inc., a Delaware corporation, as
Tenant, for 10,000(+/-) Square Feet of Space Located at 735 Palomar Avenue,
Sunnyvale, California.
39. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum
----------
of SEVEN HUNDRED FIFTY SIX THOUSAND AND NO/100 DOLLARS ($756,000.00), shall be
payable as follows:
On June 1, 1998, the sum of TWENTY THOUSAND AND NO/100 DOLLARS ($20,000.00)
shall be due, and a like sum due on the first day of each month thereafter,
through and including May 1, 1999.
On June 1, 1999, the sum of TWENTY ONE THOUSAND AND NO/100 DOLLARS
($21,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including May 1, 2000.
On June 1, 2000, the sum of TWENTY TWO THOUSAND AND NO/100 DOLLARS
($22,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including May l, 2001; or until the entire aggregate sum
of SEVEN HUNDRED FIFTY SIX THOUSAND AND NO/100 DOLLARS ($756,000.00) has been
paid.
40. "AS-IS" BASIS: It is hereby agreed that the Premises leased hereunder is
-------------
leased strictly on an "as-is" basis and in its present condition, and in the
configuration as shown on Exhibit B attached hereto, and by reference made a
----------
part hereof. It is specifically agreed between the parties that Landlord shall
not be required to make, nor be responsible for any cost, in connection with any
repair, restoration, and/or improvement to the Premises in order for this Lease
to commence, or thereafter, throughout the Term of this Lease. Notwithstanding
anything to the contrary within this Lease, Landlord makes no warranty or
representation of any kind or nature whatsoever as to the condition or repair of
the Premises, nor as to the use or occupancy which may be made thereof.
41. RULES AND REGULATIONS AND COMMON AREA: Subject to the terms and conditions
---------------------------------------
of this Lease and such Rules and Regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common With other occupants of the Parcel/Building in which the premises are
located, and their respective employees, invitees and customers, and others
entitled to the use thereof, have the non-exclusive right to use the access
roads, parking areas, and facilities provided and designated by Landlord for the
general use and convenience of the occupants of the Parcel/Building in which the
Premises are located, which areas and facilities are referred to herein as
"Common Area". This right shall terminate upon the termination of this Lease.
Landlord reserves the right from time to time to make changes in the shape,
size, location, amount and extent of Common Area. Landlord further reserves the
right to promulgate such reasonable rules and regulations relating to the use of
the Common Area, and any part or parts thereof, as Landlord may deem appropriate
for the best interests of the occupants of the Parcel/Building. Such Rules and
Regulations may be amended by Landlord from time to time, with or without
advance notice, and all amendments shall be effective upon delivery of a copy to
Tenant. Landlord shall not be responsible to Tenant for the non-performance by
any other tenant or occupant of the Parcel/Building of any of said Rules and
Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in which
the Common Area shall be maintained and the expenditures for such maintenance
shall be at the discretion of Landlord.
42. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF
-------------------------------------------------------------------------
THE PARCEL, AND BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional Rent
- ----------------------------------------------------------
and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord
Tenant's proportionate share (calculated on a square footage or other equitable
basis as calculated by landlord) of all expenses of operation, management,
maintenance and repair of the Common Areas of the Parcel including, but not
limited to, license, permit, and inspection fees; security; utility charges
associated with exterior landscaping and lighting (including water and sewer
charges); all charges incurred in the maintenance and replacement of landscaped
areas,
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<PAGE>
lakes, parking lots and paved areas (including repairs, replacement, resealing
and restriping), sidewalks, driveways, maintenance, repair and replacement of
all fixtures and electrical, mechanical and plumbing systems; supplies,
materials, equipment and tools; the cost of capital expenditures which have the
effect of reducing operating expenses, provided, however, that in the event
Landlord makes such capital improvements, Landlord may amortize its investment
in said improvements (together with interest at the rate of fifteen (15%)
percent per annum on the unamortized balance) as an operating expense ill
accordance with standard accounting practices, provided, that such amortization
is not at a rate greater than the anticipated savings in the operating expenses.
As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant
shall pay its proportionate share (calculated on a square footage or other
equitable basis as calculated by Landlord) of the cost of operation (including
common utilities), management, maintenance, and repair of the building
(including structural and common areas such as lobbies, restrooms, janitor's
closets, hallways, elevators, mechanical and telephone rooms, stairwells,
entrances, spaces above the ceilings and janitorization of said common areas) in
which the Premises are located. The maintenance items herein referred to
include, but are not limited to, all windows, window frames, plate glass,
glazing, truck doors, main plumbing systems of the building (such as water drain
lines, sinks, toilets, faucets, drains, showers and water fountains), main
electrical systems (such as panels and conduits), heating and airconditioning
systems (such as compressors, fans, air handlers, ducts, boilers, heaters),
structural elements and exterior surfaces of the building; store fronts, roof,
downspouts, building common area interiors (such as wall coverings, window
coverings, floor coverings and partitioning), ceilings, building exterior doors,
skylights (if any), automatic fire extinguishing systems, and elevators (if
any); license, permit and inspection fees; security, supplies, materials,
equipment and tools; the cost of capital expenditures which have the effect of
reducing operating expenses, provided, however, that in the event Landlord makes
such capital improvements, Landlord may amortize its investment in said
improvements (together with interest at the rate of fifteen (15%) percent per
annum on the unamortized balance) as an operating expense in accordance with
standard accounting practices, provided, that such amortization is not at a rate
greater than the anticipated savings in the operating expenses. Tenant hereby
waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and
Sections 1941 and 1942 of the California Civil Code and under any similar law,
statute or ordinance now or hereafter in effect.
"Additional Rent" as used herein shall not include Landlord's debt repayments;
interest on charges, expenses directly or indirectly incurred by Landlord for
the benefit of any other tenant; cost for the installation of partitioning or
any other tenant improvements; cost of attracting tenants; depreciation;
interest; or executive salaries.
43. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional
-----------------------------------------------------------
Rent and in accordance with Paragraph 4D of this Lease Tenant shall pay its
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the cost of all utility charges such as water, gas,
electricity, (telephone, telex and other electronic communications service, if
applicable) sewer service, waste pick-up and any other utilities, materials or
services furnished directly to the building in which the Premises are located,
including, without limitation, any temporary or permanent utility surcharge or
other exactions whether or not hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
Provided that Tenant is not in default in the performance or observance of any
of the terms, covenants or conditions of this Lease to be performed or observed
by it, Landlord shall furnish to the Premises between the hours of 8:00 am and
6:00 pm, Mondays through Fridays (holidays excepted) and subject to the rules
and regulations of the Common Area hereinbefore referred to, reasonable
quantities of water, gas and electricity suitable for the intended use of the
Premises and heat and airconditioning required in Landlord's judgment for the
comfortable use and occupation of the Premises for such purposes. Tenant agrees
that at all times it will cooperate fully with Landlord and abide by all
regulations and requirements that Landlord may prescribe for the proper
functioning and protection of the building heating, ventilating and
airconditioning systems. Whenever heat generating machines, equipment, or any
other devices (including exhaust fans) are used in the Premises by Tenant which
affect the temperature or otherwise maintained by the
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<PAGE>
airconditioning system, Landlord shall have tile right to install supplementary
airconditioning units in the Premises and the cost thereof, including the cost
of installation and the cost of operation and maintenance thereof, shall be paid
by Tenant to Landlord upon demand by Landlord. Tenant will not, without the
written consent of Landlord, use any apparatus or device in the Premises
(including, without limitation), electronic data processing machines or machines
using current in excess of 110 Volts which will in any way increase the amount
of electricity, gas, water or airconditioning usually furnished or supplied to
premises being used as general office space, or connect with electric current
(except through existing electrical outlets in the Premises), or with gas or
water pipes any apparatus or device for the purposes of using electric current,
gas, or water. If Tenant shall require water, gas, or electric current in excess
of that usually furnished or supplied to premises being used as general office
space, Tenant shall first obtain the written consent of Landlord, which consent
shall not be unreasonably withheld and Landlord may cause an electric current,
gas or water meter to be installed in the Premises in order to measure the
amount of electric current, gas or water consumed for any such excess use. The
cost of any such meter and of the installation, maintenance and repair thereof,
all charges for such excess water, gas and electric current consumed (as shown
by such meters and at the rates then charged by the furnishing public utility);
and any additional expense incurred by Landlord in keeping account of electric
current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to
pay Landlord therefor promptly upon demand by Landlord.
44. PARKING: Tenant shall have the right to the nonexclusive use of thirty
-------
eight (38) parking spaces in the common parking area of the building. Tenant
agrees that Tenant, Tenant's employees, agents, representatives, and/or invitees
shall not use parking spaces in excess of said 38 parking spaces allocated to
Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion,
to specifically designate the location of Tenant's parking spaces within the
common parking area of the building in the event of a dispute among the tenants
occupying the building referred to herein, in which event Tenant agrees that
Tenant, Tenant's employees, agents, representatives and/or invitees shall not
use any parking spaces other than those parking spaces specifically designated
by Landlord for Tenant's use. Said parking spaces, if specifically designated by
Landlord to Tenant, may be relocated by Landlord at any time, and from time to
time. Landlord reserves the right, at Landlord's sole discretion, to rescind any
specific designation of parking spaces, thereby returning Tenant's parking
spaces to the common parking area. Landlord shall give Tenant written notice of
any change in Tenant's parking spaces. Tenant shall not, at any time, park, or
permit to be parked, any trucks or vehicles adjacent to the loading area so as
to interfere in any way with the use of such areas, nor shall Tenant, at any
time, park or permit the parking of Tenant's trucks and other vehicles or the
trucks and vehicles of Tenant's suppliers or others, in any portion of the
common areas not designated by Landlord for such use by Tenant. Tenant shall not
park nor permit to be parked, any inoperative vehicles or equipment on any
portion of the common parking area or other common areas of the building. Tenant
agrees to assume responsibility for compliance by its employees with the parking
provision contained herein. If Tenant or its employees park in other than
designated parking areas, then Landlord may charge Tenant, as an additional
charge, and Tenant agrees to pay Ten Dollars ($10.00) per day for each day or
partial day each such vehicle is parking in any area other than that designated.
Tenant hereby authorizes Landlord, at Tenant's sole expense, to tow away from
the building any vehicle belonging to Tenant or Tenant's employees parked in
violation of these provisions, or to attach violation stickers or notices to
such vehicles. Tenant shall use the parking area for vehicle parking only and
shall not use the parking areas for storage.
45. ASSESSMENT CREDITS: The demised property herein may be subject to a special
------------------
assessment levied by the City of Sunnyvale as part of an Improvement District.
As a part of said special assessment proceedings (if any), additional bonds were
or may be sold and assessments were or may be levied to provide for construction
contingencies and reserve funds. Interest shall be earned on such funds created
for contingencies and on reserve funds which will be credited for the benefit of
said assessment district. To the extent surpluses are created in said district
through unused contingency funds, interest earnings or reserve funds, such
surpluses shall be deemed the property of Landlord. Notwithstanding that such
surpluses may be credited on assessments otherwise due against the Leased
Premises, Tenant shall pay to Landlord, as additional rent if, and at the time
of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment of
$1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt notice from Landlord, pay
to Landlord said $200.00 credit as Additional Rent.
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<PAGE>
46. ASSIGNMENT AND SUBLETTING (CONTINUED):
--------------------------------------
A. Tenant has advised Landlord that Tenant intends to sublease a portion
of the Premises to tile following companies which are affiliates of Tenant
Advanced Closure, Systems, Inc.; Cardiosynopsis, Inc.; Vidaderm, Inc.; and
Genesis Medical, Inc. ("Proposed Subtenants"). Landlord has agreed (i) to issue
a consent to each of said subleases, subject to (a) Tenant submitting to
Landlord a copy of each of said subleases (prior to said sublease commencing),
(b) Landlord, Tenant and Proposed Subtenants thereafter executing Landlord's
standard Consent to Sublease agreement and (c) Landlord receives payment from
Tenant of Landlord's costs for processing said Sublease Consent prior to said
sublease commencing, and (ii) provided the total combined square footage
subleased to any or all of said Proposed Subtenants is less than filly percent
(50%) of the total square footage leased by Tenant hereunder (i.e. Tenant
subleases less than 5,000 square feet), Tenant shall be entitled to retain one
hundred percent (100%) of any excess sublease rent received from said Proposed
Subtenants.
B. Notwithstanding the foregoing, Landlord and Tenant agree that it shall
not be unreasonable for Landlord to refuse to consent to a proposed assignment,
sublease or other transfer ("Proposed Transfer") if the Premises or ant other
portion of the Property would become subject to additional or different
Government Requirements as a direct or indirect consequence of the Proposed
Transfer and/or the Proposed Transferee's use and occupancy of the Premises and
the Property. However, Landlord may, in its sole discretion, consent to such a
Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or
(ii) Assignee, in form and substance satisfactory to Landlord's counsel, by
Tenant and/or the Proposed Transferee from and against any and all costs,
expenses, obligations and liability arising out of the Proposed Transfer and/or
the Proposed Transferee's use and occupancy of the Premises and the Property.
C. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any
reason whatsoever, to terminate the Master Lease prior to the scheduled
Master Lease termination date, then this Sublease (if then still in effect)
shall terminate concurrently with the termination of the Master Lease.
Subtenant expressly acknowledges and agrees that (1) the voluntary
termination of the Master Lease by Landlord and Tenant and the resulting
termination of this Sublease shall not give Subtenant any right or power to
make any legal or equitable claim against Landlord, including without
limitation any claim for interference with contract or interference with
prospective economic advantage, and (2) Subtenant hereby waives any and all
rights it may have under law or at equity against Landlord to challenge
such an early termination of the Sublease, and unconditionally releases and
relieves Landlord, and its officers, directors, employees and agents, from
any and all claims, demands, and/or causes of action whatsoever
(collectively, "Claims"), whether such matters are known or unknown, latent
or apparent, suspected or unsuspected, foreseeable or unforeseeable, which
Subtenant may have arising out of or in connection with any such early
termination of this Sublease. Subtenant knowingly and intentionally waives
any and all protection which is or may be given by Section 1542 of the
California Civil Code which provides as follows: "A general release does
not extend to claims which the creditor does not know or suspect to exist
in his favor at the time of executing the release, which if known by him
must have materially affected his settlement with debtor.
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of
and agreement to this early termination provision, (b) Subtenant's
acknowledgment that, in determining the net benefits to be derived by
Subtenant under the terms of this Sublease, Subtenant has anticipated the
potential for early termination, and (c) Subtenant's agreement to the
general waiver and release of Claims above.
Initials: Initials:
-------- ---------------
Subtenant Tenant
Page 12
Initial: /s/ S.E. /s/ R.P. /s/ J.A.
--------------------------
<PAGE>
47. BANKRUPTCY AND DEFAULT: Paragraph 19 is modified to provide that with
----------------------
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such non-
monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
48. ABANDONMENT: Paragraph 20 is modified to provide that Tenant shall not
-----------
be in default under the Lease if it leaves all or any part of Premises vacant so
long as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left: vacant, (iii) such vacancy does not materially and adversely
affect the validity or coverage or any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
49. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect
-------------------
to the existence or use of "Hazardous Materials" (as defined herein) on, in,
under or about the Premises and real property located beneath said Premises and
the common areas of the Parcel, which includes the entire parcel of land on
which the Premises are located as shown in Green on A attached hereto
(hereinafter collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any material,
waste, chemical, mixture or byproduct which is or hereafter is defined, listed
or designated under Environmental Laws (defined below) as a pollutant, or as a
contaminant, or as a toxic t)r hazardous substance, waste or material, or any
other unwholesome, hazardous, toxic, biohazardous, or radioactive material,
waste, chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental
Laws" shall mean any applicable Federal, State of California or local government
law (including common law), statute, regulation, rule, ordinance, permit,
license, order, requirement, agreement, or approval, or any determination,
judgment, directive, or order of any executive or judicial authority at any
level of Federal, State of California or local government (whether now existing
or subsequently adopted or promulgated) relating to pollution or the protection
of the environment, ecology, natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage, disposal,
treatment, transportation, release, discharge, or emission of any Hazardous
Materials on, in, beneath, to, from, at or about the Property, in connection
with Tenant's use of the Property, or by Tenant or by any of Tenant's agents,
employees, contractors, vendors, invitees, visitors or its future subtenants or
assignees. Tenant agrees that any and all Tenant's Hazardous Materials
Activities shall be conducted in strict, full compliance with applicable
Environmental Laws at Tenant's expense, and shall not result in any
contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with prompt written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous Materials
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense' (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation or to require any such
installation); (ii) provide Landlord with a written inventory of such Hazardous
Materials, including an update of same each year upon the anniversary date of
the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each
Anniversary Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether tenant is in compliance with all applicable
Environmental Laws with respect to Tenant's Hazardous Materials Activities.
Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the
Page 13
Initial: /s/ S.E. /s/ R.P. /s/ J.A.
--------------------------
<PAGE>
environmental consultant's findings within two (2) months of each Anniversary
Date. Tenant, at its expense, shall promptly undertake and complete any and all
steps necessary, and in full compliance with applicable Environmental Laws, to
fully correct any and all problems or deficiencies identified by the
environmental consultant, and promptly provide Landlord with documentation of
all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous Materials
which come to be located at the Property in connection with Tenant's Hazardous
Materials Activities, and (ii) fully comply with and complete all facility
closure requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x) properly
restoring and repairing the Property to the extent damaged by such closure
activities, and (y) obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written concurrence that
closure has been completed in compliance with applicable Environmental Laws.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
such closure activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Notwithstanding the above, Landlord may, at its option and in
its sole and absolute discretion, choose to perform remediation and obtain
reimbursement for cleanup costs as set forth herein from Tenant. Any cleanup
costs incurred by Landlord as the result of Tenant's Hazardous Materials
Activities shall be reimbursed by Tenant within thirty (30) days of presentation
of written documentation of the expense to Tenant by Landlord. Such reimbursable
costs shall include, but not be limited to, any reasonable consultant and
attorney fees incurred by Landlord. Tenant shall take all actions necessary to
preserve any claims it has against third parties, including, but not limited to,
its insurers, for claims related to its operation, management of Hazardous
Materials or contamination of the Property. Except as may be required of Tenant
by applicable Environmental Laws, Tenant shall not perform any sampling,
testing, or drilling to identify the presence of any Hazardous Materials at the
Property, without Landlord's prior written consent which may be withheld in
Landlord's discretion. Tenant shall promptly provide Landlord with copies of any
claims, notices, work plans, data and reports prepared, received or submitted in
connection with any sampling, testing or drilling performed pursuant to the
preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date or: the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 49 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
49.
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Initial: /s/ S.E. /s/ R.P. /s/ J.A.
--------------------------
<PAGE>
50. CONSENT: Whenever the consent of one party to tile, other is required
-------
hereunder, such consent shall not be unreasonably withheld.
51. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
--------------------
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the temps, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
Page 15
Initial: /s/ S.E. /s/ R.P. /s/ J.A.
--------------------------
<PAGE>
EXHIBIT 10.9
SUBLEASE
This Sublease ("Sublease") is made as of April 2 , 1999, by and
---
between Faroudja Laboratories, Inc., a California corporation ("Sublandlord"),
and Conway Stuart Medical, Inc., a Delaware corporation ("Subtenant"), and is
--------
based upon the following facts and circumstances:
A. Sublandlord is the tenant under that certain Lease Agreement and
addendum thereto dated August 27, 1997 (the "Master Lease"), with John
Arrillaga, Trustee, or his Successor Trustee, UTA dated July 20, 1977 (John
Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his
Successor Trustee, UTA dated July 20, 1977 (Richard T. Peery Separate Trust) as
amended (the "Master Landlord"), a copy of which Master Lease is attached to
this Sublease and marked as Exhibit A.
---------
B. Subtenant desires to sublease from Sublandlord the premises
commonly known as 733 Palomar Avenue, Sunnyvale, California ("Subleased
Premises"), consisting of the entirety of the premises leased to Sublandlord
under the Master Lease. All the defined terms used herein shall have the meaning
given to such terms in the Master Lease, unless otherwise noted herein.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Sublease, and for valuable consideration, the receipt and sufficiency of
which are acknowledged by the parties, the parties agree as follows:
1. Sublease. Sublandlord subleases to Subtenant and Subtenant
--------
subleases from Sublandlord the Subleased Premises, subject to the terms,
covenants, and conditions contained in this Sublease. Subtenant and Sublandlord
hereby agree that any statements of square footage (rentable, usable or
otherwise) set forth in the Master Lease or in this Sublease that may have been
used in calculating the Basic Rent or any other matters, are not subject to
revision, whether or not the actual square footage is more or less, and the
Basic Rent is not subject to revision. Subtenant hereby acknowledges and agrees
that, as of the start of this Sublease, the Subleased Premises are in good order
and condition, and Subtenant accepts the Subleased Premises on an "AS IS" basis,
in the condition existing as of the start of this Sublease.
2. Term.
----
2.1 Subject to the conditions set forth herein, the term of this
Sublease shall commence on April 2 , 1999 or upon delivery by Sublandlord to
---
Subtenant of Master Landlord's written consent as provided provided in Section
3.1 below, if later ("Commencement Date").
2.2 Subtenant shall immediately commence efforts to extend its
current lease on the premises adjacent to the Subleased Premises, 735 Palomar
Avenue, Sunnyvale California (the "Adjacent Premises"), until September 30,
2003. Subtenant agrees to notify Sublandlord immediately if it is successful in
extending said lease.
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<PAGE>
2.3 If Subtenant is successful in extending the lease on the
Adjacent Premises on or before July 1, 1999, this Sublease shall extend until,
and expire on, September 30, 2003. If Subtenant is not successful in extending
the lease on the Adjacent Premises on or before July 1, 1999, this Sublease
shall extend until, and expire on, June 30, 2001. The date on which the Sublease
expires is referred to hereinafter as the Expiration Date.
3. Master Landlord's Written Consent to this Sublease.
--------------------------------------------------
3.1 The Master Landlord's written consent to this Sublease in
accordance with the terms of the Master Lease is a condition subsequent to the
validity of this Sublease. If the Master Landlord denies Sublandlord's request
for consent or if Master Landlord's consent has not been obtained and a copy of
that consent delivered to Subtenant on or before the Commencement Date, then
either Sublandlord or Subtenant shall thereafter each have the ongoing right,
subject to the terms of this Section, to terminate this Sublease pursuant to a
notice so stating and delivered to the other party ("Termination Notice"). If
either party gives the Termination Notice, then this Sublease shall terminate
immediately following receipt of the Termination Notice by the other party
("Termination Date"). Subtenant agrees to cooperate with the Sublandlord, at no
cost or expense to the Sublandlord, in obtaining the written consent of the
Master Landlord to this Sublease, which cooperation shall include, but not be
limited to, providing documents, materials and information requested or required
by the Master Landlord.
3.2 Except as provided otherwise above, if this Sublease is
terminated pursuant to one party's giving the Termination Notice, then this
Sublease shall be terminated, Sublandlord shall return to Subtenant the first
month's Basic Rent and the Security Deposit, and the parties shall be released
from any further obligations under this Sublease as of the Termination Date.
4. Basic Rent, Additional Rent, Management Fee, and Security Deposit.
-----------------------------------------------------------------
4.1 Subtenant shall pay Basic Rent ("Basic Rent") on the first
day of each month during the term of this Sublease as follows:
(i) From May 1, 1999, or the Commencement Date, if later,
to May 1, 2000, Subtenant shall pay the sum of Eighteen Thousand Dollars
($18,000) per month. Subtenant shall pay Basic Rent for the first month of this
Sublease concurrently with the execution hereof.
(ii) From May 1, 2000 to September 30, 2000, Subtenant
shall pay the sum of Nineteen Thousand Five Hundred Dollars ($19,500) per month.
(iii) From October 1, 2000 to June 30, 2001, Subtenant
shall pay the sum of Twenty Thousand Dollars ($20,000) per month.
4.2 If the term of this Sublease extends beyond June 30, 2001, in
accordance with Section 2.3 hereof, Basic Rent shall be payable thereafter as
follows:
(i) From July 1, 2001 to September 30, 2001, Subtenant
shall pay the sum of Twenty Thousand Dollars ($20,000) per month.
2
<PAGE>
(ii) From October 1, 2001 to September 30, 2002, Subtenant
shall pay the sum of Twenty Thousand Five Hundred Dollars ($20,500) per month.
(iii) From October 1, 2002 to September 30, 2003, Subtenant
shall pay the sum of Twenty One Thousand Dollars ($21,000) per month.
4.2 Throughout the term of this Sublease, Subtenant shall pay
Sublandlord, in addition to Basic Rent, all amounts charged to or payable by
Sublandlord under the Master Lease, including, but not limited to, Additional
Rent (which Additional Rent includes without limit: Real Estate Property Taxes,
Property Insurance, Utilities, Landscape, and Miscellaneous charges) and
Management Fees.
4.3 Concurrent with Subtenant's execution of this Sublease,
Subtenant shall deliver to Sublandlord the amount of Thirty-Nine Thousand
Dollars ($39,000) which amount shall constitute the first month's rent and a
security deposit of $21,000 ("Security Deposit") to be held by Sublandlord in
accordance with the terms hereof. The Security Deposit shall be held by
Sublandlord as security for the faithful performance by Subtenant of all the
terms, covenants, and conditions of this Sublease to be kept and performed by
Subtenant during the term. If Subtenant defaults with respect to any provision
of this Sublease, including, but not limited to, any provision relating to the
payment of Basic Rent, Sublandlord may (but shall not be required to) use,
retain and apply all or any part of the Security Deposit for the payment of any
Basic Rent or any other sum in default, or for the payment of any amount which
Sublandlord may spend or become obligated to spend by reason of Subtenant's
default, or to compensate Sublandlord for any other loss or damage which
Sublandlord may suffer as a result of Subtenant's default. If any portion of the
Security Deposit is so used or applied, Subtenant shall, within five (5) days
after written demand therefor, deposit with Sublandlord in cash or a cashier's
check an amount sufficient to restore the Security Deposit to its original
amount, and Subtenant's failure to do so shall constitute a material default
under this Sublease.
4.4 No trust relationship is created between Sublandlord and
Subtenant with respect to the Security Deposit. Sublandlord shall not be
required to keep the Security Deposit separate from its general funds, and
Subtenant shall not be entitled to interest on the Security Deposit. If
Subtenant shall fully and faithfully perform every provision of this Sublease,
the Security Deposit, or any balance thereof, shall be returned to Subtenant
(or, at Sublandlord's option, to the last assignee of Subtenant's interest
hereunder) within fifteen (15) days following the expiration of the Sublease
term or vacation of the Premises by Subtenant, whichever event occurs last. In
the event of a termination of Sublandlord's interest in this Sublease, the
Security Deposit, or any portion thereof not previously applied, may be released
by Sublandlord to Sublandlord's transferee and, if so released, Subtenant agrees
to look solely to such transferee for proper application of the Security Deposit
in accordance with the terms of this Section and the return thereof in
accordance herewith.
5. Use. Subtenant shall use and occupy the Subleased Premises for
---
general office and research and development purposes in accordance with the
provisions of the Master Lease and this Sublease, provided that such use shall
be in accordance with all applicable governmental laws and ordinances, and for
no other use or purpose.
3
<PAGE>
6. Master Lease.
-------------
6.1 As applied to this Sublease, the words "Landlord" and
"Tenant" in the Master Lease shall be deemed to refer to Sublandlord and
Subtenant, respectively, under this Sublease. Except as otherwise expressly
provided in this Sublease, the covenants, agreements, provisions, and conditions
of the Master Lease are made a part of and incorporated into this Sublease as if
recited in full in this Sublease.
6.2 Except as otherwise expressly provided in this Sublease, the
rights and obligations of the Master Landlord and the Tenant under the Master
Lease will be deemed the rights and obligations of Sublandlord and Subtenant,
respectively, under this Sublease, and will inure to the benefit of, and be
binding on, Sublandlord and Subtenant, respectively. As between the parties to
this Sublease only, in the event of a conflict between the terms of the Master
Lease and the terms of this Sublease, the terms of this Sublease shall control.
6.3 Subtenant recognizes that Sublandlord is not in a position to
render any of the services or to perform any of the obligations required of
Master Landlord by the terms of the Master Lease, including, but not limited to,
the services or obligations of Master Landlord under the following sections of
the Master Lease:
12 (Property Insurance).
21 (Destruction).
40 ("As-Is" Basis).
41 (Rules and Regulations and Common Area).
43 (Utilities of the Building in which the Premises are
Located).
44 (Parking).
Therefore, despite anything to the contrary in this Sublease,
Subtenant agrees that Sublandlord shall have no obligation, responsibility or
liability for the performance or non-performance of Master Landlord's
obligations, responsibilities or liabilities under the Master Lease, Subtenant
shall look solely to Master Landlord therefor, and Sublandlord shall not be
liable to Subtenant for any default of the Master Landlord under the Master
Lease.
6.4 Subtenant shall not have any claim against Sublandlord based
on the Master Landlord's failure or refusal to comply with any of the provisions
of the Master Lease. Despite the Master Landlord's failure or refusal to comply
with any of those previsions of the Master Lease, this Sublease shall remain in
full force and effect and Subtenant shall pay the Basic Rent and all other
charges provided for in this Sublease without any abatement, deduction or
offset.
6.5 Whenever consent or approval of the Master Landlord is
required under the Master Lease, then consent or approval of Sublandlord shall
also be required, which Sublandlord's consent or approval shall be subject to
the same standards, terms and conditions of Master Landlord's consent or
approval. Whenever notice to the Master Landlord is required under the Master
Lease, then notice to Sublandlord shall also be required.
6.6 Subtenant acknowledges and agrees that, in accordance with
Section 16 (Assignment and Subletting) of the Master Lease, Subtenant shall have
no right to sub-sublease the Subleased Premises without the prior agreement of
the Master Landlord.
4
<PAGE>
Sublandlord shall use reasonable efforts to assist Subtenant in obtaining the
agreement of Master Landlord to a sub-sublease of the Subleased Premises to an
affiliate of Subtenant.
6.7 In accordance with Section 46B (Assignment and Subletting
(Continued)) of the Master Lease, the following terms shall apply to this
Sublease:
If Master Landlord and Sublandlord jointly and voluntarily elect, for
any reason whatsoever, to terminate the Master Lease prior to the scheduled
Master Lease termination date, then this Sublease (if then still in effect)
shall terminate concurrently with the termination of the Master Lease.
Subtenant expressly acknowledges and agrees that (1) the voluntary
termination of the Master Lease by Master Landlord and Sublandlord and the
resulting termination of this Sublease shall not give Subtenant any right
or power to make any legal or equitable claim against Master Landlord,
including, without limitation, any claim for interference with contract or
interference with prospective economic advantage, and (2) Subtenant hereby
waives any and all rights it may have under law or at equity against Master
Landlord to challenge such an early termination of the Sublease, and
unconditionally releases and relieves Master Landlord, and its officers,
directors, employees and agents, from any and all claims, demands, and/or
causes of action whatsoever (collectively, "Claims"), whether such matters
are known or unknown, latent or apparent, suspected or unsuspected,
foreseeable or unforeseeable, which Subtenant may have arising out of or in
connection with any such early termination of this Sublease. Subtenant
knowingly and intentionally waives any and all protection which is or may
be given by Section 1542 of the California Civil Code which provides as
follows: "A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement
with debtor."
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of
and agreement to this early termination provision, (b) Subtenant's
acknowledgment that, in determining the net benefits to be derived by
Subtenant under the terms of this Sublease, Subtenant has anticipated the
potential for early termination, and (c) Subtenant's agreement to the
general waiver and release of Claims above.
Initials: /s/ A.M. Initials: /s/ K.B.
--------- ---------------
Subtenant Sublandlord
7. Variations from Master Lease. As between Sublandlord and
----------------------------
Subtenant, the terms and conditions of the Master Lease are modified as stated
below in this Section:
7.1 The following provisions of the Master Lease shall not apply
to this Sublease:
1 (Use) (First Sentence Only).
2 (Term).
4A (Basic Rent).
4F (Place of Payment of Basic Rent and Additional Rent).
4G (Security Deposit).
5
<PAGE>
31 (Notices).
39 (Basic Rent).
52 (Landlord's Corporate Authority).
53 (Punch List).
7.2 Despite anything contained in the Master Lease to the
contrary, as between Sublandlord and Subtenant only, in the event of damage to
or condemnation of the Subleased Premises or of the building in which the
premises are located, the Basic Rent payable hereunder shall not be abated, all
insurance proceeds or condemnation awards received by Sublandlord under the
Master Lease shall be deemed to be the property of Sublandlord, and Sublandlord
shall have no obligation to rebuild or restore the Subleased Premises.
7.3 Any notice that may or must be given by either party under
this Sublease will be delivered (i) personally, (ii) by certified mail, return
receipt requested, or (iii) by a nationally recognized overnight courier,
addressed to the party to whom it is intended. Any notice given to Sublandlord
or Subtenant shall be sent to the respective address set forth on the signature
page below, or to such other address as that party may designate for service of
notice by a notice given in accordance with the provisions of this section. A
notice sent pursuant to the terms of this section shall be deemed delivered (A)
when delivery is attempted, if delivered personally, (B) three (3) business days
after deposit into the United States mail, or (C) the day following deposit with
a nationally recognized overnight courier.
7.4 All amounts payable under this Sublease by Subtenant are
payable directly to Sublandlord. Subtenant shall make any and all such payments
to Faroudja Laboratories, Inc.
7.5 Subtenant shall name Sublandlord as an additional insured
under all insurance policies Subtenant is required to obtain hereunder pursuant
to the Master Lease, including but not limited to those policies required under
Sections 10 (Liability Insurance), 11 (Tenant's Personal Property Insurance and
Workman's Compensation Insurance), and 12 (Property Insurance) of the Master
Lease.
8. Broker. Subtenant represents to Sublandlord that (i) Subtenant
------
has had no dealings with any real estate broker or agent in connection with the
negotiation of this Sublease except for Bristol Commercial and CPS Realty Group
and (ii) Subtenant knows of no real estate broker or agent who is entitled to a
commission or finders fee in connection with this Sublease except for Bristol
Commercial and CPS Realty Group. Subtenant shall indemnify, protect, defend and
hold harmless Sublandlord against all claims, demands, losses, liabilities,
lawsuits, judgments and costs and expenses (including reasonable attorneys'
fees) for any subleasing commission, finder's fee, or equivalent compensation
alleged to be owing on account of the Subtenant's dealings with any real estate
broker or agent other than fees owed to Bristol Commercial and CPS Realty Group
by Sublandlord. The terms of this section shall survive the expiration or
earlier termination of this Sublease.
9. Indemnity. Subtenant shall, at Subtenant's sole expense and with
---------
counsel reasonably acceptable to Sublandlord, indemnify, defend, protect and
hold harmless Master Landlord, Sublandlord and their respective shareholders,
directors, officers, employees, partners, affiliates and agents from and against
all claims, demands, losses, liabilities, lawsuits, judgments and costs and
expenses (including reasonable attorney's fees) caused by, arising or resulting
from (a) the failure of Subtenant to perform any of the covenants, agreements,
terms,
6
<PAGE>
provisions, or conditions contained herein or in the Master Lease that Subtenant
is obligated to perform under the provisions of this Sublease, (b) Subtenant's
use or occupancy of the Subleased Premises, (c) the release of any Hazardous
Materials in or about the Subleased Premises, or the violation of any
Environmental Law, by Subtenant or Subtenant's agents, contractors or invitees.
This indemnification includes losses attributable to diminution in the value of
the Subleased Premises, loss or restriction of use of the Subleased Premises,
adverse effect on the marketing of any space on the Subleased Premises, and all
other liabilities, obligations, penalties, fines, claims, actions (including
remedial or enforcement actions of any kind and administrative or judicial
proceedings, orders, or judgments), damages (including consequential and
punitive damages), and costs (including attorney, consultant, and expert fees
and expenses) resulting from any such failure, use or occupancy by Subtenant.
This indemnification shall survive the expiration or termination of this
Sublease.
10. Cancellation of Master Lease. In the event the Master Lease is
----------------------------
canceled or terminated for any reason, or involuntarily surrendered by operation
of law before the expiration date of this Sublease, then this Sublease shall
also terminate.
11. General Provisions.
------------------
11.1 Severability. If any provision of this Sublease or the
------------
application of any provision of this Sublease to any person or circumstance is,
to any extent, held to be invalid or unenforceable, the remainder of this
Sublease or the application of that provision to persons or circumstances other
than those as to which it is held invalid or unenforceable, will not be
affected, and each provision of this Sublease will be valid and be enforced to
the fullest extent permitted by law.
11.2 Entire Agreement; Waiver. This Sublease constitutes the
------------------------
final, complete and exclusive statement between the parties to this Sublease
pertaining to the Subleased Premises, supersedes all prior and contemporaneous
understandings or agreements of the parties, and is binding on and inures to the
benefit of their respective heirs, representatives, successors, and assigns. No
party has been induced to enter into this Sublease by, nor is any party relying
on, any representation or warranty outside those expressly set forth in this
Sublease. Any agreement made after the date of this Sublease is ineffective to
modify, waive, release, terminate, or effect an abandonment of this Sublease, in
whole or in part, unless that agreement is in writing, is signed by the parties
to this Sublease, and specifically states that agreement modifies this Sublease.
11.3 Captions. Captions to the sections in this Sublease are
--------
included for convenience only and do not modify any of the terms of this
Sublease.
11.4 Further Assurances. Each party to this Sublease will at its
------------------
own cost and expense execute and deliver such further documents and instruments
and will take such other actions as may be reasonably required to evidence or
carry out the intent and purposes of this Sublease.
11.5 Governing Law. This Sublease will be governed by and in all
-------------
respects construed in accordance with the laws of the State of California.
11.6 Capitalized Terms. All terms spelled with initial capital
-----------------
letters in this Sublease that are not expressly defined in this Sublease will
have the respective meanings given such terms in the Master Lease.
7
<PAGE>
11.7 Word Usage. Unless the context clearly requires otherwise,
----------
(a) the plural and singular numbers will each be deemed to include the other;
(b) the masculine, feminine, and neuter genders will each be deemed to include
the others; (c) "shall," "will," "must," "agrees," and "covenants" are each
mandatory; (d) "may" is permissive; (e) "or" is not exclusive; and (f)
"includes" and "including" are not limiting.
The parties have executed this Sublease as of the date specified above.
Sublandlord: FAROUDJA LABORATORIES, INC.,
By:/s/ Kenneth Boschwitz
-------------------------
Its: VP Bus. Develop. & General Counsel
----------------------------------
Date: 2 April 1999
------------
Address of Sublandlord: 750 Palomar Avenue
Sunnyvale, California 94086
Subtenant: Conway Stuart Medical, Inc.
By:/s/ Alistair McLaren
-------------------------
Its: Chief Financial Officer
-----------------------
Date: April 2, 1999
--------------
Address of Subtenant: 735 Palomar Avenue
Sunnyvale, California 94086
8
<PAGE>
[LETTERHEAD OF FARIYDJA LABORATORIES]
Faroudja Laboratories, Inc.
750 Palomar Avenue Sunnyvale, California 94086 Tel (408) 735-1492
Fax (408) 735-8571
By Hand
April 21, 1999
Mr. Alistair F. McLaren
Vice President, Finance and Administration
Conway Smart Medical, Inc.
735 Palomar Avenue
Sunnyvale, CA 94086
Re: Sublease of 733 Palomar
-----------------------
Dear Alistair:
Enclosed please find a fully executed copy of the Consent to
Sublease 733 Palomar Avenue.
Now that we have received the Master Landlord's consent, the
sublease between Conway Smart and Faroudja Laboratories is in
full force and effect. I have asked our Controller, Ita Geva, to
give you a call to discuss procedures for billing and payment.
Please let me know when you have received Peery/Arrillaga's
agreement to extend your current lease at 735 Palomar so that I
can determine the final amount of the brokers' commissions and
make appropriate payment arrangements.
On behalf of all of us at Faroudja, I would like to extend our
best wishes for a long and prosperous tenancy.
Yours truly,
/s/ KENNETH S. BOSCHWITZ
-------------------------------------
Kenneth S. Boschwitz, Vice President
Business Development & General Counsel
cc: I. Geva (w/encl.)
<PAGE>
[LETTERHEAD OF PEERY/ARRILLAGA]
April 7, 1999
Mr. Ken Boschwitz
Faroudja Laboratories
750 Palomar Avenue
Sunnyvale, CA 94086
Re: CONSENT TO SUBLEASE TO CONWAY STUART MEDICAL, INC., A CALIFORNIA
CORPORATION FOR A PERIOD OF FOUR YEARS FIVE MONTHS NINETEEN DAYS,
COMMENCING APRIL 12, 1999 AND TERMINATING SEPTEMBER 30, 2003
Gentlemen:
This letter is written with regard to your proposed sublease of all of the
10,000(plus or minus sign) square feet of space (as shown on Exhibit A attached
---------
hereto) (the "Sublet Premises") leased by Tenant at 733 Palomar Avenue,
Sunnyvale, California, under Lease Agreement dated August 27, 1997 ("Master
Lease"), by and between John Arrillaga Separate Property Trust and Richard T.
Peery Separate Property Trust ("Master Landlord"), and Faroudja Laboratories,
Inc., a California corporation ("Tenant"), which Tenant is proposing to sublease
to Conway Stuart Medical, Inc., a Delaware corporation ("Subtenant") on the
terms and conditions set forth in the proposed Sublease dated April 2, 1999,
submitted by Tenant to Master Landlord on April 2, 1999 (the "Sublease").
Pursuant to Master Lease Paragraph 16 ("Assignment and Subletting") Master
Landlord hereby approves Tenant's subleasing said space to Subtenant, under the
Sublease, subject to the following terms and conditions:
1. Master Landlord's Consent shall in no way void or alter any of the terms of
the Lease by and between Master Landlord and Tenant, nor shall this Consent
alter or diminish in any way Tenant's obligations to Master Landlord.
2. Tenant shall not give Subtenant any rights or privileges in excess of those
given Tenant under the terms of the Master Lease.
3. Subtenant shall not have a separate address from the address of the
Premises. Therefore, Tenant shall provide Subtenant with internal mail
delivery. Tenant and Subtenant shall share (the prorata shares to be
determined in a separate agreement between Tenant and Subtenant) the
existing signage allocated to Tenant for the Premises.
Initial: /s/ K.B. /s/ A.M. /s/ J.A.
--------------------------
<PAGE>
4. Master Landlord has not reviewed the terms of any agreement between Tenant
and Subtenant, and in approving said Sublease, Master Landlord is in no way
approving any term, covenant or condition therein contained, and said
Sublease is subject and subordinate to all terms, covenants and conditions
of the Master Lease. Master Landlord shall not be bound by any agreement
other than the terms of the Master Lease between Master Landlord and
Tenant. In the event of conflict in the terms, covenants and conditions
between the Sublease and the Master Lease, the terms, covenants and
conditions of the Master Lease shall prevail and take precedence over said
Sublease. Master Landlord does not make any warranties or representations
as to the condition of the Leased Premises or the terms of the Lease
between Master Landlord and Tenant. This Consent to Sublease shall in no
event be construed as consent to any future sublease agreement (including
any extensions and/or amendments to the current Sublease) between Tenant
and Subtenant, or any other party; and any future sublease agreement
(including any extensions and/or amendments to the current Sublease)
between Tenant and Subtenant, or any other party shall require the prior
written consent of Master Landlord. Under no circumstances will Master
Landlord consent to a sub-sublease or assignment under the Sublease.
5. A. It is agreed by all parties hereto that in the event Master Landlord
terminates the Master Lease, pursuant to any right therein contained, said
Sublease shall automatically terminate simultaneously with the Master
Lease. Notwithstanding anything to the contrary set forth above, Master
Landlord, at Master Landlord's sole option and election, may choose to
allow Subtenant to remain in possession of the Sublet Premises leased under
said Sublease subject to all terms, covenants and conditions of said Master
Lease by giving Subtenant written notice prior to the effective date of
termination of said Master Lease, of Master Landlord's election to allow
Subtenant to remain in possession of the Sublet Premises in which event
Subtenant shall be entitled and obligated to remain in possession of the
Sublet Premises under the terms of said Sublease, subject to all terms,
covenants and conditions of the Master Lease, including, without limitation
to, payment of Basic Rent at the greater of: (i) the rate provided for in
the Master Lease, or (ii) the rate provided for in the Sublease. Such
election by Master Landlord shall not operate as a waiver of any claims
Master Landlord may have against Tenant. Following such written notice by
Master Landlord Subtenant shall then, as of the effective date of said
termination of said Master Lease, be liable to and shall attorn in writing
directly to Master Landlord as though said Sublease were executed directly
between Master Landlord and Subtenant; provided, however, it is
specifically agreed between the parties hereto, that whether Master
Landlord elects to allow Subtenant to remain in possession of the Sublet
Premises under the terms of the Sublease, subject to the Master Lease, or
allow said Sublease to automatically terminate simultaneously with the
Master Lease, Master Landlord shall not, in any event, nor under any
circumstances be responsible or liable to Subtenant for (i) the return of
any security deposit paid by Subtenant to Tenant, nor shall Subtenant be
given credit for any prepaid rental or other monetary consideration paid by
Subtenant to Tenant under said Sublease; (ii) any other claim or
Initial: /s/ K.B. /s/ A.M. /s/ J.A.
--------------------------
<PAGE>
damage of any kind or nature whatsoever by reason of or in connection with
Master Landlord's termination of said Master Lease and/or Sublease; and
(iii) any default of Tenant under the Sublease.
B. In the event Master Landlord has terminated the Master Lease, and has
not elected, in writing prior to the effective date of termination of said
Master Lease, to allow Subtenant to remain in the Sublet Premises as set
forth above, said Sublease shall terminate co-terminously with the
effective termination of the Master Lease automatically, without notice,
and Subtenant and/or Tenant, jointly and severally, shall surrender the
Sublet Premises to Master Landlord in good condition and repair as of the
effective termination of the Master Lease, with Master Landlord having no
obligation or liability whatsoever to Subtenant by reason of or in
connection with such early termination of the Master Lease. In the event
Subtenant and/or Tenant fails to timely surrender the Sublet Premises to
Master Landlord in good condition and repair as of the date the Master
Lease terminates, Subtenant and/or Tenant, jointly and severally, shall be
liable to Master Landlord in such event for all damages, costs, claims,
losses, liabilities, fees or expenses sustained by Master Landlord,
including, but not limited to, loss of rental income, attorney's fees and
court costs resulting from or in connection with Subtenant's failure to
timely vacate the Sublet Premises and surrender the Sublet Premises to
Master Landlord as of the effective termination date of said Master Lease.
C. As a condition to Landlord's consent to the Sublease, by execution of
this Consent to Sublease, Subtenant hereby agrees to be bound by the
following provision in relation to both Tenant and Master Landlord:
If Master Landlord and Tenant jointly and voluntarily elect, for any
reason whatsoever, to terminate the Master Lease prior to the
scheduled Master Lease Termination Date, then this Sublease (if then
still in effect) shall terminate concurrently with the termination of
the Master Lease. Subtenant expressly acknowledges and agrees that (1)
the voluntary termination of the Master Lease by Master Landlord and
Tenant and the resulting termination of this Sublease shall not give
Subtenant any right or power to make any legal or equitable claim
against Master Landlord or Tenant, including without limitation any
claim for interference with contract or interference with prospective
economic advantage, and (2) Subtenant hereby waives any and all rights
it may have under law or at equity to challenge such an early
termination of the Sublease, and unconditionally releases and relieves
Master Landlord and Tenant, and their officers, directors, employees
and agents, from any and all claims, demands, and/or causes of action
whatsoever (collectively, "Claims"), whether such matters are known or
unknown, latent or apparent, suspected or unsuspected, foreseeable or
unforeseeable, which Subtenant may have arising out of or in
connection with any such early termination of this Sublease. Subtenant
knowingly and intentionally waives any and all protection which is or
may be given by Section 1542 of the California Civil Code which
provides as follows: "A general release does not extend to claims
which the
Initial: /s/ K.B. /s/ A.M. /s/ J.A.
--------------------------
<PAGE>
creditor does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with debtor."
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration
of and agreement to this early termination provision, (b) Subtenant's
acknowledgment that, in determining the net benefits to be derived by
Subtenant under the terms of this Sublease, Subtenant has anticipated
the potential for early termination, and (c) Subtenant's agreement to
the general waiver and release of Claims above.
Initials: /s/ A.M. Initials: /s/ K.B.
--------------- ---------------
Subtenant Subtenant
6. In consideration of Master Landlord's consent to the Sublease, Tenant
irrevocably assigns to Master Landlord, as security for Tenant's
obligations under this Lease, all rent and income payable to Tenant under
the Sublease. Therefore Master Landlord may collect all rent due under the
Sublease and apply it towards Tenant's obligations under the Master Lease.
Tenant and Subtenant agree to pay same to Master Landlord upon demand
without further consent of Tenant and Subtenant required; provided,
however, that until the occurrence of a default by Tenant under the Master
Lease, Tenant shall have the right to collect such rent. Tenant hereby
irrevocably authorizes and directs Subtenant, upon receipt of a written
notice from Master Landlord stating that a default exists in the
performance of Tenant's obligations under the Master Lease, to pay to
Master Landlord the rents due and to become due under the Sublease. Tenant
agrees that Subtenant shall have the right to rely on any such statement
and request from Master Landlord, and that Subtenant shall pay such rents
to Master Landlord without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice or claim from Tenant to
the contrary. Tenant shall have no right or claim against Subtenant or
Master Landlord for any such rents so paid by Subtenant to Master Landlord.
It is further agreed between the parties hereto that neither Tenant's
assignment of such rent and income, nor Master Landlord's acceptance of any
payment of rental or other sum due by Subtenant to Tenant under said
sublease, whether payable directly to Master Landlord or endorsed to Master
Landlord by Tenant, shall in any way nor in any event be construed as
creating a direct contractual relationship between Master Landlord and
Subtenant, unless the Parties expressly so agree in writing and such
acceptance shall be deemed to be an accommodation by Master Landlord to,
and for the convenience of, Tenant and Subtenant. Any direct contractual
agreement between Master Landlord and Subtenant must be in writing.
7. Pursuant to the provisions of Paragraph 16 entitled "Assignment and
Subletting" of the Master Lease, Master Landlord hereby requires Tenant to
pay to Master Landlord, as
Initial: /s/ K.B. /s/ A.M. /s/ J.A.
--------------------------
<PAGE>
Additional Rent, all rents and/or additional consideration received by
Tenant from said Sublease in excess of the Basic Rent payable to Master
Landlord in said Lease (hereinafter referred to as "Excess Rent"). Tenant
and Subtenant acknowledge that any Excess Rent is owed to Master Landlord
and Tenant hereby agrees to pay any Excess Rent to Master Landlord as due
under said Sublease. Tenant and Subtenant represent and warrant to Master
Landlord that: (1) the information to be completed and provided by Tenant
and Subtenant on the attached Exhibit B "Summary of Amounts/Consideration
---------
to be Paid by Subtenant" accurately represents amounts to be paid by
Subtenant under said Sublease; (2) no additional consideration is due
Tenant under said Sublease, other than the additional consideration (if
any) identified on Exhibit B; and (3) no changes in the terms and/or
---------
conditions of said Sublease shall be made without Master Landlord's prior
written approval.
8. This Consent is conditional upon Master Landlord's receipt of Master
Landlord's reasonable costs and attorney's fees, to which Master Landlord
is entitled under Paragraph 16 of the Master Lease. Tenant shall pay such
fees and costs to Landlord, pursuant to the invoice provided to Tenant by
Landlord with this Consent, upon execution of this Consent by Tenant and
Subtenant.
9. This Consent to Sublease shall only be considered effective, and Master
Landlord's consent to the Sublease given, when (i) Landlord receives
payment from Tenant of Landlord's costs, and (ii) this Letter Agreement is
executed by Master Landlord, Tenant, and Subtenant, and Guarantors (if any)
under the Master Lease.
Please execute this letter in the space provided below, obtain the signature of
Subtenant, and return all copies to our office no later than April 21, 1999. In
the event Tenant fails to return the fully executed documents to Landlord by
April 21, 1999, this Consent shall be automatically rescinded, in which event,
Tenant shall be required to resubmit its request in the event Tenant desires to
go forward with said Sublease. A fully executed copy will be returned to you
after execution by the Master Landlord.
Very truly yours,
PEERY/ARRILLAGA
By /s/ JOHN ARRILLAGA
------------------
John Arrillaga
(Signatures Continued on Following Page)
Initial: /s/ K.B. /s/ A.M. /s/ J.A.
--------------------------
<PAGE>
THE UNDERSIGNED Tenant and Subtenant do hereby jointly and severally agree to
the terms and conditions of this Consent to Sublease.
TENANT: SUBTENANT:
FAROUDJA LABORATORIES, INC. CONWAY STUART MEDICAL, INC.
a California corporation a Delaware corporation
By /s/ Kenneth S. Boschwitz By /s/ Alistair McLauren
---------------------------- ------------------------
Print Name Kenneth S. Boschwitz Print Name Alistair McLauren
-------------------- ------------------
VP Business Development & Title Chief Financial Officer
Title General Counsel -----------------------
-------------------------
Initial: /s/ A.M. /s/ J.A.
-----------------
<PAGE>
Exhibit 10.10
[LETTERHEAD OF PEERY/ARRILLAGA]
April 29, 1999
Mr. Alistair McLaren
Conway Stuart Medical, Inc.
735 Palomar Avenue
Sunnyvale CA 94086
RE: AMENDMENT NO. 1 DATED APRIL 16, 1999 BETWEEN THE JOHN ARRILLAGA SURVIVOR'S
TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD, AND
CONWAY STUART MEDICAL, INC., AS TENANT FOR LEASED PREMISES LOCATED AT 735
PALOMAR AVENUE, SUNNYVALE, CALIFORNIA
Dear Alistair,
The aforementioned document is enclosed for your retention.
If you have any questions regarding this document please call me at 408/980-
0130.
Sincerely,
/s/ Sandra Klemens
Sandra Klemens
Property Manager
Enclosure
<PAGE>
Palomar 3
AMENDMENT NO. 1
TO LEASE
THIS AMENDMENT NO. 1 is made and entered into this 16/th/ day of April,
1999, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated
7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "John
Arrillaga Separate Property Trust") as amended, and RICHARD T. PEERY, Trustee,
or his Successor Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE TRUST) as
amended, collectively as LANDLORD, and CONWAY STUART MEDICAL, INC., a Delaware
corporation, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated May 6, 1998 Landlord leased to
Tenant approximately 10,000 +/- square feet of that certain 20,000 +/- square
foot building located at 735 Palomar Avenue, Sunnyvale, California, the details
of which are more particularly set forth in said May 6, 1998 Lease Agreement,
and
B. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by (i) extending the Term for two years and four months, changing the
Termination Date from May 31, 2001 to September 30, 2003, (ii) amending the
Basic Rent schedule and Aggregate Rent accordingly and (iii) increasing the
Security Deposit required under the Lease Agreement as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERM OF LEASE: It is agreed between the parties that the Term of said
-------------
Lease Agreement shall be extended for an additional two year four month period,
and the Lease Termination Date shall be changed from May 31, 2001 to September
30, 2003.
2. BASIC RENTAL FOR EXTENDED TERM OF LEASE: The monthly Basic Rental for
---------------------------------------
the Extended Term of Lease shall be as follows:
On June 1, 2001, the sum of TWENTY THREE THOUSAND AND NO/100 DOLLARS
($23,000.00) shall be due, and a like sum due on the first day of each month
thereafter through and including May 1, 2002.
On June 1, 2002, the sum of TWENTY FOUR THOUSAND AND NO/100 DOLLARS
($24,000.00) shall be due, and a like sum due on the first day of each month
thereafter through and including May 1, 2003.
On June 1, 2003 the sum of TWENTY FIVE THOUSAND AND NO/100 DOLLARS
($25,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including September 1, 2003.
The Aggregate Basic Rent for the Lease shall be increased by $664,000.00 or
from $756,000.00 to $1,420,000.00.
3. SECURITY DEPOSIT: Tenant's Security Deposit shall be increased by
----------------
$6,000.00, or from $44,000.00 to $50,000.00, payable upon Tenant's execution of
this Amendment No. 1.
Initial: /s/ J.A. /s/ A.M. /s/ R.P.
<PAGE>
Palomar 3
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said May 6, 1998 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1
to Lease as of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S CONWAY STUART MEDICAL, INC.
TRUST a Delaware corporation
By /s/ John Arrillaga By /s/ Alistair F. McLaren
------------------------ -----------------------------
John Arrillaga, Trustee
Alistair F. McLaren
Date: 4/27/99 -------------------------------
--------------------- Print or Type Name
RICHARD T PERRY SEPARATE Title: Chief Financial Officer
-------------------------
PROPERTY TRUST
By /s/ Richard T. Peery Date: 4/27/99
------------------------ ---------------------------
Richard T Peery, Trustee
Date: 4/28/99
---------------------
Initial: /s/ J.A. /s/ A.M. /s/ R.P.
--------------------------
<PAGE>
EXHIBIT 10.14
TECHNOLOGY LICENSE AGREEMENT
THIS TECHNOLOGY LICENSE AGREEMENT (the "Agreement"), effective as of the
Effective Date, is entered into by and between Somnus Medical Technologies,
Inc., a Delaware Corporation having a principal place of business located at 285
N. Wolfe Road, Sunnyvale, California 94086, ("Somnus") and Conway Stuart
Medical, Inc., a Delaware Corporation having a principal place of business
located at 735 Palomar Avenue, Sunnyvale, California 94086 ("Conway Stuart").
RECITALS
WHEREAS, Somnus owns certain patents, patent applications and know-how
covering certain inventions, discoveries and information, developed by Somnus at
Somnus's expense, relating to Somnus's Model S2 two channel radio frequency
("RF") generator with capability to be expanded to six channels; and
WHEREAS, Conway Stuart wishes to develop an RF generator based on Somnus's
Model S2 RF generator with up to six channels for use by Conway Stuart in the
Licensed Field; and
WHEREAS, Conway Stuart wishes to obtain from Somnus, and Somnus is willing
to grant to Conway Stuart, a right and license under the Licensed Subject Matter
(as defined hereinafter below) to develop such an RF generator; and
WHEREAS, Conway Stuart desires to obtain from Somnus, and Somnus is willing
to grant to Conway Stuart, a right and license under the Licensed Subject Matter
to manufacture, use and sell RF generators based on the licensed technology in
the Licensed Field.
NOW, THEREFORE, Somnus and Conway Stuart agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated:
1.1 "Licensed Field" shall mean the field of RF ablation for treatment of
gastroesophageal reflux and other medical disorders or conditions of the
stomach, esophagus, intestine, anus and all other structures, organs or tissues
of the digestive tract; provided, however, that the Licensed Field shall
specifically exclude treatment of any body structure located above the upper
esophageal sphincter. Notwithstanding anything to the contrary, the term
"Licensed Field" shall not include any structures, organs or tissues other than
structures, organs or tissues of the digestive tract. Notwithstanding anything
to the contrary, the term "Licensed Field" shall not include any structures,
organs or tissues other than structures, organs or tissues of the digestive
tract.
1.2 "Licensed Subject Matter" shall mean the Intellectual Property Rights
and the Technology Rights.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
1.3 "Intellectual Property Rights" shall mean all rights owned or
otherwise held by Somnus in, to or under patents and patent applications,
whether domestic or foreign, and all divisions, continuations and continuations-
in-part of any patent applications, and all patents which may issue from any
patent applications, and all reissues, reexaminations and extensions of patents,
relating to Somnus's Model S2 RF generator.
1.4 "Technology Rights" shall mean all rights owned or otherwise
controlled by Somnus in, to or under technical information, know-how, process,
procedure, composition, device, method, formula, protocol, technique, software,
design, drawing or data relating to Somnus's Model S2 RF generator which are not
covered by Intellectual Property Rights, but which are necessary for the
practice and full utilization of inventions at any time disclosed or claimed
under the Intellectual Property Rights.
1.5 "Technology" shall mean all tangible and intangible results and items
arising out of, developed in connection with or constituting the results of
Conway Stuart's development, including all ideas, inventions, discoveries,
designs, know-how, notes, memoranda, documentation, and copyrighted materials,
and all intellectual property rights constituting, embodied in, or pertaining to
any of the foregoing.
1.6 "Affiliate" shall mean (a) any entity controlled, controlling or under
common control with, directly or indirectly, at least fifty percent (50%) of the
stock normally entitled to vote for election of directors of a party; or (b) any
entity at least fifty percent (50%) of whose stock normally entitled to vote for
election of directors is controlled, controlling or under common control with,
directly or indirectly, a party, or, if such level exceeds that which is
otherwise permissible in the country of residence of such entity, the maximum
level permitted in such country.
1.7 "Effective Date" shall mean the date of transfer by Conway Stuart to
Somnus of the Conway Stuart Medical, Inc. Series A Preferred Stock, as further
set forth in Section 3.1 of this Agreement.
1.8 Rules of Construction. As used in this Agreement, all terms defined in
the singular shall include the plural, and vice versa, as the context may
require. The words "hereof," "herein," and "hereunder" and other words of
similar import refer to this Agreement as a whole. The word "including" when
used herein is intended to be exclusive and is not intended to mean "including,
without limitation." The headings of the several sections of this Agreement are
intended for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement. This Agreement has
been negotiated and drafted by the parties with assistance by counsel and shall
be fairly interpreted in accordance with its terms and without any rules of
construction relating to which party drafted the Agreement being applied in
favor or against either party.
2
<PAGE>
2. LICENSE
2.1 Grant. Subject to the terms and conditions stated herein, Somnus
hereby grants to Conway Stuart an irrevocable, [*] right and license under
Licensed Subject Matter to manufacture, have manufactured, use, offer to sell,
sell and import RF generators in the Licensed Field.
2.2 Ownership. Conway Stuart acknowledges and agrees that Somnus is and
shall remain the sole and exclusive owner of the Licensed Subject Matter.
2.3 No Other Rights. Except as expressly provided herein, no right, title,
or interest is granted by Somnus to Conway Stuart in, to or under the Licensed
Subject Matter.
2.4 No Sublicense. Conway Stuart shall have no right to sublicense the
technology licensed under this Agreement. Any attempt to sublicense this
Agreement by Conway Stuart shall result in an immediate termination of this
Agreement.
3. PAYMENT
3.1 Equity in Conway Stuart. In consideration for the rights and licenses
granted hereunder subject to approval by the Board of Directors of Conway
Stuart, Conway Stuart shall deliver to Somnus [*] of Conway Stuart Medical, Inc.
Series A Preferred Stock. In the event of a reverse stock split, Conway Stuart
shall transfer stock to Somnus in order to make Somnus whole.
3.2 Technology License Payment. Subject to the terms set forth below in
this Section 3.2, Conway Stuart shall pay Somnus a nonrefundable total
technology license fee equal to [*] Such fee shall be paid in two nonrefundable
installments. The first installment equal to [*] shall be paid on the Effective
Date. The second and final installment equal to [*] shall be paid on February 1,
1999.
3.3 Document Payment. Conway Stuart shall pay to Somnus nonrefundable fees
equal to [*] upon receipt of the design documents and [*] upon receipt of the
manufacturing documents listed below. Somnus shall have no obligation to provide
to Conway Stuart any documents that do not already exist at Somnus' facility as
of the Effective Date. Additionally, Somnus shall have no obligation to provide
to Conway Stuart any copies of Somnus' filings with UL, TUV, and FDA.
(a) Design Documents. Somnus shall deliver copies of documents
relating to hardware and software for Somnus's Model S2 RF generator, including
without limitation the following documents, to be provided according to the
indicated schedule:
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(i) Somnus shall provide to Conway Stuart the following
materials within ten (10) days of the Effective Date of this Agreement:
mechanical drawings for Conway Stuart's enclosure development project.
(ii) Somnus shall provide to Conway Stuart the following
materials within sixty (60) working days of the Effective Date of this
Agreement: bill of materials, mechanical drawings for electronics, schematics,
PCB layouts in hard copy format, and letters of reference to UL, TUV and FDA for
these agencies to refer to Somnus' filed documents.
(b) Manufacturing Documents. Somnus shall deliver copies of documents
relating to the manufacture of Somnus' Model S2 RF generator, limited to the
following: documents of materials, suppliers, all phases of manufacturing, and
all manufacturing, quality assurance test procedures and source code for all
software related to Somnus' Model S2 generator.
3.4 Royalty. For the life of this Agreement, Conway Stuart shall pay to
Somnus a royalty equal to [*] of Conway Stuart's average selling price of RF
generators which, absent the right and license granted by Somnus to Conway
Stuart under Section 2.1, would infringe Somnus' rights under the Licensed
Subject Matter. For purposes of this Section 3.4, the term "average selling
price" shall mean the average of net revenue actually received by Conway Stuart
from end users on sales of such RF generators in each calendar quarter during
the term of this Agreement. As used in the previous sentence, "net revenue"
shall equal the total gross revenue, less credits or allowances on account of
rejections of RF generators previously sold upon which a royalty has already
been made to Somnus. In the event that Conway Stuart places such RF generators
with end users at no cost, Conway Stuart shall pay Somnus a royalty based on the
average selling price of [*] per unit.
3.5 Records, Reports and Payment of Royalties. During the term of this
Agreement and for five (5) years thereafter, Conway Stuart shall keep complete
and accurate records of the sale of RF generators which, absent the right and
license granted by Somnus to Conway Stuart under Section 2.1, would infringe
Somnus' rights under the Licensed Subject Matter in sufficient detail to enable
the royalties payable to Somnus under Section 3.4 of this Agreement to be
determined. Within sixty (60) days after the end of each calendar quarter
during which units using the technology licensed under this Agreement have been
sold, Conway Stuart shall furnish to Somnus a written report setting forth the
number of such RF generators sold in such just-ended calendar quarter, together
with royalties payable to Somnus pursuant to Section 3.4.
3.6 Audit Rights. Conway Stuart shall permit Somnus, or representatives of
Somnus which are reasonably acceptable to Conway Stuart, at Somnus's expense, to
periodically examine Conway Stuart's books, ledgers, and records during regular
business hours for the sole purpose of, and only to the extent necessary, to
verify reports furnished to Somnus pursuant to Section 3.5; provided that Somnus
--------
delivers to Conway Stuart a written notice of Somnus's intention to conduct an
inspection not less than ten
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(10) business days before the intended date of such inspection; and provided
--------
further that only one (1) such inspection may be conducted during any calendar
- -------
six (6) month period. In the event that amounts due Somnus are determined to
have been underpaid by an amount greater than ten percent (10%) of the amount
actually due, Conway Stuart shall pay the cost of such examination. Any royalty
payment not paid on or before the date corresponding to forty five (45) days
after the end of the calendar quarter for which such royalties are due and
payable hereunder shall accrue interest at a rate equal to one percent (1%) per
calendar month or, if less, the maximum rate permitted under applicable law.
Notwithstanding the above, each report delivered by Conway Stuart to Somnus
pursuant to Section 3.5, shall be deemed correct and accurate, and Somnus shall
have no right to inspection records relating thereto, or otherwise challenge the
accuracy of either such report or the records relating thereto, after the third
anniversary of the date of delivery of such report to Somnus.
4. DEVELOPMENT PROGRAM
4.1 Kits. Somnus shall provide Conway Stuart with up to twenty (20) RF
Generator kits, including one (1) extra RF board per kit, at a price of [*] per
kit, payable upon request of a kit by Conway Stuart to Somnus. The twenty (20)
kits shall be consumed by Conway Stuart in, at most, two (2) separate orders.
Ten (10) kits shall include Somnus' Model S2 generator enclosure, the remaining
ten (10) kits shall not include the enclosure. A kit shall be composed of the
components necessary to build Somnus' Model S2 RF generator. Conway Stuart shall
have ten (10) days to inspect the kits upon receipt from Somnus. Conway Stuart
shall have no claim against Somnus for defective kits, or components therein,
after the ten (10) day inspection period has expired or after the kit has been
assembled, whichever event occurs first.
4.2 Use of Resources. Conway Stuart is expressly prohibited from using any
resources belonging to Somnus, including but not limited to engineering
resources, equipment and Somnus's employees and consultants, without first
obtaining express written permission from Somnus. Such permission shall be
requested and obtained from Somnus's Chief Executive Officer and Chief Financial
Officer, and such officers of Somnus shall have the authority to grant such
permission. Payment for Conway Stuart's use of Somnus's resources shall be
determined by Somnus' Chief Executive Officer and Chief Financial Officer, shall
be made by Conway Stuart to Somnus and, in the case of Somnus's employees, shall
not exceed two times such employee's hourly rate.
4.3 Solicitation of Employees. Except as provided in this Section 4.3
below, Conway Stuart is expressly prohibited from soliciting any employee or
consultant of Somnus involved with the development of Somnus's Model S2 RF
generator. For purposes of clarification, Bruno Strul, Ph.D., is not an employee
or a consultant of Somnus.
4.3.1 Use of George Schils. Upon execution of this Agreement, Conway
Stuart shall reimburse Somnus in an amount equal to Twenty Four Thousand Dollars
($24,000) for consulting services performed by George Schils on behalf of
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Conway Stuart that were paid by Somnus through December 31, 1998. Upon execution
of this Agreement, Conway Stuart shall pay George Schils directly for use of his
services after December 31, 1998.
4.3.2 Use of Robin Bek. Commencing on December 1, 1998, Conway Stuart
shall pay Somnus an amount equal to fifty percent (50%) of Robin Bek's burdened
salary to reimburse Somnus for the time that Mr. Bek spends on RF generator
development for Conway Stuart. Such payments shall be made by Conway Stuart to
Somnus on the fifteenth (15th) of every month until the development of Conway
Stuart's generator is completed. Conway Stuart shall be limited to fifty percent
(50%) of Mr. Bek's working time.
4.4 Transfer of Technology. Conway Stuart agrees that copies of all
information and descriptions of technology, including but not limited to, all
ideas, inventions, discoveries, specifications, designs, know-how, notes,
memoranda, documentation, test fixtures, calibration equipment, all copyrighted
materials, and all intellectual property rights constituting, embodied in, or
pertaining to any of the foregoing, developed by Conway Stuart as a result of
this Technology License Agreement shall be transferred by Conway Stuart to
Somnus. Somnus hereby grants to Conway Stuart an irrevocable, non-exclusive,
worldwide, fully-paid, royalty-free right and license under intellectual
property covering such information and technology to use and otherwise exploit
such information and technology.
4.5 No Conflicts. Conway Stuart agrees not to conduct any work for its own
behalf or seek out any services from any party which relates to development of
an RF generator or RF generator technology for use in treatment of any body
structure located above the upper esophageal sphincter. Somnus agrees not to
conduct any work for its own behalf or seek out any services from any party
which relates to development of an RF generator or RF generator technology for
use in the Licensed Field.
4.6 Documentation. Conway Stuart agrees that copies of all documentation,
test results and test protocols, verifications and validations, lists of
components different from Somnus's Model S2 RF generator, and proof of
regulatory approvals shall be delivered by Conway Stuart to Somnus in a timely
fashion.
4.7 Ownership and Rights in Technology. Somnus shall own all right, title
and interest in Technology developed, made or otherwise created solely by
employees and consultants of Somnus. Conway Stuart shall own all right, title
and interest in Technology developed, made or otherwise created solely by
employees and consultants of Conway Stuart. Somnus and Conway Stuart jointly
shall own all right, title and interest in Technology developed, made or
otherwise created jointly by employees and consultants of Somnus and Conway
Stuart. Somnus and Conway Stuart each agrees to deliver to the other party
hereto (i) a written description of any Technology developed, made or otherwise
created by its employees and consultants as a result of this Technology License
Agreement, and (ii) an example of tangible embodiments of such Technology, where
applicable. Conway Stuart shall require each of its employees and consultants to
enter into confidentiality and proprietary rights agreements, in a form
acceptable to
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Somnus, irrevocably assigning any and all right, title and interest such
employees and consultants might have in, to and under such Technology to Conway
Stuart. Somnus shall require each of its employees and consultants to enter into
confidentiality and proprietary rights agreements, in a form acceptable to
Conway Stuart, irrevocably assigning any and all right, title and interest such
employees and consultants might have in, to and under such Technology to Somnus.
All Technology shall be deemed to be Confidential Information of the party (or
parties) whose employee(s) and consultant(s) developed, made or otherwise
created such Technology and shall be subject to the restrictions set forth in
Article 6 below. Application and registration for intellectual property
protection of Technology shall be the exclusive right of the party owning such
Technology and such party shall bear the cost of such application and
registration; provided, however, that the parties shall determine which of the
parties hereto shall apply and register for intellectual property protection of
Technology jointly owned by the parties and the parties shall bear the cost and
expense of such application and registration equally. Each party agrees to
execute such documents, render such assistance, and take such other action
reasonably requested by the other party in connection with application,
registration, perfection, enforcement and defense of intellectual property
rights relating to Technology developed, made or otherwise created. Conway
Stuart agrees to grant, and hereby grants, to Somnus an irrevocable, non-
exclusive, worldwide, fully-paid, royalty-free right and license, together with
the right to grant and authorize sublicenses, under intellectual property
covering Technology developed as a result of this Technology License Agreement
and owned by Conway Stuart to make, have made, import, use, offer for sale, sell
and otherwise distribute tangible embodiments of such Technology in all fields
other than the Licensed Field. Somnus agrees to grant, and hereby grants, to
Conway Stuart an irrevocable, non-exclusive, worldwide, fully-paid, royalty-free
right and license, under intellectual property covering Technology developed as
a result of this Technology License Agreement and owned by Somnus to make, have
made, import, use, offer for sale, sell and otherwise distribute tangible
embodiments of such Technology in the Licensed Field, and to use such Technology
in development projects.
4.8 Use of Third Party Developers. Due to the confidential nature of the
Licensed Subject Matter, in the event Conway Stuart uses a third party developer
or manufacturer, Conway Stuart shall require such third party developer or
manufacturer to execute confidentiality agreements in a form acceptable to
Somnus. Conway Stuart shall provide copies of all such confidentiality
agreements to Somnus.
4.9 Control Use Algorithm. Conway Stuart is expressly prohibited from
incorporating into the RF generators to be developed as a result of this
Technology License Agreement Somnus' [*]. If Conway Stuart elects to incorporate
into such RF generators an [*] that is based upon the intellectual property that
Somnus licensed from [*], Conway Stuart must obtain an independent license from
[*] prior to incorporating this feature.
4.10 Conway Stuart Generator Appearance. Conway Stuart shall develop an
icon user interface, enclosure and connector for use in the RF generators to be
developed as a result of this Technology License Agreement which are separate
and
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distinct from the icon user interface, enclosure and connector used by Somnus as
of the Effective Date. For the avoidance of doubt, in the event that any
question exists as to whether such icon user interface, enclosure and connector
developed by Conway Stuart is not separate and distinct from the icon user
interface, enclosure and connector used by Somnus as of the Effective Date,
Conway Stuart shall obtain written approval from Somnus prior to implementation
of such icon user interface, enclosure and connector into the RF generators to
be developed as a result of this Technology License Agreement.
4.11 Regulatory Approvals and Testing. Conway Stuart shall be responsible
for obtaining necessary regulatory approvals and authorizations for the RF
generators to be developed as a result of this Technology License Agreement,
development of all test procedures and all test fixtures. Conway Stuart shall be
responsible for developing all verification and validation protocols and
performing such verification and validation protocols to determine whether each
unit using the technology licensed under this Agreement meets the specification
requirements for such RF generators.
4.12 Software and Hardware Changes. Conway Stuart shall be solely
responsible for development of a proprietary enclosure for RF generators to be
developed as a result of this Technology License Agreement.
4.13 Right of Access. Representatives of Somnus shall have the right to
visit Conway Stuart's facilities and the facilities of Conway Stuart's
contractors and subcontractors during normal business hours to observe, discuss
progress with representatives of Conway Stuart and Conway Stuart's contractors,
consultants, and subcontractors, and inspect all relevant documents; provided
--------
that, with respect to any visit or inspection of documents, Somnus shall notify
Conway Stuart of its intention to visit or inspect documents at least five (5)
business days in advance; and provided further that copies of any documents
-------- -------
shall be provided to Somnus only after consent by Conway Stuart, such consent
not to be unreasonably withheld; and provided further that any and all
--------
information obtained by Somnus as a result of actions permitted under this
Section 4.13, including without limitation any and all copies of documents,
shall be deemed Confidential Information of Conway Stuart and shall be subject
to the restrictions set forth in Article 6 below.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS
5.1 Representations, Warranties and Covenants of Somnus. Somnus
represents, warrants and covenants that: (i) Somnus is the sole and exclusive
owner of all right, title and interest in the Licensed Subject Matter; (ii) the
Licensed Subject Matter is free and clear of any lien, encumbrance, security
interest and restriction on license; (iii) Somnus has not previously granted,
and will not grant during the term of this Agreement, any right, license or
interest in, to or under the Licensed Subject Matter, or any portion thereof,
which is inconsistent with the rights and licenses granted to Conway Stuart
herein; (iv) to the best of Somnus' knowledge as of the Effective Date, the
Licensed Subject Matter does not infringe any intellectual property right of any
third party; (v) there are no actions, suits, investigations, claims or
proceedings pending or threatened in any way relating to the Licensed Subject
Matter; (vi) during the term of this Agreement,
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Somnus will not conduct any work for its own behalf or seek out any services
from any party which relates to development of an RF generator, or RF generator
technology, for use in the Licensed Field, (vii) Somnus is a corporation, duly
organized validly existing and in good standing under the laws of the State of
Delaware; and (viii) the execution, delivery and performance of this Agreement
have been duly authorized by all necessary corporate action on the part of
Somnus.
5.2 Representations, Warranties and Covenants of Conway Stuart. Conway
Stuart represents, warrants and covenants that: (i) during the term of this
Agreement, Conway Stuart will not conduct any work for its own behalf or seek
out any services from any party which relates to development of an RF generator,
or RF generator technology, for use in treatment of any body structure located
above the upper esophageal sphincter; (ii) Conway Stuart is a corporation, duly
organized validly existing and in good standing under the laws of the State of
Delaware; and (iii) the execution, delivery and performance of this Agreement
have been duly authorized by all necessary corporate action on the part of
Conway Stuart.
5.3 Effect of Representations, Warranties and Covenants. It is understood
that if the representations and warranties made by a party under this Article 5
are not true and accurate, or if the covenants made by a party under this
Article 5 are not upheld and complied with, and the other party incurs damages,
liabilities, costs or other expenses as a result of such falsity or non-
compliance, the party making such representations, warranties and covenants
shall indemnify and hold the other party harmless from and against any such
damages, liabilities, costs or other expenses incurred as a result of such
falsity or such non-compliance.
6. CONFIDENTIAL INFORMATION
6.1 General. Somnus and Conway Stuart each agree that all information
contained in documents marked "confidential" which are received by one party
from the other party, and all information indicated to be Confidential
Information in Sections 4.7 and 4.13 (collectively, "Confidential Information")
shall be received in strict confidence, used only for the express purposes set
forth in this Agreement, and not disclosed by the recipient party (except as
required by law or court order), its agents or employees without the prior
written consent of the other party, unless such Confidential Information (i) was
in the public domain at the time of disclosure, (ii) later became part of the
public domain through no act or omission of the recipient party, its employees,
agents, or permitted successors or assigns, (iii) was lawfully disclosed to the
recipient party by a third party having no obligation to the disclosing party,
(iv) was already known by the recipient party at the time of disclosure, (v) was
independently developed by the recipient without use of or access to such
Confidential Information or (vi) is required to be disclosed to a government
agency.
6.2 Protection of Confidential Information. Each party's obligations of
confidentiality, non-use and nondisclosure set forth in Section 6.1 shall be
fulfilled by using at least the same degree of care with the other party's
Confidential Information as it uses to protect its own confidential information.
This obligation shall continue in full
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force and effect during the term of this Agreement and thereafter for a period
of three (3) years.
7. INFRINGEMENT BY THIRD PARTIES
7.1 General. Conway Stuart shall notify Somnus if it learns of any
possible infringement by any third party of the Intellectual Property Rights. In
the event that Somnus does not file suit against a substantial infringer of such
patents or other rights granted herein within six (6) months after receipt of
such notification from Conway Stuart, Conway Stuart shall have a right, but no
obligation, to enforce any patent licensed hereunder on behalf of itself and
Somnus. Somnus shall provide all reasonable assistance requested by Conway
Stuart in connection with any action taken by Conway Stuart to enforce the
Intellectual Property Rights consistent with its obligations pursuant to Section
7.2, including without limitation joining legal action initiated by Conway
Stuart as a party. In the event that Conway Stuart takes action to enforce the
Intellectual Property Rights, Conway Stuart shall retain for its own benefit all
recoveries obtained from such action.
7.2 Cooperation. In any suit or dispute involving an infringer, the
parties shall cooperate fully, and upon the request and at the expense of the
party bringing suit, the other party shall make available to the party bringing
suit, at reasonable times and under appropriate conditions all relevant
personnel, records, papers, information, samples, specimens, and the like in its
possession.
8. INDEMNIFICATION
8.1 General. Conway Stuart shall hold harmless and indemnify Somnus, its
officers, employees and agents from and against any claims, demands or causes of
action whatsoever, including without limitation those arising on account of any
injury or death of persons or damage to property caused by, or arising out of,
or resulting from, the exercise or practice of the rights and licenses granted
hereunder by Conway Stuart, its Affiliates or their officers, employees, agents
or representatives, except to the extent that any such claims, demands or causes
of action arise as a result of Somnus' negligence or misconduct.
9. TERM AND TERMINATION
9.1 Term. The term of this Agreement shall commence on the Effective Date
and continue in full force and effect until the earlier of either (i) the
expiration of the term of the last patent within the Licensed Subject Matter or,
if sooner, determination by a court or administrative agency of competent
jurisdiction that the last patent within the Licensed Subject Matter is invalid
or unenforceable, or (ii) fifteen (15) years if no patents within the Licensed
Subject Matter issue.
9.2 Termination for Cause. Either party may, without penalty, terminate
this Agreement, effective upon written notice to the other party in the event of
one of the following events:
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9.2.1 The other party materially breaches this Agreement, and such breach
remains uncured for thirty (30) days following written notice of breach by the
non-breaching party, unless such breach is incurable, in which event termination
shall be immediate upon receive of written notice;
9.2.2 To the extent permitted by applicable, a petition for relief under
any bankruptcy statute is filed by or against the other party, or the other
party makes an assignment for creditors, or a receiver is appointed for all or a
substantial party of the party's assets, and such petition, assignment or
appointment is not dismissed or vacated within sixty (60) days.
9.3 Licenses.
9.3.1 Upon expiration of this Agreement pursuant to the terms of
Section 9.1, Conway Stuart shall have a paid-up, irrevocable, [*] right and
license under the Technology Rights to manufacture, have manufactured, use,
offer to sell, sell and import RF generators in the Licensed Field.
9.3.2 Upon termination of this Agreement by Somnus pursuant to Section
9.2, all rights and licenses granted herein by Somnus to Conway Stuart under
Licensed Subject Matter shall terminate. Upon termination of this Agreement by
Conway Stuart pursuant to Section 9.2, or upon expiration of this Agreement, all
rights and licenses granted herein by Somnus to Conway Stuart under Licensed
Subject Matter shall survive.
9.4 Return of Confidential Information. Upon termination of this Agreement
by Somnus pursuant to Section 9.2, but not upon expiration or termination of
this Agreement by Conway Stuart pursuant to Section 9.2, Conway Stuart shall
promptly return to Somnus any Confidential Information of Somnus received from
Somnus prior to such termination, and Conway Stuart shall be no longer be
entitled to use any such Confidential Information for any purpose.
9.5 Accrued Rights. Expiration or termination of this Agreement shall not
release either party from any obligation theretofore accrued.
9.6 Survival. Articles 5, 6, and 10, and Sections 9.3, 9.4, 9.5 and 9.6,
of this Agreement shall survive expiration or termination of this Agreement for
any reason.
10. MISCELLANEOUS
10.1 Governing Law. This Agreement shall be governed by, and construed and
interpreted, in accordance with the laws of the State of California without
reference to principles of conflicts of laws.
10.2 Compliance with Laws. Each party shall perform this Agreement in
compliance with all applicable federal, national, state and local laws, rules
and regulations and shall indemnify the other party and its customers for loss
or damage sustained because of such party's noncompliance with any such law,
rule or regulation.
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Each party shall furnish to the other party any information requested or
required by that party during the term of this Agreement or any extensions
hereof to enable that party to comply with the requirements of any U.S. or
foreign federal, state, and/or governmental agency.
10.3 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES OF THE OTHER PARTY
ARISING OUT OF THIS AGREEMENT, UNDER ANY THEORY OF LIABILITY.
10.4 Force Majeure. Neither party shall be held responsible for any delay
or failure in performance hereunder caused by strikes, embargoes, unexpected
government requirements, civil or military authorities, acts of God, earthquake,
or by the public enemy or other causes reasonably beyond such party's control
and without such party's fault or negligence.
10.5 Independent Contractors. The relationship of Somnus and Conway Stuart
established by this Agreement is that of independent contractors. Nothing in
this Agreement shall be constructed to create any other relationship between
Somnus and Conway Stuart. Neither party shall have any right, power or authority
to assume, create or incur any expense, liability or obligation, express or
implied, on behalf of the other.
10.6 Confidentiality of Agreement. Except as required by law, neither
party to this Agreement shall disclose the contents or any term of this
Agreement to any person or entity without the prior written consent of the non-
disclosing party.
10.7 Assignment. The parties agree that their rights and obligations under
this Agreement may not be transferred or assigned to a third party without the
prior written consent of the other party hereto. Notwithstanding the foregoing,
a party may transfer or assign its rights and obligations under this Agreement
to a successor to all or substantially all of its business or assets relating to
this Agreement whether by sale, merger, operation of law or otherwise.
10.8 No Use of Names. Neither party will use the name of the other in its
advertising or promotional materials without the prior written consent of such
other party.
10.9 Notices. Any required notices hereunder shall be given in writing by
certified mail or overnight express delivery service (such as FedEx) at the
address of each party below, or to such other address or as either party may
substitute by written notice. Notice shall be deemed served when delivered or,
if delivery is not accomplished by reason or some fault of the addressee, when
tendered.
If to Somnus: Somnus Medical Technologies, Inc.
285 N. Wolfe Road
Sunnyvale, California 94086
Attn: Chief Executive Officer
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If to Conway Stuart: Conway Stuart Medical, Inc.
735 Palomar Avenue
Sunnyvale, California 94086
Attn: Chief Executive Officer
10.10 Modification; Waiver. This Agreement may not be altered, amended or
modified in any way except by a writing signed by both parties. The failure of
a party to enforce any provision of the Agreement shall not be construed to be a
waiver of the right of such party to thereafter enforce that provision or any
other provision or right.
10.11 Severability. If any provision of any provision of this Agreement
shall be found by a court to be void, invalid or unenforceable, the same shall
be reformed to comply with applicable law or stricken if not so conformable, so
as not to affect the validity or enforceability of this Agreement.
10.12 Entire Agreement. The parties hereto acknowledge that this Agreement
sets forth the entire Agreement and understanding of the parties hereto as to
the subject matter hereof, and supersedes all prior discussions, agreements, and
writings in respect hereto.
10.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and which together shall
constitute one instrument.
IN WITNESS WHEREOF, Somnus and Conway Stuart have executed this Agreement
by their respective duly authorized representatives.
SOMNUS MEDICAL CONWAY STUART MEDICAL, INC.
TECHNOLOGIES, INC. ("Conway Stuart")
("Somnus")
By: /s/ John Schulte By: /s/ Stuart D. Edwards
-------------------------- --------------------------
Print: John Schulte Print: Stuart D. Edwards
Title: Chief Executive Officer Title: Chief Executive Officer
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EXHIBIT 10.16
Conway Stuart Medical, Inc.
735 Palomar Avenue
Sunnyvale, CA 94086
September 30, 1999
Mr. John W. Morgan
13215 Deerfield Court
Lake Oswego, OR 97035
Dear John:
On behalf of Conway Stuart Medical, Inc. ("Company"), I am pleased to offer
you the position of Chief Executive Officer, reporting to the Board of
Directors. As Chief Executive Officer, you will be responsible for the day-to-
day management of the Company.
Your annual salary will be $250,000, paid in accordance with the Company's
standard payroll procedures and subject to applicable withholdings. In addition
to your salary, you will be eligible to participate in employee benefit programs
generally available to employees as the Company may establish from time to time.
Within two weeks of your official starting date, you will receive a $50,000
sign-on bonus, subject to applicable withholdings.
I will recommend to the Board of Directors that they approve a bonus of 20%
of your salary to be granted to you for the year 2001, contingent upon the
Company achieving sales revenue goals for the year 2001 of $14M shown in the
June 9, 1999 Conway Stuart Business Plan.
Subject to the approval of the Board of Directors, you will be granted a
stock option for 975,000 shares of the Company's Common Stock at an exercise
price of the current fair market value of $0.15 per share ("Option"). The Option
shall vest over a four (4) year period with 25% of the shares vesting upon
November 1, 2000 and an additional one-forty eighth (1/48) of the shares will
vest each month thereafter, provided that you remain employed by the Company,
and provided further, that should your employment with the Company terminate for
any reason other than for "Cause" (as defined below) during the first year of
your employment with the Company, you shall be entitled to receive 1/48 of the
shares for every full month of completed employment prior to such termination.
Notwithstanding the foregoing, in the event of a "Change in Control" (as defined
below) and either (a) the Company terminates you other than for "Cause" (as
defined below) or (b) a "Constructive Termination" (as defined below) occurs,
within twelve months of such Change in Control, then all unvested options shall
become fully vested.
The Company understands that you will incur expenses in connection with you
and your family's move from Oregon to California, including your temporary
residence prior to the move, the sale of your house in Oregon, and the purchase
of a home in the Bay Area. The Company will
<PAGE>
Page 2
John W. Morgan
September 28, 1999
pay you a fixed sum of $75,000 to cover all expenses. Upon acceptance of the
position, 1/3 of the $75,000 will be paid to you. Another 1/3 will be paid to
you two months after your official start date. Another 1/3 will be paid to you
upon your closing on a new residence in the Bay Area.
The Company shall also make a payment to you equal to the amount needed to
pay any increased income tax, incurred by you and associated with the fixed sum
described in the paragraph above.
The Company shall make a loan to you of up to $8,500 per month for four
years as a mortgage interest differential in conjunction with your acquiring a
primary residence within 30 miles of the Company's headquarters. The loan will
be subordinated to your mortgage loan. The loan shall bear the lowest possible
federal applicable interest rate, compounded annually. In the event that the
Company terminates you other than for "Cause" (as defined below) during the
four-year period, or in the event of your death or "Disability" (as defined
below) during such four-year period, the loan will be forgiven. If you
voluntarily leave the Company, you will immediately repay the loan. Full
repayment of the loan plus accumulated interest will be due within 12 months of
an IPO or within 6 months of a "Change in Control" (as defined below) unless the
acquiring entity agrees to assume the loan, whichever comes first.
For this purpose, "Cause" is defined as: (i) an act of dishonesty made by
you in connection with your responsibilities as an employee that causes serious
reputational harm to the Company, (ii) your conviction of, or plea of nolo
----
contendere to, a felony, (iii) your gross misconduct, or (iv) your failure to
- ----------
perform in any material respect any material aspect of your employment duties as
defined by the Board.
For this purpose, "Change of Control" of the Company is defined as: (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 50% or more of the total voting power represented by
the Company's then outstanding voting securities; or (ii) the date of the
consummation of a merger or consolidation of the Company with any other
corporation that has been approved by the stockholders of the Company, other
than a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company; or (iii)
the date of the consummation of the sale or disposition by the Company of all or
substantially all of the Company's assets.
For this purpose, "Constructive Termination" is defined as (I) a material
reduction in your responsibilities, duties, or base pay or (ii) relocation of
your workplace to any place outside of the San Francisco Bay Area.
For this purpose, "Disability" occurs upon both of the following conditions
being met: (i) your becoming unable to perform the essential functions of your
job with or without a reasonable accommodation, and (ii) 90 days following
written notice by the Company to you of such determination by an independent
physician acceptable to the Board and to you (which acceptance will not be
unreasonably withheld), provided, however, that if you resume work on a
<PAGE>
Page 3
John W. Morgan
September 28, 1999
regular basis prior to the end of such 90 day period, you shall not be deemed to
have a "Disability."
You should be aware that your employment with the Company constitutes "at-
will" employment. This means that your employment relationship with the Company
may be terminated at any time with or without notice, with or without good cause
or for any or no cause, at either parties' option. You understand and agree that
neither your job performance nor promotions, commendations, bonuses or the like
from the Company give rise to or in any way serve as the basis for modification,
amendment, or extension, by implication or otherwise, of your employment with
the Company. If the Company terminates the employment relationship at any time,
other than for Cause, you will receive (i) a lump sum payment equal to six (6)
months of your then current monthly salary, subject to applicable withholdings,
and (ii) six (6) months acceleration of vesting on your options.
As a condition of your employment with the Company, you will be required to
sign the Company's standard Proprietary Agreement ("Agreement"), two originals
of which are attached.
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 date of hire, or our employment relationship with you may
be terminated.
By signing this letter you hereby represent to the Company that (i) except
as previously disclosed to the Company: (a) your employment with the Company is
not prohibited under any employment agreement or other contractual arrangement,
and (b) you do not know of any conflicts which would restrict your employment
with the Company, and (ii) you agree not to bring with you to your employment
any confidential or proprietary information belonging to any previous employers.
This offer is valid through September 30, 1999, and is contingent on your
starting employment by November 1, 1999 (or a later date, mutually agreed to by
you and the Company). We look forward to your early acceptance and would be
pleased to have you start as soon as your present commitments allow. Enclosed
are two originals of this letter. Please sign and return one to me, to indicate
your acceptance.
Sincerely,
/s/ Alan L. Kaganov
Alan L. Kaganov, Sc.D.
Member, Board of Directors
I accept employment with Conway Stuart Medical, Inc., subject to the terms and
conditions hereof. I understand that the terms set forth in this letter
supersede all oral or written discussions I have had, or may have, with anyone
in the Company regarding the subject matter hereof.
AGREED AND ACCEPTED
/s/ John W. Morgan
<PAGE>
Page 4
John W. Morgan
September 28, 1999
Date: 10/01/99
Encl.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated May 3, 2000 except for Note 13, for which the date is May 19,
2000, relating to the financial statements of Curon Medical, Inc., which
appears in such Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
May 25, 2000
- --------------------------------------------------------------------------------
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