<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------------
FORM 10-K
( X ) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 1996
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-24540
INCONTROL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 91-1501619
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
6675 - 185TH AVENUE N.E.
REDMOND, WA 98052-6734
(206) 861-9800
(Address and telephone number of registrant's principal executive offices)
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter periods that the
registrant has been required to file such reports), and (2) has been subject
to filing requirements for the past 90 days.
Yes ( X ) No ( )
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of the registrant's Common Stock
on March 20, 1996, as reported on the Nasdaq National Market, was
$117,197,147.
As of March 20, 1996, there were 17,015,513 shares of the registrant's
Common Stock outstanding.
Portions of the registrant's Proxy Statement relating to its 1997 annual
meeting of stockholders are incorporated by reference into Part III hereof.
Such Proxy Statement will be filed with the Securities and Exchange
Commission no later than 120 days after the registrant's fiscal year ended
December 31, 1996.
<PAGE> 2
INCONTROL, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Item 1. Business ..................................................................1
Business of the Company ................................................1
Products ...............................................................2
Clinical Affairs and Sales .............................................4
Manufacturing ..........................................................5
Marketing ..............................................................5
Competition ............................................................6
Patents and Proprietary Rights .........................................6
Government Regulation ..................................................7
Employees ..............................................................8
Important Factors Regarding
Forward-Looking Statements .........................................8
Item 2. Properties ...............................................................12
Item 3. Legal Proceedings ........................................................12
Item 4. Submission of Matters to a Vote of the Security Holders ..................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....13
Item 6. Selected Consolidated Financial Data .....................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................15
Item 8. Financial Statements and Supplementary Data ..............................17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .....................................................32
PART III
Item 10. Directors and Executive Officers of the Registrant .......................32
Item 11. Executive Compensation ...................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management ...........32
Item 13. Certain Relationships and Related Transactions ...........................32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .........33
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
Certain statements within the following description of the business of the
Company and elsewhere in the Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward
looking statements. See "--Important Factors Regarding Forward-Looking
Statements"
BUSINESS OF THE COMPANY
Founded in 1990, InControl, Inc. (the "Company" or "InControl") is a leader in
the development of therapeutic devices for the treatment of atrial fibrillation
("AF"), a common heart rhythm disorder. The Company's first product, an
automatic implantable atrial defibrillation system (the "METRIX(TM) System"),
which includes an implantable device (the "METRIX device"), a transvenous lead
system (the "PERIMETER(R) Lead System"), the Defibrillator System Analyzer (the
"DSA") and the INCONTROL(R) Programmer (the "Programmer") entered clinical
trials in the United States and Europe during 1996. The Company is also
developing a line of other products known collectively as the Temporary Atrial
Defibrillation ("TAD") products. The TAD products include a family of
defibrillation catheters ("TADCATH" products), and temporary pacing and
defibrillation heartwires ("TADPOLE" heartwires). The TADPOLE heartwires entered
clinical trials in Europe and Canada in late 1996.
AF is a common heart arrhythmia. The Company estimates that in each of the
United States and Europe approximately 2,000,000 people suffer from AF;
approximately 160,000 new cases develop annually, and the disease accounts for
hospitalization more often than any other heart rhythm disorder. It is also
estimated that temporary post-surgical AF occurs in up to 1/3 of patients who
have undergone thoracic surgery. There are approximately 400,000 such surgeries
performed annually in the United States and the Company believes that a like
number are performed in Europe. AF is a condition in which the regular pumping
action of the atria, or upper chambers of the heart, is replaced by disorganized
quivering caused by chaotic conduction of electrical signals in the atria.
Although not immediately life threatening, this disease may cause up to a 30%
reduction in cardiac output, resulting in symptoms such as shortness of breath,
fainting, fatigue, and reduced exercise capacity. Moreover, AF significantly
increases the risk of stroke. The American Heart Association estimates that
75,000 strokes per year in the United States are related to AF. In addition to
these clinical consequences/complications, patients who suffer post-surgical AF
can require extended hospital stays for up to five days resulting in increased
costs for health care providers.
The Company believes that the METRIX System will be best suited for the
treatment of patients with symptomatic persistent episodes of AF who are drug
refractory and at risk for stroke. For these patients, it may offer significant
advantages over current therapies, including reduced morbidity, decreased
mortality risk, fewer adverse side effects and more effective and prompt
treatment of AF. These therapies consist mainly of the administration of a
combination of pharmaceuticals and external electrical cardioversion. Less
frequently, AF is treated by permanent destruction of the heart's normal
atrial-ventricular conduction system (a process known as ablation) accompanied
by pacemaker implantation, and occasionally by open-heart surgery. All of these
therapies present certain risks and side effects, with generally none being
reported to be completely effective. With both antiarrhythmic pharmaceuticals
and external cardioversion, AF recurs in a substantial percentage of patients
treated. In addition, studies have indicated that antiarrhythmic pharmaceuticals
may be associated with adverse side effects, including an increased risk of
life-threatening ventricular arrhythmias. The Company believes that the TADCATH
products will serve patients with similar AF characteristics as will be served
by the METRIX System, in a non-implanted, temporary therapeutic protocol.
InControl anticipates that certain of the patients successfully treated with the
TADCATH products will become candidates for METRIX device implants. The TADPOLE
heartwires are designed for treatment of temporary procedurally induced AF
suffered by patients after thoracic surgery procedures, including coronary
artery bypass grafts ("CABG") and valve replacement surgery.
1
<PAGE> 4
InControl has successfully completed trials of prototypes of the device
implanted in animals as well as clinical trials in Europe with an external
emulator of the device and a limited clinical trial of the METRIX System in the
United States, under a non-implanted (acute) clinical protocol, pursuant to an
Investigational Device Exemption ("IDE") granted by the United States Food and
Drug Administration (the "FDA"). In 1996, InControl received approval from the
FDA to begin clinical trials of the METRIX System in three investigational
centers, and since expanded to four centers under an implanted clinical
protocol. These trials began in April 1996. In addition, in early 1996, the
Company received permission from regulatory authorities in Europe to begin
clinical trials of the METRIX System to gather data required for obtaining the
conformite europeenne ("CE") mark, or European regulatory approval. These trials
also began in April 1996. The Company expects that in early 1997 it will file
for permission from the FDA to expand its United States trials to include more
patients in its existing centers and additional centers. InControl also expects
to be able to file with regulatory authorities in Europe, in the first half of
1997, the required data to obtain the CE mark.
During 1996, InControl introduced into its ongoing clinical trials its second
generation METRIX device, the METRIX 3020, to replace the Company's initial
device, the METRIX 3000. With the introduction of the new device, the Company
also modified the DSA and the Programmer to accommodate the METRIX 3020 in
addition to the METRIX 3000. The principal difference between the first and
second generation METRIX devices is a doubling of the device's available energy
for therapy, made possible by increased capacitance and a change in the
waveform, which the Company believes, and early clinical data indicate, results
in increased patient tolerability. The first implants of the METRIX 3020 were
performed in September of 1996 in Europe.
PRODUCTS
METRIX(TM) System
The METRIX System is comprised of four components: the METRIX 3020 implantable
atrial defibrillator, three transvenous leads, the DSA and the Programmer. Much
like a pacemaker, the METRIX 3020 is designed to be surgically implanted in the
pectoral region of the chest and connected to the heart via the transvenous
leads. The three-lead set includes InControl's proprietary PERIMETER RA (right
atrium), and PERIMETER CS (coronary sinus), shocking and sensing leads and a
standard right ventricular bipolar pacing lead. The leads are designed to be
positioned in the heart to optimize signal sensing and shock delivery vectors.
The DSA, an external instrument, is used at the time of implant to help verify
lead placement, evaluate atrial defibrillation thresholds, and determine device
settings. The Programmer utilizes sophisticated digital telemetry to allow the
physician to rapidly assess the implanted device on follow-up visits and is
designed to easily reprogram the device, if necessary.
METRIX 3020 Implantable Atrial Defibrillator
The METRIX 3020 is a small (approximately 53 cc, 80 grams) implantable device
similar in size to a stopwatch. Maximum energy output of the device is
approximately 6 joules. For most patients the device is expected to last
approximately four years, although this period will vary by patient depending on
the programming of the device and therapy required. The device is designed to be
replaced as needed; procedures for device replacements are expected to be
similar to the procedures followed for pacemaker replacements. Proprietary
technology is incorporated in the device that is intended to optimize safety,
minimize energy requirements for atrial defibrillation and for device operation
and provide a digital telemetry link with the Programmer.
The METRIX 3020 is designed to detect the presence of AF, confirm the
persistence of the arrhythmia, deliver a low-energy synchronized shock on a safe
R-R interval (heartbeat to heartbeat interval), monitor the heart and initiate
post-shock ventricular back-up pacing if required, store relevant
electrocardiograms and reinitiate the therapy cycle if patient's heart has not
been converted to normal heart rhythm. Once normal heart rhythm is restored, the
device is designed to reset and reinitiate the therapy cycle when AF is again
detected. To optimize shock safety, the device incorporates patented redundant
ventricular sensing channels designed to enhance shock synchronization. In
addition, proprietary technology incorporated into the device will enable it to
be programmed to emit a very low-energy output warning signal, if desired by the
patient and physician, to alert the patient when a therapeutic level shock is
about to be delivered. To minimize defibrillation energy requirements and shock
intensity, the device utilizes a proprietary
2
<PAGE> 5
biphasic shock waveform generated by a single capacitor. To minimize the
device's power consumption and to maximize its life, InControl has incorporated
a proprietary approach to intermittently power-up the microprocessors at
preprogrammed intervals and has patented a means to charge the capacitor
efficiently in preparation for shock delivery.
PERIMETER Transvenous Sensing and Defibrillation Lead System
Three permanent transvenous leads, providing what InControl believes to be a
unique three-way view of the electrical conduction system of the heart, are
attached to the heart and connected to the METRIX 3020. One lead each is
positioned in the coronary sinus, the right atrium and the right ventricle.
InControl has developed a proprietary single electrode sensing and shocking lead
for the coronary sinus, the PERIMETER CS lead. The PERIMETER CS lead is designed
with a pre-formed helical shape to improve fixation in the coronary sinus. The
PERIMETER RA lead is a single electrode sensing and shocking lead designed for
fixation in the right atrium. These two leads provide a bipolar system for both
sensing and shock delivery. A third lead, a standard right ventricular bipolar
pacing lead, provides cardiac signals needed for shock synchronization, rhythm
discrimination and post-shock back-up ventricular pacing.
Defibrillator System Analyzer and Programmer
A pen-based touch screen computer serves as the system platform for the DSA and
the Programmer. The Company has designed innovative displays for
device-programming parameters, and electrogram, as well as AF episode data. The
DSA emulates the implanted device and will allow the implanting physician to
verify proper lead placement and performance, test initial device settings and
determine the patient's atrial defibrillation threshold prior to device
implantation. The Programmer allows the physician to assess and adjust device
performance at follow-up evaluations and prints selected data and electrogram
information for patient chart documentation. Employing proprietary technology,
the Programmer transfers information to or from the METRIX 3020, via digital
wireless communication. Each implant center will be equipped with a DSA and a
Programmer.
TAD Products
The TAD Products include TADCATH products and TADPOLE heartwires. The TADCATH
products are a family of temporary atrial defibrillation catheters being
designed for use in an acute clinical setting. The TADPOLE heartwires are being
designed for use to defibrillate the atria of patients who are suffering from
temporary AF as a result of thoracic surgery procedures and also to allow for
cardiac pacing, if needed, in these patients.
TADCATH--temporary atrial defibrillation catheters
The TADCATH products are a family of defibrillation catheters being designed and
developed by InControl and, in certain instances, in cooperation with selected
suppliers. The TADCATH 7903 temporary catheter has been used as part of the
pre-implant testing associated with the METRIX System clinical trials. The
Company anticipates designing and developing other catheters with varied
electrode and design configurations as may be required by the Company's
customers or its clinical research staff. The Company believes that these
products will provide physicians and patients a therapeutic alternative for the
acute temporary treatment of AF, particularly those patients who have failed
external cardioversion. InControl also believes that use of these products at
implant centers will help to identify patients with AF characteristics that
would make the patient suitable for a METRIX device implant. The Company
believes that these products will be classified as pre-amendment devices by the
FDA and as such will be subject to the 510(k) approval process. There can be no
assurances, however, that these products will be classified as pre-amendment
devices and may be subject to the FDA's PMA approval process which would delay
commercialization of these products. (See "--Important Factors Regarding
Forward-Looking Statements--Extensive Governmental Regulation and Uncertainty of
Product Approvals").
TADPOLE--temporary atrial defibrillation and cardiac pacing heartwires
TADPOLE is a proprietary system of temporary cardiac pacing and atrial
defibrillation heartwires designed and developed by InControl to serve patients
who suffer from AF as result of thoracic surgical procedures including CABG and
valve replacement procedures. The TADPOLE heartwires are designed to be placed
post-surgery on the
3
<PAGE> 6
heart. This procedure for the placement of the heartwires is anticipated to be
similar to that utilized by cardiovascular surgeons to place temporary cardiac
pacing heartwires. Each patient will receive at least two TADPOLE heartwires.
The heartwires are then attached to a temporary pacemaker or to an external
defibrillation energy source if the patient requires either pacing or atrial
defibrillation during the post-operative recovery time period. The TADPOLE
heartwires are designed to be removed via simple manual traction prior to the
patient's discharge from the hospital. The Company believes that the TADPOLE
heartwires will be classified as pre-amendment devices by the FDA and as such
will be subject to the 510(k) approval process. There can be no assurances,
however, that the TADPOLE heartwires will be classified as pre-amendment devices
and may be subject to the FDA's PMA approval process which would delay
commercialization of the TADPOLE heartwires. (See "--Important Factors Regarding
Forward-Looking Statements--Extensive Governmental Regulation and Uncertainty of
Product Approvals")
Next generation atrial defibrillators and leads/Other products under
development
InControl is also working on newer generations of atrial defibrillators and
transvenous leads. Future generations of atrial defibrillators are expected to
be designed to be smaller, lighter and have a longer battery life. Future
devices may also offer broader therapy to serve both patients suitable for the
METRIX 3020 as well as to possibly address larger patient populations. The
Company is also developing new PERIMETER transvenous leads to improve on
existing designs and to address requirements of future generations of atrial
defibrillators. InControl does not anticipate introducing a new generation
atrial defibrillator in 1997. The Company may introduce certain new leads in
1997. The successful introduction of such leads, like any new product
introduction, is dependent upon the timing and completion of the final design
work, design verification and qualification testing, component availability and
manufacture. InControl invested $23.1 million, 20.1 million and $16.4 million in
research and development for the years ended December 31, 1996, 1995 and 1994,
respectively.
CLINICAL AFFAIRS -- CLINICAL ENGINEERING AND CLINICAL RESEARCH
The Company believes that a strong technical group that supports implanting
physicians will be critical to market acceptance of the METRIX System. A
clinical engineering team is in place in Europe and the United States to conduct
training programs, attend implant procedures, and assist with patient follow-up
and device troubleshooting.
During 1996, the Company formed a Clinical Research group. This group initiates
studies into quality of life and cost of care for AF patients. InControl
believes that the outcomes from such studies are important factors which will
influence the rate of market acceptance and the availability of third-party
reimbursement for its products in the United States and Europe. Certain of these
studies are ongoing in the United States and Europe, and the Company anticipates
initiating more such studies in 1997.
SALES IN THE UNITED STATES AND EUROPE
During the investigational period of the METRIX System, the number of devices
and implant centers in the United States will be controlled by the FDA.
Marketing and promotional activities in the United States are heavily restricted
until product approval is granted. If approval to market the METRIX System in
the United States is granted by the FDA, the Company intends to establish a
direct sales force to serve the estimated 1,500 cardiac electrophysiologists in
the United States.
The Company expects that marketing and sales activities in Europe will commence
in 1997. The Company has established a subsidiary in Belgium (InControl, Europe,
S.A./N.V.) which serves as its European headquarters and base for its European
marketing, sales, regulatory, clinical engineering and administrative
activities. InControl also has sales subsidiaries in Germany (InControl, GmbH)
and France (InControl France, S.A.S.). InControl anticipates that it will add
sales and marketing personnel to all three European office in 1997 and in future
years in anticipation of European market release of its products in 1997 and the
expected growth in customers and clinical activity. The Company plans to sell
the METRIX System through a combination of a direct sales force and independent
medical device distributors in Europe. InControl anticipates that a significant
portion of its expected revenues in 1997 will be
4
<PAGE> 7
generated through its European operations. (See Notes to Consolidated Financial
Statements--Note 9, Business Segment Information")
If approval to market the TAD Products is granted by the FDA and European
regulatory authorities, InControl anticipates utilizing a combination of
distribution strategies to sell the products to customers in the United States
and Europe. These strategies may include utilization of a direct sales force,
agreements with medical products distributors, product licensing or some
combination of these approaches.
MANUFACTURING
InControl has a manufacturing facility consisting of an approximately 4,100
square foot Class-10,000 clean room and approximately 5,900 square feet of
manufacturing support area at its headquarters in Redmond, Washington. The
Company currently is assembling METRIX 3020 devices, leads, the DSA and the
Programmer at this location. The TAD Products are currently being manufactured
under contract with qualified suppliers. InControl believes that its Redmond
facility will meet the Company's manufacturing capacity requirements through
1998. During 1996, InControl was re-certified to be in compliance with the
International Standards Organization ("ISO") 9001 standards as well as with the
quality systems requirements of the European Active Implantable Device Directive
(the "AIMDD"). The Company will be required to meet and adhere to all applicable
requirements of, and the Company's manufacturing facilities will be subject to
periodic inspection by, both United States and European regulatory agencies.
The manufacturing process for the METRIX System consists primarily of assembly
of purchased components, testing operations, sterilization and packaging.
Components are purchased according to InControl's specifications from approved
suppliers. A number of product components, such as hybrid circuits, batteries,
integrated circuits, capacitors and transformers, are currently supplied by sole
source vendors. Because of the long lead time for some components, a vendor's
inability to supply such components in a timely manner and in the quantity
required would have a material adverse effect on the Company's ability to
manufacture its products . The Company believes that it is employing appropriate
action to minimize the risk of component shortages, including entering into
long-term and volume commitments and stockpiling some key materials required for
production of its products.
ATRIAL DEFIBRILLATOR MARKET
The Company expects that during the initial phase of market development, in both
the United States and Europe, the decision to treat a patient with the METRIX
3020 will be made primarily by cardiac electrophysiologists ("EPs"), specialists
in the management of patients with persistent rhythm disorders. InControl also
expects that in the initial phases of market development of the TADCATH products
the decisions to utilize the TADCATH products will also be made by the EPs.
Today, the majority of patients with AF are cared for by their general
practitioner, internist or cardiologist. Because there have been few new
electrophysiology-based therapies for AF, referral of patients to cardiac
electrophysiologists has been limited. The Company believes that, with the
introduction of the METRIX 3020, treatment referral patterns to
electrophysiologists will develop similar to referrals to electrophysiologists
for patients with persistent ventricular arrhythmias and for patients with heart
rhythm disorders responsive to ablation techniques.
The Company estimates that there are currently 1,500 electrophysiologists who
practice at 600 centers in the United States, and 500 electrophysiologists who
practice at 200 implant centers in Europe. The Company's initial marketing and
sales activities will concentrate on electrophysiologists based in those centers
most active in the implantation of ICDs.
The Company believes that the key to adoption of the METRIX System as a new
therapy will be positive clinical experience as well as continued research and
publication of results by leading electrophysiology academic researchers. In
addition to a strong clinical and research base, the Company believes that the
commercial success of the METRIX System will require active marketing and sales
efforts to build name and brand loyalty and the development of a strong clinical
engineering team to support physicians at implanting centers.
5
<PAGE> 8
POST OPERATIVE ATRIAL DEFIBRILLATION AND CARDIAC PACING HEARTWIRE MARKET
The Company expects that the decision to use TADPOLE heartwires will be made by
cardiovascular surgeons and their staff. The Company believes that this is
similar to the process that currently exists for the post-operative cardiac
pacing heartwires. InControl estimates that there are approximately 1,000
cardiac surgery centers in the United States and another 400 in Europe. The
Company's initial marketing and sales activities will concentrate on the centers
with the largest number on surgical procedures in each geographical area.
The Company believes that the key to adoption of the TADPOLE heartwires as a new
therapy will be positive clinical experience, including efficacy, safety and
ease of use, as well as publication of early clinical results by leading
cardiovascular surgery academic researchers. In addition to a strong clinical
and research base, the Company believes that the commercial success of the
TADPOLE heartwires will require active marketing and sales efforts to build name
and brand loyalty and the development of adequate supply and distribution
capabilities.
COMPETITION
METRIX System and TADCATH Products
The METRIX System is a new technology that must compete with other more
established treatments for AF such as pharmaceuticals, external electrical
cardioversion, ablation accompanied by pacemaker implantation and open-heart
surgery. Furthermore, although currently no implantable device is being marketed
to treat AF, InControl believes that manufacturers of ICD's and pacemakers are
developing dual-chamber defibrillator systems that will be used to treat
patients with both ventricular and atrial arrhythmias and may be marketed to
patients who have only AF. In addition, these and other companies, academic
institutions, governmental agencies and other research organizations may be
pursuing alternative approaches to the treatment of AF. The Company believes
that the primary competitive factors in the market for the treatment of
symptomatic AF are therapeutic efficacy, safety and patient acceptance.
TADPOLE heartwires
The TADPOLE heartwires represent a new technology that must compete with
existing treatments for temporary post-surgical AF. Existing treatments are
primarily pharmaceuticals and watchful waiting. Furthermore, although currently
no defibrillation heartwires are being marketed to treat temporary post-surgical
AF, InControl believes that manufacturers of cardiac pacing heartwires may be
attempting to develop systems that will be designed to be used to treat patients
suffering from temporary post-surgical AF. In addition, these and other
companies, academic institutions, governmental agencies and other research
organizations may be pursuing alternative approaches to the treatment of
temporary post-surgical AF. The Company believes that the primary competitive
factors in the market for the treatment of temporary post-surgical AF are
therapeutic efficacy, safety, distribution capabilities and cost
competitiveness.
PATENTS AND PROPRIETARY RIGHTS
InControl is committed to developing and protecting its intellectual property.
The Company files patent applications to protect innovative technology,
inventions and innovative improvements that are significant to the development
of its business. InControl has 49 United States and 16 non-United States patents
issued , and 16 United States and 82 non-United States patent applications
pending, covering various aspects of the Company's technology. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the medical
device industry places considerable importance on obtaining patent protection
and protecting trade secrets for new technologies, products and processes. The
Company also relies on trade secrets and know-how that it seeks to protect, in
part through confidentiality agreements with employees, consultants and other
parties.
The segment of the medical device industry that includes implantable
defibrillator systems has been characterized by extensive litigation regarding
patents and other intellectual property rights. Litigation may be necessary to
enforce
6
<PAGE> 9
patents issued to InControl, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of proprietary
rights of others. Such litigation may result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in any such litigation could
subject InControl to significant liabilities to third parties or require the
Company to seek licenses from third parties. Although patent and intellectual
property disputes in the medical device industry have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. (See "--Important Factors
Regarding Forward-Looking Statements--Industry History of Patent Litigation;
Dependence on Patents and Proprietary Rights").
The Company has six federally registered marks in the United States:
InControl(R), InControl(R) and Design, a miscellaneous design (a stylized heart
with a trailing catheter), InC(R), AAD(R), and PERIMETER(R) and has obtained
registrations in several foreign countries for the marks InControl(R) and
InControl(R) and Design. InControl also has pending applications for
registration of the marks METRIX(TM), PERIMETER SOLO(TM), TADCATH(TM),
TADPOLE(TM), ATRIOVERTER(TM) and ATRIOVERSION(TM), in the United States.
GOVERNMENT REGULATION
UNITED STATES
Under the Federal Food, Drug and Cosmetic Act (the "FDC Act"), the METRIX System
is a Class III medical device, subject to the most stringent FDA review to
ensure that the device is safe and effective before commencement of marketing,
sales and distribution in the United States. The FDA regulates the research,
development, manufacturing, packaging, labeling, distribution, promotion and
post-market surveillance of medical devices in the United States. Preclinical
studies of medical devices must be conducted in conformity with the FDA's Good
Laboratory Practice regulations. In addition, state and local permits may be
required under regulations relating to laboratory activities. During 1996, the
Company filed an Investigational Device Exemption ("IDE") application with the
FDA to begin human clinical trials of the METRIX System in the United States.
The IDE application was approved and human clinical trials began in April 1996.
These clinical trials are being managed in compliance with the FDA's regulations
regarding institutional review board approval and informed consent.
After completing the clinical trials, the Company must submit a premarket
approval ("PMA") application that is supported by extensive data, including
preclinical and clinical trial data, to prove the safety and effectiveness of
the device. In addition, the Company must submit a full description of the
device and its components, a full description of the methods, facilities and
controls used for manufacturing, and proposed labeling. In addition,
modifications may be made to the METRIX System to enhance its functionality and
performance based upon new data and design review that may necessitate
additional FDA clearances or approvals.
If the PMA application is approved and the Company markets the METRIX System,
the Company will be required to register with the FDA and to submit device
listing information for products in commercial distribution. The Company will be
inspected on a routine basis by the FDA for compliance with Good Manufacturing
Practice regulations with respect to manufacturing, testing, distribution,
storage and control activities. Labeling and promotional activities will be
subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. The Company will be required to establish and maintain a
system for tracking the METRIX System through the chain of distribution to the
patient level, to conduct post-market surveillance and to provide periodic
reports containing safety and effectiveness information.
In addition, the Medical Device Reporting ("MDR") regulation obligates the
Company to provide information to the FDA whenever there is evidence to
reasonably suggest that one of its devices may have caused or contributed to a
death or serious injury, or the device malfunctioned and the device or any other
device marketed by the Company would be likely to cause or contribute to a death
or serious injury if the malfunction were to recur.
If, as a result of FDA inspections, MDR reports or information derived from any
other source, the FDA believes that the Company is not in compliance with the
law, the FDA can refuse to clear or approve applications to market the product
in the United States or to allow the Company to enter into government supply
contracts; withdraw previously approved applications; require notification to
users regarding newly found unreasonable risks; request repair, refund
7
<PAGE> 10
or replacement of faulty devices; request corrective advertisements, institute
formal recalls or temporary marketing suspension; or institute legal proceedings
to detain or seize products, enjoin future violations or assess criminal
penalties against the Company, its officers or employees. Civil penalties for
FDC Act violations may be assessed by the FDA in lieu of or in addition to
instituting legal action. Any such action by the FDA could result in disruption
of the Company's operations for an indeterminate time. Various states in which
the Company's products may be sold in the future may impose additional
regulatory requirements. (See "--Important Factors Regarding Forward-Looking
Statements--Extensive Governmental Regulation and Uncertainty of Product
Approvals").
EUROPE
InControl intends to pursue product registration in Europe simultaneously with
its efforts in the United States. The Company intends to obtain the CE mark for
the METRIX System under the AIMDD, which will permit the METRIX System to be
marketed in countries that are members of the European Community and the
European Free Trade Association, subject to authorization at local government
levels. Pursuant to this plan, InControl is working with TUV Munich, an
organization authorized to certify that InControl is in compliance with the
AIMDD (the "Notified Body") and issue a safety opinion as to InControl's
satisfaction of requirements under the AIMDD. InControl initially received
notification of such certification in mid-1995 and also received certification
that the Company is in compliance with ISO 9001. Such certifications must be
obtained each year for the Company to remain eligible to affix the CE mark to
the METRIX System and the Company received such required re-certifications in
1996.
In April 1996, after meeting all requirements of the qualification standards of
the AIMDD, receiving a safety opinion from the Company's Notified Body and
having filed formal notifications with the regulatory agency with authority over
the approval of medical devices, the Company began clinical investigation of the
METRIX System in Europe. At the conclusion of the trial, results of the trial
will be submitted to the Notified Body for evaluation. Once the Notified Body
has tested the device for compliance with the AIMDD and has evaluated the
results of the clinical trials and the program designed to monitor manufacturing
quality, the device will be certified if the Notified Body determines that the
device and the manufacturing process comply with the requirements of the AIMDD.
If such certification is received, the CE mark may be affixed to the product
labeling. InControl anticipates receiving approval to affix the CE mark in
mid-1997. (See "--Important Factors Regarding Forward-Looking Statements--
Extensive Governmental Regulation and Uncertainty of Product Approvals").
EMPLOYEES
As of December 31, 1996, the Company had 169 employees. None of the Company's
employees are covered by collective bargaining agreements, and management
believes that its relationship with its employees is good.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following important factors, among others, could cause the Company's actual
results to differ materially from those expressed in the Company's
forward-looking statements in this report and presented elsewhere by management
from time to time.
EXTENSIVE GOVERNMENTAL REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The manufacture and sale of medical devices intended for human use are subject
to extensive governmental regulation in the United States and in other
countries. In the United States, medical devices such as the METRIX System must
undergo rigorous preclinical studies and clinical testing and an extensive FDA
approval process before they can be marketed. Similar requirements are imposed
by other countries. The METRIX System has not obtained regulatory approval to be
marketed in any country. There can be no assurance that clinical implant trials
in the Unites States or other countries will demonstrate that the METRIX System
is safe and effective. Implantable medical devices in Europe must be certified
under the AIMDD prior to marketing. Although the Company anticipates obtaining
approval to affix the CE mark to the METRIX System in mid-1997, the time
required for completing such testing and
8
<PAGE> 11
obtaining such approvals is uncertain and will depend on numerous factors,
including the performance of the implanted device in humans. The Company expects
it will file for permission from the FDA to expand its United States trials to
include additional patients and investigational centers, but completion of
United States clinical trials of the METRIX System may take several years.
Completion of European and United States clinical trials may take longer than
expected and will require the expenditure of substantial resources. The time
required for completing clinical trials will depend on a number of factors,
including the performance of the device when it is implanted in humans and the
rate at which patients can be recruited. Approval may never be obtained from the
FDA or from authorities in other countries. In addition, delays or rejections
may be encountered based on changes in FDA policy or regulations during the
period of product development and FDA regulatory review of each submitted
application. Similar delays may also be encountered in other countries. There
can be no assurance that the Company will obtain the required regulatory
clearance or approval for the METRIX System on a timely basis, if at all. If
regulatory clearance or approval of a product is granted, such clearance or
approval may entail limitations on the indicated uses for which the METRIX
System may be marketed, which may restrict the patient population on which the
METRIX System may be used. Medical devices are also subject to strict
regulations regarding manufacturing, marketing and distribution, including, in
the United States, periodic audits and surveillance by the FDA of the
manufacturing facilities of device manufacturers to determine their compliance
with GMP regulations and, in Europe, annual certification of compliance with the
quality systems requirements of the AIMDD. The failure of the Company to comply
with GMP regulations could result in penalties or enforcement proceedings being
imposed on the Company, including the recall of a product or a "cease
distribution" order requiring the Company to stop distributing products in the
United States and for export from the United States. The loss of the Company's
AIMDD quality systems certifications could prevent the Company from distributing
its products in Europe. The Company also will be required by the FDA to maintain
a system for tracking patients implanted with the METRIX device and transvenous
leads to conduct post-market surveillance and to provide periodic reports
containing safety and effectiveness information. If the FDA believes the Company
is not in compliance with applicable law, the FDA can institute legal
proceedings to detain or seize products, enjoin future violations or access
civil and criminal penalties. Any such action by the FDA could result in
disruption of the Company's operations for an indeterminate time. There can be
no assurance that the Company will be able to attain or maintain compliance with
GMP or AIMDD requirements. Failure to obtain regulatory approvals or to either
attain compliance with GMP requirements or maintain compliance with the
requirements of the various regulatory agencies would have a material adverse
effect on the Company's ability to manufacture, market and distribute its
products and therefore on its business, financial condition and ability to
market the METRIX System as currently contemplated. See "Business--
Manufacturing" and "--Governmental Regulation."
MARKET ACCEPTANCE; SUBSTANTIAL DEPENDENCE ON SINGLE PRODUCT
Even if regulatory approval to market the METRIX System is obtained, there can
be no assurance that the METRIX System will gain market acceptance. Currently,
there are no implantable devices on the market to treat AF. The METRIX System is
a new approach to the treatment of AF and the timing and rate of adoption of new
medical technology cannot be predicted. Substantial clinical experience with the
METRIX System will be required to address safety, efficacy and patient tolerance
concerns such as ventricular proarrhythmia and potential shock discomfort. There
can be no assurance that these and other concerns will be adequately addressed.
Since the Company anticipates that for the foreseeable future it will be
substantially dependent on the successful development and commercialization of
the METRIX System, failure of the Company to successfully develop and
commercialize the METRIX System would have a material adverse effect on the
Company's business, financial condition and results of operations.
HISTORY OF LOSSES; FUTURE LOSSES AND CAPITAL NEEDS
The Company has not generated significant revenues from product sales since its
incorporation in November 1990. As of December 31, 1996, the Company had an
accumulated deficit of approximately $87.6 million. The Company expects to incur
substantial additional losses, at least until the METRIX System is approved for
marketing in the United States, attributable primarily to the Company's clinical
trial activities, expansion of European operations, expansion of manufacturing
and marketing capabilities and continuing research and development activities.
The amount and timing of the Company's future revenues and losses will be
affected by, among other things, the progress and costs of preclinical studies
and clinical trials, including the recruitment of suitable patients, the timing
of regulatory approvals, the availability of third-party reimbursement for the
Company's products, the rate of market
9
<PAGE> 12
acceptance and adoption of the METRIX System, the costs associated with
increases in marketing and sales capabilities in the United States and Europe,
the costs associated with the development of manufacturing capabilities, the
costs associated with its product development efforts and the status of
competing products. There can be no assurance that the Company will ever achieve
profitability or generate significant product revenues sufficient to offset the
Company's losses. The Company will be required to obtain additional funding
through public or private financing, including equity financing, from time to
time. Adequate funds may not be available when needed or may not be available on
terms favorable to the Company. If funding is insufficient, the Company will be
required to delay, scale back or eliminate certain of its research and
development, clinical, marketing and manufacturing programs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEPENDENCE ON REIMBURSEMENT
Successful sales of the METRIX System in the United States and Europe will
depend on the availability of reimbursement from third-party payors such as
government and private insurance plans. There is significant uncertainty
concerning third-party reimbursement of investigational and newly approved
healthcare products, and there can be no assurance that third-party
reimbursement will be made available for the METRIX System or that any
third-party reimbursement that is obtained will be adequate. Government and
other third-party payors are increasingly scrutinizing patient indications for
medical device therapy and limiting coverage. The United States Health Care
Financial Administration has entered into an interagency agreement with the FDA
pursuant to which the FDA will place all IDEs that it approves into one of two
categories, "Category A" or "Category B." The METRIX System has been designated
a Category A device. Category A devices are innovative devices believed to be in
class III (the class of medical devices subject to the most stringent FDA
review) for which initial questions of safety and effectiveness have not been
resolved for the device type and will not be eligible for Medicare
reimbursement. If adequate coverage and reimbursement levels are not provided by
government and third-party payors for the METRIX System, the Company's business,
financial condition and ability to market the METRIX System as currently
contemplated would be materially adversely affected. See "Business--Third-Party
Reimbursement."
SIGNIFICANT COMPETITION
The METRIX System is a new technology that must compete with the established
treatments for AF: pharmaceuticals, external electrical cardioversion,
atrioventricular node ablation accompanied by pacemaker implantation and
open-heart surgical ablation. Furthermore, although currently no implantable
device is being marketed to treat AF, certain manufacturers of implantable
ventricular defibrillators and pacemakers are developing dual-chamber
defibrillator systems that will be used to treat patients with both ventricular
and atrial arrhythmias and may be marketed to patients who have only AF. Some of
the Company's competitors are also researching other approaches to the treatment
of AF, including endocardial ablation and preventative pacing techniques. In
addition, other companies and research organizations, academic institutions and
governmental agencies may be pursuing alternative approaches for the treatment
of AF. These entities may market products to treat AF either on their own or
through collaborative efforts. Many of the Company's competitors have
substantially greater financial and other resources, larger research and
development staffs and more experience and capabilities in conducting research
and development activities, testing products in clinical trials, obtaining
regulatory approvals and manufacturing, marketing and distributing products than
the Company. The Company's competitors may develop new technologies and products
that are available for sale prior to the METRIX System or that are more
effective than the METRIX System. In addition, competitive products may be
manufactured and marketed more successfully than the METRIX System. Such
developments could render the METRIX System less competitive or obsolete, and
could have a material adverse effect on the Company's business, financial
condition and ability to market the METRIX System as currently contemplated.
DEPENDENCE ON SOLE SOURCES OF SUPPLY
The Company relies on outside vendors to manufacture certain major components
used in the METRIX System. A number of significant components, such as hybrid
circuits, batteries, integrated circuits, capacitors and transformers, are
supplied by sole source vendors. For certain of these components, there are
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components, particularly hybrid circuits and
batteries, cannot be accomplished quickly. In addition, each supplier and each
component must be qualified with the
10
<PAGE> 13
FDA, and the time required for such qualification may be lengthy. The
establishment of additional or replacement sources of supply would require the
Company to certify the new suppliers, which in the case of certain components
would cause a delay in the Company's ability to manufacture the products. The
Company's inability to obtain acceptable components in a timely manner or find
and maintain suitable replacement suppliers would have a material adverse effect
on the Company's ability to manufacture the METRIX System and therefore on its
business, financial condition and ability to market the METRIX System as
currently contemplated. See "Business--Manufacturing."
INDUSTRY HISTORY OF PATENT LITIGATION; DEPENDENCE ON PATENTS AND
PROPRIETARY RIGHTS
The segment of the medical device industry that includes implantable
defibrillator systems has been characterized by extensive litigation regarding
patents and other intellectual property rights. Litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
proprietary rights of others. Such litigation may result in substantial expense
to the Company and significant diversion of effort by the Company's technical
and management personnel. An adverse determination in any such litigation could
subject the Company to significant liability to third parties or require the
Company to seek licenses from third parties. Although patent and intellectual
property disputes in the medical device industry have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. Moreover, there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms, if at all. If such licenses could not be obtained on
acceptable terms, the Company could be prevented from marketing the METRIX
System. Accordingly, an adverse determination in such litigation could have a
material adverse effect on the Company's business, financial condition and
ability to market the METRIX System as currently contemplated. The Company's
success will depend in part on its ability to obtain and maintain patent
protection for its technologies. There can be no assurance that issues patents
or pending applications will not be challenged or circumvented by competitors,
or that the rights granted thereunder will provide competitive advantages to the
Company.
LIMITED MANUFACTURING AND MARKETING EXPERIENCE
The METRIX System has never been manufactured on a commercial scale and there
can be no assurance that this product can be manufactured at a cost or in
quantities necessary to make it commercially viable. There can be no assurance
that the Company's reliance on others for the manufacture of its components will
not result in problems with product supply. Interruptions in the availability of
components would delay or prevent the development and commercial marketing of
the METRIX System. The Company expects to expand its domestic manufacturing
capacity and its European and domestic marketing and sales capabilities. There
can be no assurance that the Company will be able to recruit and retain skilled
sales, marketing and manufacturing management, direct salespersons or
distributors, or that the Company's expansion efforts will be successful. In
markets where the Company has entered or enters into distribution arrangements
for the sale of the METRIX System, the Company will be dependent on the efforts
of third parties. There can be no assurance that such efforts will be
successful. See "Business--Marketing, Sales and Clinical Engineering" and
"--Manufacturing."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the principal members of its scientific and
management staff, the loss of whose services might impede the achievement of its
research and development or strategic objectives. Competition among medical
device companies for highly skilled scientific and management personnel is
intense. The Company's anticipated growth and expansion in areas and activities
requiring additional expertise, such as clinical trials, manufacturing,
marketing and sales are expected to place significant increased demands on the
Company's resources. These demands are expected to require the addition of new
management personnel and the development of additional expertise by existing
management personnel. The failure to recruit such personnel, loss of existing
personnel or failure to develop such expertise would have a material adverse
effect on the Company's business, financial condition and ability to market the
METRIX System as currently contemplated.
11
<PAGE> 14
PRODUCT LIABILITY AND PRODUCT RECALL
The testing, manufacture, marketing and sale of medical devices entail the
inherent risk of liability claims or product recalls. Although the Company
maintains product liability insurance in the United States and in other
countries in which the Company intends to conduct business, including clinical
trials and product marketing and sales, there can be no assurance that such
coverage is adequate or will continue to be available. Product liability
insurance is expensive and in the future may not be available on acceptable
terms, if at all. In addition, the Company has agreed to indemnify certain of
its component suppliers for certain potential product liability. A successful
product liability claim or product recall could inhibit or prevent
commercialization of the METRIX System, or cause a significant financial burden
on the Company, or both, and could have a material adverse effect on the
Company's business, financial condition and ability to market the METRIX System
as currently contemplated.
ITEM 2. PROPERTIES
The Company leases approximately 65,000 square feet in Redmond, Washington.
These facilities contain approximately 10,000 square feet used for manufacturing
and assembly with 55,000 square feet used for research, lab space and
administrative offices. The facilities are leased through December 2003. The
Company believes that these facilities will be adequate to meet its needs
through 1999. The Company believes that it will be able to find additional space
for manufacturing and research and administrative offices as needed, without an
adverse impact on its operations.
The Company also leases approximately 4,000 square feet in Brussels, Belgium for
use as its European headquarters offices and 1,100 square feet in Lyon, France
for use as the Company's French sales office.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its properties are currently subject to any material
legal proceedings at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1996.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq National Market under the
symbol INCL. The following table sets forth, for the period since January 1,
1995, the high and low sales prices of the common stock on the Nasdaq National
Market as reported in published financial sources. These prices reflect
inter-dealer prices, without retail mark-up or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Year High Low
---- ---- ---
<S> <C> <C> <C>
1995
First quarter $10 1/4 $ 9 1/2
Second quarter $10 $ 8 3/4
Third quarter $14 1/2 $ 9 1/4
Fourth quarter $18 1/2 $11 1/4
1996
First quarter $18 $13 3/4
Second quarter $17 $11 1/4
Third quarter $12 1/8 $ 8
Fourth quarter $10 3/8 $ 7 1/8
1997
First quarter (through March 20, 1997) $10 1/4 $ 6 3/4
</TABLE>
As of March 20, 1997, there were approximately 200 holders of record of the
common stock (which does not include the number of stockholders whose shares are
held of record by a broker or clearing agency, but does include such a brokerage
house or clearing agency as one holder of record).
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain all earnings, if any, for future growth and,
therefore, does not intend to pay cash dividends on its common stock in the
foreseeable future.
13
<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from clinical trials: $ 306 $ 25 $ -- $ -- $ --
Expenses:
Research and development 23,112 20,117 16,424 9,053 3,843
Marketing and general and
administrative 7,152 4,648 2,796 1,478 839
----------- ----------- ---------- ---------- -------
30,264 24,765 19,220 10,531 4,682
Interest expense 440 485 566 279 154
Interest income (2,131) (1,512) (990) (546) (350)
----------- ----------- ---------- ---------- -------
Net loss $28,267 $ 23,713 $ 18,796 $ 10,264 $ 4,486
=========== =========== ========== ========== =======
Historical
Net loss per share(1) $ 1.77 $ 1.83 $ 3.33 $ 3.58
=========== =========== ========== ==========
Shares used in computation of
historical net loss per share(1) 15,966,399 12,934,553 5,644,504 2,863,680
=========== =========== ========== ==========
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
securities available for sale $ 37,002 $ 19,214 $ 30,444 $ 19,774 $10,130
Total assets 45,917 27,470 37,203 24,354 11,819
Long-term obligations, less
current portion 1,419 2,264 2,294 1,659 889
Total stockholders' equity(2) 41,026 22,192 32,333 21,275 10,337
</TABLE>
(1) Historical per share amounts are computed on the basis described in Note 1
of the Notes to Consolidated Financial Statements.
(2) No cash dividends have been declared.
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. The words "believe", "expect", "anticipate" and similar
expressions identify forward-looking statements. Factors that could affect the
Company's financial results are described in the following paragraphs and
elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. InControl undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events. See "Business--Important Factors Regarding
Forward Looking Statements."
OVERVIEW
Since the commencement of operations in November 1990, InControl has been
engaged in the design, development and manufacture of implantable atrial
defibrillators and related products including transvenous defibrillation leads
and temporary defibrillation catheters. During this period, the majority of the
Company's resources have been devoted to research and development activities
related to the METRIX System. Through December 1996, the Company had accumulated
a deficit of approximately $87.6 million. The Company expects to incur
substantial additional losses in the near future as any moderate increase in
revenues from expanding clinical trials and expected limited commercial release
of the Company's products should be more than offset by increases in the
Company's expenses. Increases in expenses will be due primarily to the
InControl's continuing investment in research and development efforts, the
additional expenses of the increases in clinical trial activities, the expansion
of European and domestic marketing and sales capabilities and increasing
domestic manufacturing activity. The amount and timing of the Company's future
revenues and, as a result, the amount and timing of the Company's future losses
will be affected by, among other things, the recruitment of suitable clinics and
patients, the progress of clinical trials, the timing of regulatory approvals,
the rate of market acceptance of the Company's products, and the availability of
third party reimbursement for the Company's products. The Company believes that
it will incur losses at least until the METRIX System is approved for marketing
in the United States.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES
In 1996, the Company recorded revenues from clinical trials of approximately
$306,000 from the sale of METRIX devices and accessories versus $25,000 in 1995
due to an increase in the number of devices implanted. The Company had no
revenues in any prior periods.
InControl anticipates that its revenues in 1997 will increase moderately as a
result of the Company's efforts to expand its clinical trial activities and by
the anticipated limited commercial release of its products in Europe. The
Company currently recognizes revenue from clinical investigations and trials
following the implant of a METRIX device and accessories and acknowledgment by
the clinic or hospital of its financial obligation to the Company. Following
commercial release of products the Company anticipates recognizing revenue
consistent with applicable regional, national and industry commercial practices.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $23.1 million, $20.1 million and $16.4
million for the years ended December 31, 1996, 1995, and 1994, respectively. The
increases from year to year are primarily attributable to increases in personnel
engaged in design and development work and primary research (131 at December 31,
1996,
15
<PAGE> 18
from 110 and 95 at December 31, 1995 and 1994, respectively) and
personnel-related costs, and funding of pre-clinical and clinical trials.
Research and development expenses also increased in 1996 due to manufacturing
development expenditures related to final qualification of the METRIX System and
initial production to support the commencement of clinical trials in both Europe
and the United States during 1996. InControl anticipates that it will slightly
increase its research and development expenses in connection with the continuing
investment in the development of the next generation of atrial defibrillation
devices.
MARKETING AND GENERAL AND ADMINISTRATIVE EXPENSES
Marketing and general and administrative expenses increased to $7.2 million in
1996, compared to $4.6 million in 1995 and $2.8 million in 1994. The increases
from year to year resulted primarily from increases in personnel (38 at December
31, 1996, from 30 and 21 at December 31, 1995 and 1994, respectively) and
personnel-related costs, and increases in facilities and supplies costs. The
majority of the increase in personnel during 1996 occurred within the marketing
and sales departments in the Company's European subsidiaries. InControl believes
that the intended expansion of European and domestic marketing and sales
activities and related increases in personnel and personnel related costs
associated with the expansion, will result in a substantial increase in
marketing and general and administrative expenses in 1997.
INTEREST INCOME AND INTEREST EXPENSE
The Company generated interest income on its securities available for sale
totaling $2.1 million, $1.5 million, and $990,000 for the years ended December
31, 1996, 1995, and 1994, respectively. Increases in interest income year to
year are related to the increasing average balances of investments funded with
proceeds from sales of common stock. Average investment balance increases in
1996 and 1995 resulted from a public offering of common stock completed in April
1996 and a private placement of common stock in Europe completed in July 1995.
The Company incurred interest expense of $440,000, $485,000, and $566,000 for
the years ended December 31, 1996, 1995, and 1994, respectively. The year to
year decreases are due to the Company's lower level of lease financing compared
to prior years and the subsequent lack of growth in average equipment lease
balances. Interest expense in 1997 will depend on the rate of capital
expenditures and the success and timing of the Company's efforts to secure
additional sources of lease financing for those expenditures. If additional
sources of lease financing are secured, the Company anticipates that its
interest expense will increase as a result.
LIQUIDITY AND CAPITAL RESOURCES
InControl has financed its operations since inception through the sale of common
and preferred stock, the generation of interest income and the proceeds from
equipment lease financing. Through December 1996, the Company has raised net
proceeds of $129.3 million through the sale of stock, including $46.2 million
from a public offering of common stock in 1996, $13.9 million from a private
placement of common stock in 1995, and $29.7 million from its initial public
offering in 1994, and the generation of $5.6 million of interest income on the
invested proceeds of the combined offerings. Since its inception, the Company
has invested $11.4 million in equipment and leasehold improvements and has
financed $6.0 million of these investments through leases.
At December 31, 1996, the Company had cash, cash equivalents, and securities
available for sale totaling $37.0 million, compared to a balance of $19.2
million at December 31, 1995. The increase was due primarily to the $46.2
million public offering of common stock completed in April 1996. This additional
capital was partially offset by the funding of $25.7 million in operating
activities and $2.2 million in purchases of property and equipment, and a net
reduction in lease financing of $613,000.
InControl expects that its cash needs will increase in future periods due to the
Company's expected sustained investment in research and development efforts as
well as increases in spending on clinical trial activities and the expansion of
marketing, sales and manufacturing capabilities. The Company's future capital
requirements will depend on many factors, including the progress and costs of
preclinical studies and clinical trials, including the recruitment of suitable
patients, the timing of regulatory approvals, the availability of third-party
reimbursement for
16
<PAGE> 19
the Company's products, the rate of market acceptance and adoption of the METRIX
System, the costs associated with increases in marketing and sales capabilities
in the United States and Europe, the costs associated with the development of
manufacturing capabilities, the costs associated with its product development
efforts and the status of competing products. The Company believes that existing
cash, cash equivalents and securities available for sale, and interest thereon,
will be sufficient to meet the Company's capital requirements through early
1998. Within this period, the Company will seek additional funding, through
either public or private sources, to meet its future operational requirements.
There can be no assurance such funds will be available as needed or on terms
that are acceptable to the Company. Insufficient funding will require the
Company to delay, reduce or eliminate some or all of its research and
development activities, planned clinical trials, and manufacturing and
administrative programs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
17
<PAGE> 20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InControl, Inc.
We have audited the accompanying consolidated balance sheets of InControl, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of InControl, Inc. at
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Seattle, Washington
January 29, 1997
18
<PAGE> 21
INCONTROL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,287,617 $ 2,048,600
Securities available for sale 32,714,022 17,165,307
Inventories 2,314,841 1,365,849
Prepaid expenses and other current assets 727,526 1,189,348
------------- ------------
Total current assets 40,044,006 21,769,104
Property and equipment, net 4,861,566 4,856,352
Notes receivable from employees 746,042 728,542
Other assets 265,273 115,579
------------- ------------
Total assets $ 45,916,887 $ 27,469,577
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 313,888 $ 1,005,071
Accrued expenses 1,960,642 1,018,264
Current portion of long-term obligations 1,197,614 990,773
------------- ------------
Total current liabilities 3,472,144 3,014,108
Long-term obligations, less current portion 1,418,701 2,263,767
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares--10,000,000;
Issued and outstanding shares--none -- --
Common stock, $.01 par value:
Authorized shares--40,000,000;
Issued and outstanding shares--
16,960,700 in 1996 and 13,808,432 in 1995 129,237,938 82,934,507
Accumulated deficit (87,614,031) (59,440,456)
Notes receivable from stockholders (660,000) (1,238,516)
Cumulative translation adjustment 62,135 (63,833)
------------- ------------
Total stockholders' equity 41,026,042 22,191,702
------------- ------------
Total liabilities and stockholders' equity $ 45,916,887 $ 27,469,577
============= ============
</TABLE>
See accompanying notes.
19
<PAGE> 22
INCONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues from clinical trials $ 305,605 $ 25,488 $ --
Expenses:
Research and development 23,112,242 20,116,695 16,424,184
Marketing and general and
administrative 7,151,456 4,648,130 2,795,336
------------ ------------ ------------
30,263,698 24,764,825 19,219,520
Interest expense 440,224 485,281 566,414
Interest income (2,131,572) (1,511,745) (989,731)
------------ ------------ ------------
Net loss $ 28,266,745 $ 23,712,873 $ 18,796,203
============ ============ ============
Net loss per share (Note 1) $ 1.77 $ 1.83 $ 3.33
============ ============ ============
Shares used in computation of
net loss per share 15,966,399 12,934,553 5,644,504
Pro forma net loss per share -
unaudited (Note 1) $ 1.83
============
Shares used in computation of
pro forma net loss per share -
unaudited 10,291,904
</TABLE>
See accompanying notes.
20
<PAGE> 23
INCONTROL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES TOTAL
CONVERTIBLE DURING RECEIVABLE CUMULATIVE STOCK-
PREFERRED COMMON DEVELOPMENT FROM TRANSLATION HOLDERS'
STOCK STOCK STAGE STOCKHOLDERS ADJUSTMENT EQUITY
----- ----- ----- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994 $38,134,502 $ 38,035 $(16,897,164) $ -- $ -- $ 21,275,373
Initial sale of common
stock to public,
net of issuance
costs of $2,789,982 -- 29,739,134 -- -- -- 29,739,134
Conversion of
preferred stock to
common stock (38,134,502) 38,134,502 -- -- -- --
Exercise of 1,303,802
stock options -- 1,054,010 -- -- -- 1,054,010
Unrealized losses on
securities available
for sale -- -- (362,946) -- -- (362,946)
Translation adjustment -- -- -- -- (714) (714)
Net loss for year -- -- (18,796,203) -- -- (18,796,203)
Notes receivable for
exercise of stock
options -- -- -- (575,400) -- (575,400)
----------- ------------ ------------ ----------- -------- ------------
Balance at December
31, 1994 -- 68,965,681 (36,056,313) (575,400) (714) 32,333,254
Sale of common stock
to public,
net of issuance
costs of $1,066,898 -- 13,933,102 -- -- -- 13,933,102
Exercise of 95,907
stock options -- 63,678 -- -- -- 63,678
Retirement of common
stock -- (27,954) -- 22,884 -- (5,070)
Cumulative translation
adjustment -- -- -- -- (63,119) (63,119)
Change in unrealized
gains and losses on
securities available
for sale -- -- 328,730 -- -- 328,730
Loans to stockholders -- -- -- (686,000) -- (686,000)
Net loss for year -- -- (23,712,873) -- -- (23,712,873)
----------- ------------ ------------ ----------- -------- ------------
Balance at December
31, 1995 -- 82,934,507 (59,440,456) (1,238,516) (63,833) 22,191,702
Sale of common stock
to public,
net of issuance
costs of $3,344,735 -- 46,155,265 -- -- -- 46,155,265
Exercise of 152,268
stock options -- 148,166 -- -- -- 148,166
Cumulative translation
adjustment -- -- -- -- 125,968 125,968
Change in unrealized
gains and losses on
securities available
for sale -- -- 93,170 -- -- 93,170
Reduction in loans to
stockholders -- -- -- 578,516 -- 578,516
Net loss for year -- -- (28,266,745) -- -- (28,266,745)
----------- ------------ ------------ ----------- -------- ------------
Balance at December $ -- $129,237,938 $(87,614,031) $ (660,000) $ 62,135 $ 41,026,042
31, 1996 =========== ============ ============ =========== ======== ============
</TABLE>
See accompanying notes.
21
<PAGE> 24
INCONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(28,266,745) $(23,712,873) $(18,796,203)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,492,340 2,121,088 1,463,068
Employees' compensation used to retire
loans to stockholders 552,516 -- --
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses
and other current assets 142,537 (82,099) 11,295
(Increase) in inventories (949,461) (727,808) (638,041)
Increase in accounts payable,
accrued expenses, and sales tax
payable 300,655 436,420 798,473
------------ ------------ ------------
Net cash used in operating activities (25,728,158) (21,965,272) (17,161,408)
INVESTING ACTIVITIES:
Purchases of property and equipment (2,151,267) (2,295,390) (2,642,350)
Loans to employees (60,000) (60,250) (241,381)
Proceeds from collection of employee loans 12,000 12,000 --
Purchases of securities (39,371,676) (15,703,565) (25,184,353)
Proceeds from maturity of securities 22,218,010 25,120,000 9,967,541
Proceeds from sale of securities 1,618,182 912,033 5,465,187
------------ ------------ ------------
Net cash provided by (used in) investing
activities (17,734,751) 7,984,828 (12,635,356)
FINANCING ACTIVITIES:
Repayment of note payable -- (20,498) (25,679)
Proceeds from lease financing 448,957 996,801 1,787,651
Payments on lease financing (1,061,793) (1,004,499) (769,081)
Loans to stockholders -- (686,000) --
Proceeds from collection of stockholders' loans 26,000 -- --
Proceeds from exercise of stock options 148,166 63,678 478,610
Net proceeds from sale of common stock 46,155,265 13,933,102 29,739,134
------------ ------------ ------------
Net cash provided by financing activities 45,716,595 13,282,584 31,210,635
Effect of exchange rates on cash (14,669) -- --
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 2,239,017 (697,860) 1,413,871
Cash and cash equivalents at beginning of
period 2,048,600 2,746,460 1,332,589
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,287,617 $ 2,048,600 $ 2,746,460
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 440,224 $ 498,281 $ 527,356
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
ACTIVITIES:
Notes receivable related to exercise of stock
options -- $ (22,884) $ 575,400
============ ============ ============
Conversion of preferred to common stock $ -- $ -- $ 38,134,502
============ ============ ============
</TABLE>
See accompanying notes.
22
<PAGE> 25
INCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
InControl, Inc. (the "Company"), was incorporated in the state of Delaware on
November 13, 1990. The Company is developing the METRIX automatic implantable
atrial defibrillator and related products, designed to treat AF, a common heart
rhythm disorder. The Company has devoted substantially all of its efforts to
conducting research and development activities, establishing a manufacturing
facility, recruiting and training personnel, establishing European operations,
and raising capital. Beginning in 1996 the Company began to routinely recognize
revenues from clinical trials and no longer is considered to be a development
stage company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of previously
reported amounts have been made to conform with the current year presentation.
TRANSLATION OF FOREIGN CURRENCIES
All assets and liabilities of the Company's foreign subsidiaries are translated
at exchange rates in effect on the balance sheet dates and differences due to
changing translation rates are charged or credited to "cumulative translation
adjustment" in stockholders' equity. Income and expense items are translated at
rates that approximate those in effect on transaction dates. Transaction gains
and losses had an insignificant effect on the statement of operations for all
periods presented.
CASH EQUIVALENTS
Liquid investments with a purchased maturity of three months or less are
considered to be cash equivalents. Cash equivalents are stated at cost, which
approximates fair value.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist primarily of investment-grade corporate
obligations, all of which mature in 1997.
Management currently classifies the Company's entire investment portfolio as
available-for-sale, and such securities are stated at fair value based on quoted
market prices, with the related unrealized gains and losses reflected in
stockholders' equity. Interest earned on securities available for sale is
included in interest income. The cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in interest income. Realized gains
and losses and declines in value judged to be other than temporary on securities
available for sale (none in 1996 and 1995) are also included in interest income.
The cost of securities sold is calculated using the specific identification
method.
CONCENTRATION OF CREDIT RISK
The Company is subject to concentrations of credit risk from its securities
available for sale. The Company's credit risk is managed through the purchase of
investment-grade securities and diversification of the investment portfolio
among issuers, industries, and maturities. Also see Note 2 for additional
information.
23
<PAGE> 26
INVENTORIES
Inventories are valued at the lower of cost (first in, first out method) or
market. Allowances are made for obsolete, unsalable, or unusable inventories.
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 888,639 $ 739,226
Work In Process 727,284 419,074
Finished Products 698,918 207,549
---------- ----------
$2,314,841 $1,365,849
========== ==========
</TABLE>
The Company purchases components and certain related peripheral equipment for
its products from outside vendors, including components from sole source
vendors. The establishment of additional or replacement sources of supply would
require the Company to certify the new vendors, which in the case of certain
components would cause a delay in the Company's ability to manufacture the
products.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation of property and equipment is provided using
accelerated methods over the assets' estimated useful lives, ranging from four
to seven years. Property and equipment acquired under capital leases are
amortized on a straight-line basis over the lesser of the lease term or the
assets' estimated useful lives.
REVENUE RECOGNITION
Revenue from clinical trials is recognized when there has been a device
implanted as part of the Company's ongoing clinical trials and the related
clinic or hospital recognizes that it has an obligation to the Company.
STOCK BASED COMPENSATION
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants, since all options are granted
at fair market value on date of grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The estimated value of portions of the inventory is based on assumed future
sales of inventory for clinical trials. This inventory is subject to
technological obsolescence.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of shares of
common stock. Common equivalent shares are not included in the per-share
calculation because the effect of their inclusion would be anti-dilutive, except
that, in accordance with Securities and Exchange Commission requirements, common
and common equivalent shares issued during the 12-month period immediately
preceding the Company's initial public offering have been included in the
calculation as if they were outstanding for all periods prior to the initial
public offering using the treasury stock method.
24
<PAGE> 27
The unaudited pro forma net loss per share is computed based on the historical
net loss per share adjusted for the assumed conversion of all outstanding shares
of convertible preferred stock into common stock at the time of issuance,
through the date of the Company's initial public offering.
2. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Corporate Bonds $32,035,614 $ 76,984 $(17,966) $32,094,632
Certificates of Deposit 308,533 -- -- 308,533
Government Bonds 310,925 -- (68) 310,857
----------- -------- -------- -----------
Total securities available for sale $32,655,072 $ 76,984 $(18,034) $32,714,022
=========== ======== ======== ===========
</TABLE>
Securities available for sale consist of the following at December 31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Corporate Bonds $14,469,052 $14,333 $( 30,273) $14,453,112
Bankers Acceptances 1,314,415 -- (20,416) 1,293,999
Government Bonds 1,416,056 2,140 -- 1,418,196
----------- ------- --------- -----------
Total securities available for sale $17,199,523 $16,473 $( 50,689) $17,165,307
=========== ======= ========= ===========
</TABLE>
The net adjustment for unrealized gains or (losses) on available-for-sale
securities included as a component of stockholders' equity was $58,950 and
($34,216) at December 31, 1996 and 1995 respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Computer equipment and software $ 4,074,997 $3,295,524
Engineering and production equipment 3,364,771 2,633,604
Manufacturing fixtures, furniture, and office equipment 3,894,807 3,264,046
----------- ----------
11,334,575 9,193,174
Less accumulated depreciation and amortization 6,473,009 4,336,822
----------- ----------
$ 4,861,566 $4,856,352
=========== ==========
</TABLE>
25
<PAGE> 28
Included above are assets acquired under capital leases as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Computer equipment and software $2,142,227 $1,869,632
Engineering and production equipment 2,503,353 2,347,634
Manufacturing fixtures, furniture, and office equipment 1,137,627 849,233
---------- ---------
5,783,207 5,066,499
Less accumulated amortization 4,068,759 2,918,151
---------- ----------
$1,714,448 $2,148,348
========== ==========
</TABLE>
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Capital lease obligations $2,480,362 $3,142,142
Deferred rent 23,227 --
Deferred sales tax 112,726 112,398
---------- ----------
2,616,315 3,254,540
Less current portion 1,197,614 990,773
---------- ----------
$1,418,701 $2,263,767
========== ==========
</TABLE>
Deferred sales tax represents sales tax on property and equipment purchases. The
Company has obtained approval from the State of Washington Department of Revenue
to delay payment of sales tax for three years after asset acquisition. The
amount is payable over five years with no interest. Remaining payments are due
as follows:
$20,514 in 1997; $27,353 in 1998; $34,191 in 1999; and $30,668 in 2000.
The Company has entered into sale-leaseback arrangements whereby certain
property and equipment are financed through 2 to 4 year capitalized lease
obligations at interest rates ranging from approximately 10% to 16%. The
obligations are secured by the assets under lease. See Notes 3 and 7 for
additional information.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
Information regarding common stock activity for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Shares issued and outstanding at beginning of year 13,808,432 12,181,983
Sale of common stock 3,000,000 1,558,442
Stock options exercised 152,268 95,907
Stock retired -- (27,900)
---------- ----------
Shares issued and outstanding at end of year 16,960,700 13,808,432
========== ==========
</TABLE>
At December 31, 1996 the Company had reserved 3,429,787 shares of common stock
for the exercise of stock options and warrants.
26
<PAGE> 29
WARRANTS
At December 31, 1996, the Company had warrants outstanding for 341,963 shares of
common stock, at exercise prices ranging from $6.40 to $10.04. These warrants
expire in 1997 and 1998.
.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock Based Compensation," (Statement 123) requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company maintains three stock option plans. One plan is for the granting of
stock options to employees, another plan is for the granting of options to
non-employee directors of the Company, and the final plan governs certain
options previously granted to non-employee directors of the Company. Stock
options generally have a ten year term and generally vest ratably over a
four-year period.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995 respectively: risk free interest rates of 6.02% and 6.13%; volatility
factors of the expected market price of the Company's common stock of .35 and
.60; an expected life of the options of 2.93 and 2.97; and a dividend yield rate
of 0% for both years.
The Black -Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss as reported $28,266,745 $23,712,873
Pro forma net loss $30,097,745 $24,977,873
Pro forma net loss per share $ 1.89 $ 1.93
</TABLE>
27
<PAGE> 30
A summary of the Company's stock option activity, and related weighted-average
exercise prices for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ------------------------ ------------------------
Exercise Exercise Exercise
OPTIONS Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at
beginning of year 1,879,610 $ 8.07 967,171 $ 3.46 1,750,662 $0.60
Granted 763,250 $11.97 1,026,014 $11.65 539,235 $6.26
Exercised (152,268) $ 0.97 (95,907) $ 0.67 (1,303,803) $0.81
Canceled (114,375) $10.60 (17,668) $ 3.66 (18,923) $1.33
--------- --------- ----------
Balance at
end of year 2,376,217 $ 9.66 1,879,610 $ 8.07 967,171 $3.46
========= ========= ==========
Exercisable at
end of year 888,687 $ 7.53 737,275 $ 6.44 186,092 $0.63
========= ========= ==========
Available for grant
at end of year 711,607 206,482 438,828
========= ========= ==========
Weighted-average fair value of
options granted during the year $ 3.56
=======
</TABLE>
Information regarding the weighted-average remaining contractual life and
weighted-average exercise price of options outstanding and options exercisable
at December 31, 1996 for selected exercise price ranges is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING Options Exercisable
----------------------------------------- --------------------------
REMAINING
RANGE OF CONTRACTUAL Number Exercise NUMBER Exercise
EXERCISE PRICES LIFE IN YEARS Outstanding Price EXERCISABLE Price
- --------------- ------------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 8.00 1.99 460,233 $ 2.00 323,626 $ 1.78
$ 8.13 - $12.00 8.57 1,306,057 $ 9.83 488,061 $ 9.95
$12.50 - $16.00 9.34 405,100 $13.72 22,417 $12.90
$16.13 - $18.00 8.88 204,827 $17.70 54,583 $17.81
--------- -------
$ 0.20 - $18.00 7.46 2,376,217 $ 9.66 888,687 $ 7.53
========= =======
</TABLE>
NOTES RECEIVABLE FROM STOCKHOLDERS
On March 31, 1994, the Company's Board of Directors approved the acceleration of
vesting of certain options for continuing employees holding a minimum number of
options who elected to exercise such options. The Company has the right to
repurchase certain of these shares, at original issue price, in the event the
holder's relationship with the Company terminates. The repurchase rights expire
ratably through 1998. At December 31, 1996, 154,484 outstanding common shares
were subject to repurchase.
28
<PAGE> 31
In connection with the exercise of these options (in addition to existing vested
options), the holders could elect to have the Company carry a note for up to 75%
of the purchase price. On December 31, 1995, the Company held notes in the
amount of $552,516. In April 1996 the Company's Board of Directors approved a
one-time bonus to holders of these notes. The participating employees elected to
receive payment of the bonus by offsetting principal and interest of these
notes.
During 1995, additional loans of $686,000 were made to participants of the
accelerated option vesting program. These loans were used to pay the associated
tax liabilities arising from the exercise of the program's options. These loans
accrue interest at rates of 6.8% and 7.19%. Interest is due on the anniversary
dates of the loans with the balance of the loans due on the second anniversary
date. The loans originally matured in January and April of 1997, but were
extended by the Company's Board of Directors in December 1996 for an additional
twelve months. All loans are secured by common stock.
6. INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $84.0 million for federal income tax purposes that expire in the
years 2005 through 2011. Utilization of federal income tax carryforwards is
subject to certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 28,555 $ 19,828
Accruals for book purposes in excess of tax purposes 832 120
Research and development tax credit carryforward 1,147 1,115
Property and equipment basis differences 286 109
Other (6) 72
-------- --------
Total deferred tax assets 30,814 21,244
Valuation allowance (30,814) (21,244)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
Due to uncertainty of the Company's ability to generate taxable income needed to
realize its net deferred tax assets at December 31, 1996 and 1995, a valuation
allowance has been recognized for financial reporting purposes. The Company's
valuation allowance increased $9.6 million and $8.6 million for the years ended
December 31, 1996 and 1995, respectively.
7. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases, and furniture and equipment under capital leases. Future minimum
payments under these leases at December 31, 1995 are as follows:
29
<PAGE> 32
<TABLE>
<CAPTION>
CAPITAL OPERATING
FOR THE YEARS ENDING DECEMBER 31: LEASES LEASES
- --------------------------------- ------ ------
<S> <C> <C>
1997 $1,485,294 $1,023,557
1998 1,038,159 1,014,383
1999 351,995 977,882
2000 37,009 487,775
2001 9,089 110,571
Thereafter -- --
---------- ----------
Total minimum lease payments 2,921,546 $3,614,168
==========
Less amount representing interest 441,184
----------
Present value of net minimum capital lease obligations 2,480,362
Less current installments 1,197,614
----------
Capital lease obligations, less current installments $1,282,748
==========
</TABLE>
Total rent expense for the years ended December 31, 1996, 1995, and 1994 was
$1,083,308, $1,120,335, and $564,343, respectively.
The Company has entered into agreements that require the Company to purchase
goods and services in 1997 for research and development purposes of
approximately $1.4 million. These agreements do not extend beyond 1997.
8. NOTES RECEIVABLE FROM EMPLOYEES
The Company has made advances and loans to employees in connection with their
relocation to Washington State. Notes totaling $741,042 are with the Company's
Chief Executive Officer. Interest on these loans is set at 4.94% per annum, or
the minimum interest necessary to prevent each loan from being classified as a
"below market loan" under Section 7872 of the Internal Revenue Code of 1986, as
amended, but not to exceed 8% in any event. The officer has pledged 70,000
shares of common stock as collateral for these loans.
Other notes, which are unsecured, may be, in some circumstances, forgiven
ratably over four years and charged to expense.
Information with respect to the classification of employee notes receivable is
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $ 20,000 $ 66,417
Long term 746,042 728,542
-------- --------
Total notes receivable from employees $766,042 $794,959
======== ========
</TABLE>
30
<PAGE> 33
9. BUSINESS SEGMENT INFORMATION
The Company is developing a new therapy for the treatment of AF. As such, the
Company operates only in the medical device business segment. In 1995 the
Company began clinical trials in Europe and in 1996 began clinical trials in the
United States. Information regarding the Company's revenues and assets in
different geographic areas is set forth below. Amounts presented for Europe
include revenues from a clinic in Hong Kong. Corporate assets represent cash,
cash equivalents and securities available for sale that are held in the United
States.
<TABLE>
<CAPTION>
Geographic information for 1996:
NORTH AMERICA EUROPE CONSOLIDATED
------------- ------ ------------
<S> <C> <C> <C>
Revenue from clinical trials $ 86,680 $ 218,925 $ 305,605
========== ========== ===========
Identifiable assets $8,394,711 $1,935,506 $10,330,217
========== ==========
Corporate assets 35,586,670
-----------
Total assets $45,916,887
===========
<CAPTION>
Geographic information for 1995:
NORTH AMERICA EUROPE CONSOLIDATED
------------- ------ ------------
<S> <C> <C> <C>
Revenue from clinical trials $ -- $ 25,488 $ 25,488
========== ======== ===========
Identifiable assets $8,531,611 $609,335 $ 9,140,946
========== ========
Corporate assets 18,328,631
-----------
Total assets $27,469,577
===========
</TABLE>
31
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the information under the captions "Election of
Director," "Executive Officers," and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement relating to its 1997 annual
meeting of stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information under the captions "Election of
Director" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the captions "Election of
Director," "Executive Compensation," and "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the captions "Election of
Director" and "Certain Relationships and Related Transactions" in the Proxy
Statement.
32
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Schedules
The following Consolidated Financial Statements, Notes thereto, and Report of
Independent Auditors thereon are included in Part II, Item 8.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
</TABLE>
Financial Statement Schedules
There are no Financial Statement Schedules included in this report because they
are inapplicable or the requested information is shown in the consolidated
financial statements of the registrant or related notes thereto.
Exhibits
Exhibit No.
<TABLE>
<CAPTION>
<S> <C> <C>
(i) 3.1 Restated Certificate of Incorporation
3.2 Amended and Restated By-laws
(ii) 4.1 Rights Agreement, dated as of February 27, 1996, between the
registrant and First Interstate Bank of Washington, N.A., as
Rights Agent. (Exhibit 2.1)
10.1 Executive Employment Agreement between the registrant and Kurt
C. Wheeler, dated April 1, 1995, together with First Amendment
thereto dated September 30, 1996, related Promissory Note and
Stock Pledge Agreement, each dated October 1, 1993 and related
Promissory Note, dated September 30, 1996.
(iii) 10.2 Lease and related Agreement between Michael R. Mastro and
Redmond East Associates, and the registrant, dated August 19,
1991 ("Lease"), as amended by addendum dated August 19, 1991,
and amendments dated June 1, 1992 and October 15, 1992.
(Exhibit 10.2)
10.3 Ninth Amendment to Lease between Carr Redmond Corporation
(successor to Redmond East Associates) and registrant dated
January 31, 1997.
10.4 Restated 1990 Stock Option Plan
10.5 1994 Stock Option Plan for Nonemployee Directors
10.6 1996 Stock Option Plan for Nonemployee Directors
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
<S> <C> <C>
10.7 Employment Agreement between the registrant and Michel E.
Lussier, dated August 17, 1994.
(iii) 10.8 Promissory Note, dated May 17, 1994, issued to the registrant
by Kurt C. Wheeler (Exhibit 10.7)
(iii) 10.9 Promissory Note, dated May 16, 1994, issued to the registrant
by John M. Adams (Exhibit 10.8)
(iii) 10.10 Form of Warrants to Purchase Stock issued to private
placement agents, together with schedule of actual warrants
(Exhibit 10.12)
(iii) 10.11 Agreement between Teleydne Microelectronics and the
registrant, dated March 17, 1993 (Exhibit 10.13)
(iii) 10.12 Form of Proprietary Information Agreement (Exhibit 10.15)
(iii) 10.13 Restated Stockholders Rights Agreement, dated August 17, 1993
(Exhibit 10.16)
(iii) 10.14 Form of Stock Repurchase Agreement, Promissory Note and
Stock Pledge Agreement, together with schedule of actual
agreements (Exhibit 10.17)
(iii) 10.15 Form of Indemnification Agreement for officers and directors
(Exhibit 10.18)
10.16 Form of Senior Management Employment Agreement, together with
schedule of actual agreements.
(i) 21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on the signature page of this Form
10-K)
27.1 Financial Data Schedule
</TABLE>
- --------------------------
(i) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31,1995, as same Exhibit Number.
(ii) Incorporated by reference to the Company's Registration Statement on Form
8-A, as amended, filed March 1, 1996, as the indicated Exhibit Number.
(iii) Incorporated by reference to the registrant's Registration Statement on
Form S-1, as amended, Registration No. 33-81048, as the indicated Exhibit
Number.
Reports on Form 8-K
During the quarter ended December 31, 1994, no reports were filed by the Company
on Form 8-K.
34
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Redmond, State of
Washington, on the 24th day of March 1997.
INCONTROL, INC.
By: /s/ KURT C. WHEELER
------------------------------------
Kurt C. Wheeler
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Kurt C. Wheeler and Donald F. Seaton, III, and each of them, with full
power of substitution and full power to act without the other, as his true and
lawful attorney-in-fact and agent to act in his place and stead, and to execute
in the name and on behalf of each person, individually and in each capacity
stated below, and to file any and all amendments to this report, including any
and all other documents in connection therewith.
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons in the capacities indicated below on the 24th
day of March 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ KURT C. WHEELER Chairman, President and Chief Executive Officer
- ----------------------------------
Kurt C. Wheeler
/s/ DONALD F. SEATON, III Vice President, Finance, Chief Financial Officer
- ---------------------------------- and Secretary
Donald F. Seaton, III
/s/ ALAN D. FRAZIER Director
- ----------------------------------
Alan D. Frazier
/s/ MARK B. KNUDSON Director
- ----------------------------------
Mark B. Knudson
/s/ DONALD C. HARRISON Director
- ----------------------------------
Donald C. Harrison
/s/ MICHAEL J. LEVINTHAL Director
- ----------------------------------
Michael J. Levinthal
</TABLE>
35
<PAGE> 38
EXHIBIT INDEX
Exhibits
Exhibit No.
<TABLE>
<CAPTION>
<S> <C> <C>
(i) 3.1 Restated Certificate of Incorporation
3.2 Amended and Restated By-laws
(ii) 4.1 Rights Agreement, dated as of February 27, 1996, between the
registrant and First Interstate Bank of Washington, N.A., as
Rights Agent. (Exhibit 2.1)
10.1 Executive Employment Agreement between the registrant and Kurt
C. Wheeler, dated April 1, 1995, together with First Amendment
thereto dated September 30, 1996, related Promissory Note and
Stock Pledge Agreement, each dated October 1, 1993 and related
Promissory Note, dated September 30, 1996.
(iii) 10.2 Lease and related Agreement between Michael R. Mastro and
Redmond East Associates, and the registrant, dated August 19,
1991 ("Lease"), as amended by addendum dated August 19, 1991,
and amendments dated June 1, 1992 and October 15, 1992.
(Exhibit 10.2)
10.3 Ninth Amendment to Lease between Carr Redmond Corporation
(successor to Redmond East Associates) and registrant dated
January 31, 1997.
10.4 Restated 1990 Stock Option Plan
10.5 1994 Stock Option Plan for Nonemployee Directors
10.6 1996 Stock Option Plan for Nonemployee Directors
10.7 Employment Agreement between the registrant and Michel E.
Lussier, dated August 17, 1994.
(iii) 10.8 Promissory Note, dated May 17, 1994, issued to the registrant
by Kurt C. Wheeler (Exhibit 10.7)
(iii) 10.9 Promissory Note, dated May 16, 1994, issued to the registrant
by John M. Adams (Exhibit 10.8)
(iii) 10.10 Form of Warrants to Purchase Stock issued to private
placement agents, together with schedule of actual warrants
(Exhibit 10.12)
(iii) 10.11 Agreement between Teleydne Microelectronics and the
registrant, dated March 17, 1993 (Exhibit 10.13)
(iii) 10.12 Form of Proprietary Information Agreement (Exhibit 10.15)
(iii) 10.13 Restated Stockholders Rights Agreement, dated August 17, 1993
(Exhibit 10.16)
(iii) 10.14 Form of Stock Repurchase Agreement, Promissory Note and
Stock Pledge Agreement, together with schedule of actual
agreements (Exhibit 10.17)
(iii) 10.15 Form of Indemnification Agreement for officers and directors
(Exhibit 10.18)
10.16 Form of Senior Management Employment Agreement, together with
schedule of actual agreements.
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
<S> <C> <C>
(i) 21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (included on the signature page of this Form
10-K)
27.1 Financial Data Schedule
</TABLE>
- --------------------------
(i) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31,1995, as same Exhibit Number.
(ii) Incorporated by reference to the Company's Registration Statement on Form
8-A, as amended, filed March 1, 1996, as the indicated Exhibit Number.
(iii) Incorporated by reference to the registrant's Registration Statement on
Form S-1, as amended, Registration No. 33-81048, as the indicated Exhibit
Number.
37
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
INCONTROL, INC.
Adopted by the Board of Directors on September 24, 1996
Amendments are listed on p. i
<PAGE> 2
INCONTROL, INC.
AMENDMENTS
Date of
Section Effect of Amendment Amendment
- ------------ ----------------------------------------- ---------------
-i-
<PAGE> 3
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1. OFFICES............................................... 1
SECTION 2. STOCKHOLDERS ......................................... 1
2.1 Annual Meeting ....................................... 1
2.2 Special Meetings ..................................... 1
2.3 Place of Meeting ..................................... 1
2.4 Notice of Meeting .................................... 2
2.5 Business for Stockholders' Meetings .................. 2
2.5.1 Business at Annual Meetings ................. 2
2.5.2 Business at Special Meetings ................ 3
2.5.3 Notice to Corporation ....................... 3
2.6 Waiver of Notice ..................................... 3
2.6.1 Waiver in Writing ........................... 3
2.6.2 Waiver by Attendance ........................ 3
2.7 Fixing of Record Date for Determining
Stockholders ......................................... 3
2.7.1 Meetings .................................... 3
2.7.2 Consent to Corporate Action Without a
Meeting ..................................... 4
2.7.3 Dividends, Distributions and Other
Rights ...................................... 4
2.8 Voting List .......................................... 5
2.9 Quorum ............................................... 5
2.10 Manner of Acting ..................................... 5
2.11 Proxies .............................................. 6
2.11.1 Appointment ................................. 6
2.11.2 Delivery to Corporation; Duration ........... 6
2.12 Voting of Shares ..................................... 6
2.13 Voting for Directors ................................. 6
2.14 Inspectors of Election ............................... 7
2.14.1 Appointment ................................. 7
2.14.2 Duties ...................................... 7
SECTION 3. BOARD OF DIRECTORS ................................... 7
3.1 General Powers ....................................... 7
3.2 Number and Tenure .................................... 8
3.3 Nomination and Election .............................. 8
3.3.1 Nomination .................................. 8
3.3.2 Election .................................... 9
3.4 Annual and Regular Meetings .......................... 9
3.5 Special Meetings ..................................... 9
3.6 Meetings by Telephone ................................ 9
3.7 Notice of Special Meetings ........................... 9
3.7.1 Personal Delivery ........................... 9
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
3.7.2 Delivery by Mail ............................ 10
3.7.3 Delivery by Private Carrier ................. 10
3.7.4 Facsimile Notice ............................ 10
3.7.5 Delivery by Telegraph ....................... 10
3.7.6 Oral Notice ................................. 10
3.8 Waiver of Notice ..................................... 10
3.8.1 In Writing .................................. 10
3.8.2 By Attendance ............................... 10
3.9 Quorum ............................................... 11
3.10 Manner of Acting ..................................... 11
3.11 Presumption of Assent ................................ 11
3.12 Action by Board or Committees Without a Meeting ...... 11
3.13 Resignation .......................................... 11
3.14 Removal .............................................. 12
3.15 Vacancies ............................................ 12
3.16 Committees ........................................... 12
3.16.1 Creation and Authority of Committees ........ 12
3.16.2 Audit Committee ............................. 12
3.16.3 Compensation Committee ...................... 13
3.16.4 Nominating and Organization Committee ....... 13
3.16.5 Minutes of Meetings ......................... 13
3.16.6 Quorum and Manner of Acting ................. 13
3.16.7 Resignation ................................. 14
3.16.8 Removal ..................................... 14
3.17 Compensation ......................................... 14
SECTION 4. OFFICERS ............................................. 14
4.1 Number ............................................... 14
4.2 Election and Term of Office .......................... 14
4.3 Resignation .......................................... 15
4.4 Removal .............................................. 15
4.5 Vacancies ............................................ 15
4.6 Chairman of the Board ................................ 15
4.7 President ............................................ 15
4.8 Vice President ....................................... 15
4.9 Secretary ............................................ 16
4.10 Treasurer ............................................ 16
4.11 Salaries ............................................. 16
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS ................ 16
5.1 Contracts ............................................ 16
5.2 Loans to the Corporation ............................. 17
5.3 Checks, Drafts, Etc. ................................. 17
5.4 Deposits ............................................. 17
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER ........... 17
6.1 Issuance of Shares ................................... 17
6.2 Certificates for Shares .............................. 17
6.3 Stock Records ........................................ 18
6.4 Transfer of Shares ................................... 18
6.5 Lost or Destroyed Certificates ....................... 18
SECTION 7. BOOKS AND RECORDS .................................... 18
SECTION 8. ACCOUNTING YEAR ...................................... 18
SECTION 9. SEAL ................................................. 18
SECTION 10. INDEMNIFICATION ...................................... 19
10.1 Right to Indemnification ............................. 19
10.2 Right of Indemnitee to Bring Suit .................... 19
10.3 Nonexclusivity of Rights ............................. 20
10.4 Insurance, Contracts and Funding ..................... 20
10.5 Indemnification of Employees and Agents of the
Corporation .......................................... 20
10.6 Persons Serving Other Entities ....................... 21
10.7 Procedures for the Submission of Claims .............. 21
SECTION 11. AMENDMENTS OR REPEAL ................................. 21
</TABLE>
-iv-
<PAGE> 6
AMENDED AND RESTATED BYLAWS
OF
INCONTROL, INC.
SECTION 1. OFFICES
The principal office of the corporation shall be located at its principal
place of business or such other place as the Board of Directors (the "Board")
may designate. The corporation may have such other offices, either within or
without the state of Delaware, as the Board may designate or as the business of
the corporation may require from time to time.
SECTION 2. STOCKHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the stockholders shall be held the second Tuesday of
May in each year at the principal office of the corporation or such other place
designated by the Board for the purpose of electing Directors and transacting
such other business as may properly come before the meeting. If the day fixed
for the annual meeting is a legal holiday at the place of the meeting, the
meeting shall be held on the next succeeding business day. If the annual meeting
is not held on the date designated therefor, the Board shall cause the meeting
to be held as soon thereafter as may be convenient.
At any time prior to the commencement of the annual meeting, the Board may
postpone the annual meeting for a period of up to one hundred twenty days from
the date fixed for such meeting in accordance with this Subsection 2.1.
2.2 SPECIAL MEETINGS
The Chairman of the Board, the President, the Board or the holders of not
less than thirty percent of all the outstanding shares of the corporation
entitled to vote on any issue proposed to be considered at the meeting may call
special meetings of the stockholders for any purpose.
2.3 PLACE OF MEETING
All meetings shall be held at the principal office of the corporation or
at such other place within or without the state of Delaware designated by the
Board, by any persons entitled to call a meeting hereunder or in a waiver of
notice signed by all of the stockholders entitled to notice of the meeting.
<PAGE> 7
2.4 NOTICE OF MEETING
The Chairman of the Board, the President, the Secretary, the Board, or
stockholders calling an annual or special meeting of stockholders as provided
for herein, shall cause to be delivered to each stockholder entitled to notice
of or to vote at the meeting either personally or by mail, not less than 10 nor
more than 60 days before the meeting, written notice stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. At any time, upon written request of
the holders of not less than the number of outstanding shares of the corporation
specified in subsection 2.2 hereof and entitled to vote at the meeting, it shall
be the duty of the Secretary to give notice of a special meeting of stockholders
to be held on such date and at such place and hour as the Secretary may fix, not
less than 10 nor more than 60 days after receipt of said request, and if the
Secretary shall neglect or refuse to issue such notice, the person making the
request may do so and may fix the date for such meeting. If such notice is
mailed, it shall be deemed delivered when deposited in the official government
mail properly addressed to the stockholder at such stockholder's address as it
appears on the stock transfer books of the corporation with postage prepaid. If
the notice is telegraphed, it shall be deemed delivered when the content of the
telegram is delivered to the telegraph company. Notice given in any other manner
shall be deemed delivered when dispatched to the stockholder's address,
telephone number or other number appearing on the stock transfer records of the
corporation.
2.5 BUSINESS FOR STOCKHOLDERS' MEETINGS
2.5.1 BUSINESS AT ANNUAL MEETINGS
In addition to the election of directors, other proper business may be
transacted at an annual meeting of stockholders, provided that such business is
properly brought before such meeting. To be properly brought before an annual
meeting, business must be (a) brought by or at the direction of the Board or (b)
brought before the meeting by a stockholder pursuant to written notice thereof,
in accordance with subsection 2.5.3 hereof, and received by the Secretary not
fewer than 60 nor more than 90 days prior to the date specified in subsection
2.1 hereof for such annual meeting (or if less than 60 days' notice or prior
public disclosure of the date of the annual meeting is given or made to the
stockholders, not later than the tenth day following the day on which the notice
of the date of the annual meeting was mailed or such public disclosure was
made). Any such stockholder notice shall set forth (i) the name and address of
the stockholder proposing such business; (ii) a representation that the
stockholder is entitled to vote at such meeting and a statement of the number of
shares of the corporation which are beneficially owned by the stockholder; (iii)
a representation that the stockholder intends to appear in person or by proxy at
the meeting to propose such business; and (iv) as to each matter the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting, the language of the proposal (if appropriate), and any
material interest of the stockholder in such business. No business shall be
conducted at any annual meeting of stockholders except in accordance with this
subsection 2.5.1. If the facts warrant, the Board, or the chairman of an annual
meeting of stockholders, may
-2-
<PAGE> 8
determine and declare (a) that a proposal does not constitute proper business to
be transacted at the meeting or (b) that business was not properly brought
before the meeting in accordance with the provisions of this subsection 2.5.1
and, if, in either case, it is so determined, any such business shall not be
transacted. The procedures set forth in this subsection 2.5.1 for business to be
properly brought before an annual meeting by a stockholder are in addition to,
and not in lieu of, the requirements set forth in Rule 14a-8 under Section 14 of
the Securities Exchange Act of 1934, as amended, or any successor provision.
2.5.2 BUSINESS AT SPECIAL MEETINGS
At any special meeting of the stockholders, only such business as is
specified in the notice of such special meeting given by or at the direction of
the person or persons calling such meeting, in accordance with subsection 2.4
hereof, shall come before such meeting.
2.5.3 NOTICE TO CORPORATION
Any written notice required to be delivered by a stockholder to the
corporation pursuant to subsection 2.4, subsection 2.5.1 or subsection 2.5.2
hereof must be given, either by personal delivery or by registered or certified
mail, postage prepaid, to the Secretary at the corporation's executive offices
in the city of Redmond, state of Washington.
2.6 WAIVER OF NOTICE
2.6.1 WAIVER IN WRITING
Whenever any notice is required to be given to any stockholder under
the provisions of these Bylaws, the corporation's Certificate of Incorporation,
as at any time amended (the "Certificate of Incorporation") or the General
Corporation Law of the state of Delaware, as now or hereafter amended (the
"DGCL"), a waiver thereof in writing, signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
2.6.2 WAIVER BY ATTENDANCE
The attendance of a stockholder at a meeting shall constitute a
waiver of notice of such meeting, except when a stockholder 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.
2.7 FIXING OF RECORD DATE FOR DETERMINING STOCKHOLDERS
2.7.1 MEETINGS
For the purpose of determining stockholders entitled to notice of and to
vote at any meeting of stockholders or any adjournment thereof, the Board may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is
-3-
<PAGE> 9
adopted by the Board, and which record date shall not be more than 60 (or the
maximum number permitted by applicable law) nor less than 10 days before the
date of such meeting. If no record date is fixed by the Board, the record date
for determining stockholders entitled to notice of and 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. A determination of
stockholders of record entitled to notice of and to vote at the meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
2.7.2 CONSENT TO CORPORATE ACTION WITHOUT A MEETING
Action by written consent in lieu of a meeting of stockholders may be
taken only to the extent not restricted by the Certificate of Incorporation. For
the purpose of determining stockholders entitled to consent to corporate action
in writing without a meeting, the Board may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board, and which date shall not be more than 10 (or the maximum
number permitted by applicable law) days after the date upon which the
resolution fixing the record date is adopted by the Board. If no record date has
been fixed by the Board, the record date for determining stockholders entitled
to consent to corporate action in writing without a meeting, when no prior
action by the Board is required by Chapter 1 of the DGCL, shall be the first
date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the corporation by delivery to its
registered office in the state of Delaware, its principal place of business, or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the Board
and prior action by the Board is required by Chapter 1 of the DGCL, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on which
the Board adopts the resolution taking such prior action.
2.7.3 DIVIDENDS, DISTRIBUTIONS AND OTHER RIGHTS
For the purpose of determining stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders 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 may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted, and which record
date shall be not more than 60 (or the maximum number permitted by applicable
law) days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board adopts the resolution relating thereto.
-4-
<PAGE> 10
2.8 VOTING LIST
At least 10 days before each meeting of stockholders, a complete list of
the stockholders entitled to vote at such meeting, or any adjournment thereof,
shall be made, arranged in alphabetical order, with the address of and number of
shares held by each stockholder. This list shall be open to examination by any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of 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. This list shall also be produced and kept at such meeting for
inspection by any stockholder who is present.
2.9 QUORUM
A majority of the outstanding shares of the corporation entitled to vote,
present in person or represented by proxy at the meeting, shall constitute a
quorum at a meeting of the stockholders; provided, that where a separate vote by
a class or classes is required, a majority of the outstanding shares of such
class or classes, present in person or represented by proxy at the meeting,
shall constitute a quorum entitled to take action with respect to that vote on
that matter. If less than a majority of the outstanding shares entitled to vote
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. If a quorum is
present or represented at a reconvened meeting following such an adjournment,
any business may be transacted that might have been transacted at the meeting as
originally called. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
2.10 MANNER OF ACTING
In all matters other than the election of Directors, if a quorum is
present, the affirmative vote of the majority of the outstanding shares present
in person or represented by proxy at the meeting and entitled to vote on the
subject matter shall be the act of the stockholders, unless the vote of a
greater number is required by these Bylaws, the Certificate of Incorporation or
the DGCL. Where a separate vote by a class or classes is required, if a quorum
of such class or classes is present, the affirmative vote of the majority of
outstanding shares of such class or classes present in person or represented by
proxy at the meeting shall be the act of such class or classes. Directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
Directors.
-5-
<PAGE> 11
2.11 PROXIES
2.11.1 APPOINTMENT
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by proxy. Such
authorization may be accomplished by (a) the stockholder or such stockholder's
authorized officer, director, employee or agent executing a writing or causing
his or her signature to be affixed to such writing by any reasonable means,
including facsimile signature or (b) by transmitting or authorizing the
transmission of a telegram, cablegram or other means of electronic transmission
to the intended holder of the proxy or to a proxy solicitation firm, proxy
support service or similar agent duly authorized by the intended proxy holder to
receive such transmission; provided, that any such telegram, cablegram or other
electronic transmission must either set forth or be accompanied by information
from which it can be determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
by which a stockholder has authorized another person to act as proxy for such
stockholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
2.11.2 DELIVERY TO CORPORATION; DURATION
A proxy shall be filed with the Secretary before or at the time of the
meeting or the delivery to the corporation of the consent to corporate action in
writing. A proxy shall become invalid three years after the date of its
execution unless otherwise provided in the proxy. A proxy with respect to a
specified meeting shall entitle the holder thereof to vote at any reconvened
meeting following adjournment of such meeting but shall not be valid after the
final adjournment thereof.
2.12 VOTING OF SHARES
Each outstanding share entitled to vote with respect to the subject matter
of an issue submitted to a meeting of stockholders shall be entitled to one vote
upon each such issue.
2.13 VOTING FOR DIRECTORS
Each stockholder entitled to vote at an election of Directors may vote, in
person or by proxy, the number of shares owned by such stockholder for as many
persons as there are Directors to be elected and for whose election such
stockholder has a right to vote, or if the Certificate of Incorporation provides
for cumulative voting, each stockholder may cumulate his or her votes by
distributing among one or more candidates as many votes as are equal to the
number of such Directors multiplied by the number of his or her shares.
-6-
<PAGE> 12
2.14 INSPECTORS OF ELECTION
2.14.1 APPOINTMENT
In advance of any meeting of stockholders, the Board shall appoint one or
more persons to act as inspectors of election at such meeting and to make a
written report thereof. The Board may designate one or more persons to serve as
alternate inspectors to serve in place of any inspector who is unable or fails
to act. If no inspector or alternate is able to act at a meeting of
stockholders, the chairman of such meeting shall appoint one or more persons to
act as inspector of elections at such meeting.
2.14.2 DUTIES
The inspectors shall:
(a) ascertain the number of shares of the corporation outstanding
and the voting power of each such share;
(b) determine the shares represented at the meeting and the validity
of proxies and ballots;
(c) count all votes and ballots;
(d) determine and retain for a reasonable period of time a record of
the disposition of any challenges made to any determination by them; and
(e) certify their determination of the number of shares represented
at the meeting and their count of the votes and ballots.
The validity of any proxy or ballot shall be determined by the inspectors
of election in accordance with the applicable provisions of the DGCL as then in
effect. In determining the validity of any proxy transmitted by telegram,
cablegram or other electronic transmission, the inspectors shall record in
writing the information upon which they relied in making such determination.
Each inspector of elections shall, before entering upon the discharge of his or
her duties, take and sign an oath to faithfully execute the duties of inspector
with strict impartiality and according to the best of his or her ability. The
inspectors of election may appoint or retain other persons or entities to assist
them in the performance of their duties.
SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS
The business and affairs of the corporation shall be managed by the Board.
-7-
<PAGE> 13
3.2 NUMBER AND TENURE
The Board shall be composed of not less than three nor more than nine
Directors, the specific number to be set by resolution of the Board provided
that the Board may be less than three until vacancies are filled. No decrease in
the number of Directors shall have the effect of shortening the term of any
incumbent Director. The Board shall be divided into three classes, with said
classes to be as equal in number as may be possible. A Director's term shall be
three years, and each Director shall serve for the term he or she was elected,
or until his or her successor shall have been elected and qualified, or until
his or her death, resignation or removal from office. Directors need not be
stockholders of the corporation or residents of the state of Delaware.
3.3 NOMINATION AND ELECTION
3.3.1 NOMINATION
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as Directors. Nominations for the election of
Directors may be made (a) by or at the direction of the Board or (b) by any
stockholder of record entitled to vote for the election of Directors at such
meeting; provided, however, that a stockholder may nominate persons for election
as Directors only if written notice (in accordance with subsection 2.5.3 hereof)
of such stockholder's intention to make such nominations is received by the
Secretary (i) with respect to an election to be held at an annual meeting of the
stockholders, not fewer than 60 nor more than 90 days prior to the date
specified in subsection 2.1 hereof for such annual meeting (or if less than 60
days' notice or prior public disclosure of the date of the annual meeting is
given or made to the stockholders, not later than the tenth day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made) and (ii) with respect to an election to be held at a
special meeting of the stockholders for the election of Directors, not later
than the close of business on the seventh business day following the date on
which notice of such meeting is first given to stockholders. Any such
stockholder's notice shall set forth (a) the name and address of the stockholder
who intends to make a nomination; (b) a representation that the stockholder is
entitled to vote at such meeting and a statement of the number of shares of the
corporation which are beneficially owned by the stockholder; (c) a
representation that the stockholder intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (d) as to
each person the stockholder proposes to nominate for election or re-election as
a Director, the name and address of such person and such other information
regarding such nominee as would be required in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission had such nominee
been nominated by the Board, and a description of any arrangements or
understandings, between the stockholder and such nominee and any other persons
(including their names), pursuant to which the nomination is to be made; and (e)
the consent of each such nominee to serve as a Director if elected. If the facts
warrant, the Board, or the chairman of a stockholders' meeting at which
Directors are to be elected, shall determine and declare that a nomination was
not made in accordance with the foregoing procedure and, if it is so determined,
the defective
-8-
<PAGE> 14
nomination shall be disregarded. The right of stockholders to make nominations
pursuant to the foregoing procedure is subject to the rights of the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation. The procedures set forth in this subsection 3.3
for nomination for the election of Directors by stockholders are in addition to,
and not in limitation of, any procedures now in effect or hereafter adopted by
or at the direction of the Board or any committee thereof.
3.3.2 ELECTION
At each election of Directors, the persons receiving the greatest number
of votes shall be the Directors.
3.4 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after and
at the same place as the annual meeting of stockholders. By resolution, the
Board or any committee designated by the Board may specify the time and place
either within or without the state of Delaware for holding regular meetings
thereof without other notice than such resolution.
3.5 SPECIAL MEETINGS
Special meetings of the Board or any committee appointed by the Board may
be called by or at the request of the Chairman of the Board, the President, the
Secretary or, in the case of special Board meetings, any two Directors and, in
the case of any special meeting of any committee appointed by the Board, by the
Chairman thereof. The person or persons authorized to call special meetings may
fix any place either within or without the state of Delaware as the place for
holding any special meeting called by them.
3.6 MEETINGS BY TELEPHONE
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation by such means
shall constitute presence in person at a meeting.
3.7 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day and
hour of the meeting shall be given to a Director in writing or orally by
telephone or in person. Neither the business to be transacted at, nor the
purpose of, any special meeting need be specified in the notice of such meeting.
3.7.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be effective if
delivered to a Director at least two days before the meeting.
-9-
<PAGE> 15
3.7.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail properly addressed to a Director at
his or her address shown on the records of the corporation with postage prepaid
at least five days before the meeting.
3.7.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed
effective when dispatched to a Director at his or her address shown on the
records of the corporation at least three days before the meeting.
3.7.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment which transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched at
least two days before the meeting to a Director at his or her telephone number
or other number appearing on the records of the corporation.
3.7.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed effective
if the content thereof is delivered to the telegraph company at least two days
before the meeting for delivery to a Director at his or her address shown on the
records of the corporation.
3.7.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice shall
be deemed effective if personally given to the Director at least two days before
the meeting.
3.8 WAIVER OF NOTICE
3.8.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Certificate of Incorporation or the DGCL, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the Board or any
committee appointed by the Board need be specified in the waiver of notice of
such meeting.
3.8.2 BY ATTENDANCE
The attendance of a Director at a Board or committee meeting shall
constitute a waiver of notice of such meeting, except when a Director attends a
meeting for the express
-10-
<PAGE> 16
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
3.9 QUORUM
A majority of the total number of Directors fixed by or in the manner
provided in these Bylaws or, if vacancies exist on the Board, a majority of the
total number of Directors then serving on the Board, provided, however, that
such number may be not less than one-third of the total number of Directors
fixed by or in the manner provided in these Bylaws, shall constitute a quorum
for the transaction of business at any Board meeting. If less than a majority
are present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
3.10 MANNER OF ACTING
The act of the majority of the Directors present at a Board or committee
meeting at which there is a quorum shall be the act of the Board or committee,
unless the vote of a greater number is required by these Bylaws, the Certificate
of Incorporation or the DGCL.
3.11 PRESUMPTION OF ASSENT
A Director of the corporation present at a Board or committee meeting at
which action on any corporate matter is taken shall be presumed to have assented
to the action taken unless his or her dissent is entered in the minutes of the
meeting, or unless such Director files a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof, or
forwards such dissent by registered mail to the Secretary of the corporation
immediately after the adjournment of the meeting. A Director who voted in favor
of such action may not dissent.
3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee appointed by the Board may be taken without a meeting if a written
consent setting forth the action so taken is signed by each of the Directors or
by each committee member. Any such written consent shall be inserted in the
minute book as if it were the minutes of a Board or a committee meeting.
3.13 RESIGNATION
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the President, the Secretary or the Board, or to the
registered office of the corporation. Any such resignation shall take effect at
the time specified therein, or if the time is not specified, upon delivery
thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
-11-
<PAGE> 17
3.14 REMOVAL
At a meeting of stockholders called expressly for that purpose, one or
more members of the Board (including the entire Board) may be removed only for
cause, by a vote of the holders of a majority, or such greater number as may be
required by the Certificate of Incorporation, of the shares then entitled to
vote on the election of Directors.
3.15 VACANCIES
Any vacancy occurring on the Board may be filled by the affirmative vote
of a majority of the remaining Directors though less than a quorum of the Board.
A Director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office. Any directorship to be filled by reason of an
increase in the number of Directors may be filled by the Board for a term of
office continuing only until the next election of the class for which such
Director shall have been chosen, and until his or her successor shall be elected
and qualify.
3.16 COMMITTEES
3.16.1 CREATION AND AUTHORITY OF COMMITTEES
The Board may appoint standing or temporary committees, each committee to
consist of one or more Directors of the corporation. The Board may designate one
or more Directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board 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 establishing such committee or as otherwise provided in these Bylaws,
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which require it; but no
such committee shall have the power or authority in reference to (a) approving
or adopting, or recommending to the stockholders, any action or matter expressly
required by the DGCL to be submitted to stockholders for approval or (b)
adopting, amending or repealing the Bylaws of the corporation.
3.16.2 AUDIT COMMITTEE
In addition to any committees appointed pursuant to this Section 3.16,
there shall be an Audit Committee, appointed annually by the Board, consisting
of at least two Directors who are not members of management. It shall be the
responsibility of the Audit Committee to review the scope and results of the
annual independent audit of books and records of the corporation, to review
compliance with all corporate policies which have been approved by the Board and
to discharge such other responsibilities as may from time to time be assigned to
-12-
<PAGE> 18
it by the Board. The Audit Committee shall meet at such times and places as the
members deem advisable, and shall make such recommendations to the Board as they
consider appropriate.
3.16.3 COMPENSATION COMMITTEE
The Board may, in its discretion, designate a Compensation Committee
consisting of not less than two Directors as it may from time to time determine.
The duties of the Compensation Committee shall consist of the following: (a) to
establish and review periodically, but not less than annually, the compensation
of the officers of the corporation and to make recommendations concerning such
compensation to the Board; (b) to consider incentive compensation plans for the
employees of the corporation; (c) to carry out the duties assigned to the
Compensation Committee under any stock option plan or other plan approved by the
corporation; (d) to consult with the President concerning any compensation
matters deemed appropriate by the President or the Compensation Committee; and
(e) to perform such other duties as shall be assigned to the Compensation
Committee by the Board.
3.16.4 NOMINATING AND ORGANIZATION COMMITTEE
The Board may, in its discretion, designate a Nominating and Organization
Committee consisting of not less than two Directors as it may from time to time
determine. The duties of the Nominating and Organization Committee shall consist
of the following: (a) to report and make recommendations to the Board on the
size and composition of the Board and nominees for Directors; (b) to evaluate
the performance of the officers of the corporation and together with management,
select and recommend to the Board appropriate individuals for election,
appointment and promotion as officers of the corporation and ensure the
continuity of capable management; (c) to report and make recommendations to the
Board on the organization of the corporation; and (d) to perform such other
duties as shall be assigned to the Nominating and Organization Committee by the
Board.
3.16.5 MINUTES OF MEETINGS
All committees so appointed shall keep regular minutes of their meetings
and shall cause them to be recorded in books kept for that purpose.
3.16.6 QUORUM AND MANNER OF ACTING
A majority of the number of Directors composing any committee of the
Board, as established and fixed by resolution of the Board, shall constitute a
quorum for the transaction of business at any meeting of such committee but, if
less than a majority are present at a meeting, a majority of such Directors
present may adjourn the meeting from time to time without further notice. The
act of a majority of the members of a committee present at a meeting at which a
quorum is present shall be the act of such committee.
-13-
<PAGE> 19
3.16.7 RESIGNATION
Any member of any committee may resign at any time by delivering written
notice thereof to the Chairman of the Board, the President, the Secretary, the
Board or the Chairman of such committee. Any such resignation shall take effect
at the time specified therein, or if the time is not specified, upon delivery
thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
3.16.8 REMOVAL
The Board may remove from office any member of any committee elected or
appointed by it or by an Executive Committee, but only by the affirmative vote
of not less than a majority of the number of Directors fixed by or in the manner
provided in these Bylaws.
3.17 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 4. OFFICERS
4.1 NUMBER
The officers of the corporation shall be a President, a Secretary and a
Treasurer, each of whom shall be elected by the Board. One or more Vice
Presidents and such other officers and assistant officers, including a Chairman
of the Board, may be elected or appointed by the Board, such officers and
assistant officers to hold office for such period, have such authority and
perform such duties as are provided in these Bylaws or as may be provided by
resolution of the Board. Any officer may be assigned by the Board any additional
title that the Board deems appropriate. The Board may delegate to any officer or
agent the power to appoint any such subordinate officers or agents and to
prescribe their respective terms of office, authority and duties. Any two or
more offices may be held by the same person.
4.2 ELECTION AND TERM OF OFFICE
The officers of the corporation shall be elected annually by the Board at
the Board meeting held after the annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as a Board meeting conveniently may be held. Unless an officer
dies, resigns or is removed from office, he or she shall hold office until the
next annual meeting of the Board or until his or her successor is elected.
-14-
<PAGE> 20
4.3 RESIGNATION
Any officer may resign at any time by delivering written notice to the
Chairman of the Board, the President, a Vice President, the Secretary or the
Board. Any such resignation shall take effect at the time specified therein, or
if the time is not specified, upon delivery thereof and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
4.4 REMOVAL
Any officer or agent elected or appointed by the Board may be removed by
the Board whenever in its judgment the best interests of the corporation would
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed.
4.5 VACANCIES
A vacancy in any office because of death, resignation, removal,
disqualification, creation of a new office or any other cause may be filled by
the Board for the unexpired portion of the term, or for a new term established
by the Board.
4.6 CHAIRMAN OF THE BOARD
If elected, the Chairman of the Board shall perform such duties as shall
be assigned to him or her by the Board from time to time and shall preside over
meetings of the Board and stockholders unless another officer is appointed or
designated by the Board as Chairman of such meeting.
4.7 PRESIDENT
The President shall be the chief executive officer of the corporation
unless some other officer is so designated by the Board, shall preside over
meetings of the Board and stockholders in the absence of a Chairman of the Board
and, subject to the Board's control, shall supervise and control all of the
assets, business and affairs of the corporation. The President may sign
certificates for shares of the corporation, deeds, mortgages, bonds, contracts
or other instruments, except when the signing and execution thereof have been
expressly delegated by the Board or by these Bylaws to some other officer or
agent of the corporation or are required by law to be otherwise signed or
executed by some other officer or in some other manner. In general, the
President shall perform all duties incident to the office of President and such
other duties as are prescribed by the Board from time to time.
4.8 VICE PRESIDENT
In the event of the death of the President or his or her inability to act,
the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the
-15-
<PAGE> 21
Vice President first elected to such office) shall perform the duties of the
President, except as may be limited by resolution of the Board, with all the
powers of and subject to all the restrictions upon the President. Any Vice
President may sign with the Secretary or any Assistant Secretary certificates
for shares of the corporation. Vice Presidents shall have, to the extent
authorized by the President or the Board, the same powers as the President to
sign deeds, mortgages, bonds, contracts or other instruments. Vice Presidents
shall perform such other duties as from time to time may be assigned to them by
the President or by the Board.
4.9 SECRETARY
The Secretary shall be responsible for preparation of minutes of meetings
of the Board and stockholders, maintenance of the corporation's records and
stock registers, and authentication of the corporation's records and shall in
general perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him or her by the President or by
the Board. In the absence of the Secretary, an Assistant Secretary may perform
the duties of the Secretary.
4.10 TREASURER
If required by the Board, the Treasurer shall give a bond for the faithful
discharge of his or her duties in such amount and with such surety or sureties
as the Board shall determine. The Treasurer shall have charge and custody of and
be responsible for all funds and securities of the corporation; receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in banks,
trust companies or other depositories selected in accordance with the provisions
of these Bylaws; sign certificates for shares of the corporation; and in general
perform all of the duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to him or her by the President or by
the Board. In the absence of the Treasurer, an Assistant Treasurer may perform
the duties of the Treasurer.
4.11 SALARIES
The salaries of the officers shall be fixed from time to time by the Board
or by any person or persons to whom the Board has delegated such authority. No
officer shall be prevented from receiving such salary by reason of the fact that
he or she is also a Director of the corporation.
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances.
-16-
<PAGE> 22
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the Board. Such authority may be general or confined to specific instances.
5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, or agent or agents, of the corporation and
in such manner as is from time to time determined by resolution of the Board.
5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositories as the Board may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
No shares of the corporation shall be issued unless authorized by the
Board, which authorization shall include the maximum number of shares to be
issued and the consideration to be received for each share.
6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed by the
Chairman of the Board or a Vice Chairman of the Board, if any, or the President
or a Vice President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, any of whose signatures may be a facsimile.
The Board may in its discretion appoint responsible banks or trust companies
from time to time to act as transfer agents and registrars of the stock of the
corporation; and, when such appointments shall have been made, no stock
certificate shall be valid until countersigned by one of such transfer agents
and registered by one of such registrars. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have 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 such person was such officer, transfer agent or registrar at
the date of issue. All certificates shall include on their face written notice
of any restrictions which may be imposed on the transferability of such shares
and shall be consecutively numbered or otherwise identified.
-17-
<PAGE> 23
6.3 STOCK RECORDS
The stock transfer books shall be kept at the registered office or
principal place of business of the corporation or at the office of the
corporation's transfer agent or registrar. The name and address of each person
to whom certificates for shares are issued, together with the class and number
of shares represented by each such certificate and the date of issue thereof,
shall be entered on the stock transfer books of the corporation. The person in
whose name shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
6.4 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and cancelled.
6.5 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
SECTION 7. BOOKS AND RECORDS
The corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its stockholders
and Board and such other records as may be necessary or advisable.
SECTION 8. ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year,
provided that if a different accounting year is at any time selected for
purposes of federal income taxes, the accounting year shall be the year so
selected.
SECTION 9. SEAL
The seal of the corporation, if any, shall consist of the name of the
corporation, the state of its incorporation and the year of its incorporation.
-18-
<PAGE> 24
SECTION 10. INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved (including, without limitation, as a witness) in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a Director or officer of the corporation or that,
being or having been such a Director or officer or an employee of the
corporation, he or she is or was serving at the request of the corporation as a
Director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as such a Director,
officer, employee or agent or in any other capacity while serving as such a
Director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than permitted prior thereto), or by other applicable law
as then in effect, against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators; provided,
however, that except as provided in subsection 10.2 hereof with respect to
proceedings seeking to enforce rights to indemnification, the corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized or ratified by the Board. The right to indemnification conferred in
this subsection 10.1 shall be a contract right and shall include the right to be
paid by the corporation the expenses incurred in defending any such proceeding
in advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that if the DGCL requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a Director or officer (and
not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such indemnitee is
not entitled to be indemnified for such expenses under this subsection 10.1 or
otherwise.
10.2 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 10.1 hereof is not paid in full by the
corporation within 60 days after a written claim has been received by the
corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the corporation to recover the unpaid
-19-
<PAGE> 25
amount of the claim. If successful in whole or in part in any such suit, or in a
suit brought by the corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expense of prosecuting or defending such suit. The indemnitee shall be
presumed to be entitled to indemnification under this Section upon submission of
a written claim (and, in an action brought to enforce a claim for an advancement
of expenses, where the required undertaking, if any is required, has been
tendered to the corporation), and thereafter the corporation shall have the
burden of proof to overcome the presumption that the indemnitee is not so
entitled. Neither the failure of the corporation (including its Board,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances nor an actual determination by the corporation
(including its Board, independent legal counsel or its stockholders) that the
indemnitee is not entitled to indemnification shall be a defense to the suit or
create a presumption that the indemnitee is not so entitled.
10.3 NONEXCLUSIVITY OF RIGHTS
The rights to indemnification and to the advancement of expenses conferred
in this Section shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, agreement, vote of stockholders or
disinterested Directors, provisions of the Certificate of Incorporation or
Bylaws of the corporation or otherwise. Notwithstanding any amendment to or
repeal of this Section, any indemnitee shall be entitled to indemnification in
accordance with the provisions hereof with respect to any acts or omissions of
such indemnitee occurring prior to such amendment or repeal.
10.4 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect itself
and any Director, officer, employee or agent of the corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the corporation would have the power
to indemnify such person against such expense, liability or loss under the DGCL.
The corporation, without further stockholder approval, may enter into contracts
with any Director, officer, employee or agent in furtherance of the provisions
of this Section and may create a trust fund, grant a security interest or use
other means (including, without limitation, a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification as
provided in this Section.
10.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees or agents or groups of
employees or agents of the corporation with the same scope and effect as the
provisions of this Section with respect to the indemnification and advancement
of expenses of Directors and officers of the corporation; provided, however,
that an undertaking shall be made by an employee or agent only if required by
the Board.
-20-
<PAGE> 26
10.6 PERSONS SERVING OTHER ENTITIES
Any person who is or was a Director, officer or employee of the
corporation who is or was serving (a) as a Director or officer of another
corporation of which a majority of the shares entitled to vote in the election
of its Directors is held by the corporation or (b) in an executive or management
capacity in a partnership, joint venture, trust or other enterprise of which the
corporation or a wholly owned subsidiary of the corporation is a general partner
or has a majority ownership shall be deemed to be so serving at the request of
the corporation and entitled to indemnification and advancement of expenses
under subsection 10.1 hereof.
10.7 PROCEDURES FOR THE SUBMISSION OF CLAIMS
The Board may establish reasonable procedures for the submission of claims
for indemnification pursuant to this Section, determination of the entitlement
of any person thereto and review of any such determination. Such procedures
shall be set forth in an appendix to these Bylaws and shall be deemed for all
purposes to be a part hereof.
SECTION 11. AMENDMENTS OR REPEAL
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of this corporation by the affirmative vote of two-thirds of the Board of
Directors; provided, however, the Board of Directors may not repeal or amend any
by-law that the stockholders have expressly provided may not be amended or
repealed by the Board of Directors. The stockholders shall also have the power
to adopt, amend or repeal the Bylaws of this corporation by the affirmative vote
of the holders of not less than two-thirds of the outstanding shares and, to the
extent, if any, provided by resolution or resolutions of the Board of Directors
providing for the issue of a series of Common or Preferred Stock, not less than
two-thirds of the outstanding shares entitled to vote thereon, voting as a
class.
Notwithstanding any amendment to Section 10 hereof or repeal of these
Bylaws, or of any amendment or repeal of any of the procedures that may be
established by the Board pursuant to Section 10 hereof, any indemnitee shall be
entitled to indemnification in accordance with the provisions hereof and thereof
with respect to any acts or omissions of such indemnitee occurring prior to such
amendment or repeal.
The foregoing Amended and Restated Bylaws were adopted by the Board of
Directors on September 24, 1996.
/s/ Donald F. Seaton III
----------------------------------
Secretary
-21-
<PAGE> 1
Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT, dated as of April 1, 1995, between
INCONTROL, INC., a Delaware corporation (the "Company"), and KURT C. WHEELER
(the "Executive").
RECITALS
A. The Company and the Executive have entered into that certain
Executive Employment Agreement dated as of April 23, 1992 (as amended by the
First Amendment to Executive Employment Agreement dated as of October 1, 1993,
the "First Employment Agreement").
B. The Company and the Executive believe that the First Employment
Agreement fails to reflect accurately the spirit of the agreement between the
Company and the Executive, as set forth in correspondence between the Executive
and Glenn Mueller, a former director of the Company, predating the First
Employment Agreement, whereby the Executive agreed to join the Company as Chief
Executive Officer and relocate to Seattle from the San Francisco area.
C. Accordingly, the Company and the Executive desire to amend the
Executive's current employment arrangement as hereinafter set forth.
AGREEMENTS
1. EMPLOYMENT
The Company shall continue to employ the Executive and the Executive
shall continue to accept employment by the Company as its President and Chief
Executive Officer and Chairman of the Company's Board of Directors (the
"Board"), and the Executive shall have the authority, subject to the Company's
Certificate of Incorporation and Bylaws, as may be granted from time to time by
the Board. The Executive shall perform the duties assigned to the President and
Chief Executive Officer and Chairman of the Board in the Company's Bylaws, the
duties customarily performed by the President and Chief Executive Officer and
Chairman of the Board of a corporation that is, in all respects, similar to the
Company, and such other duties as may be assigned from time to time by the Board
which relate to the business of the Company.
<PAGE> 2
2. ATTENTION AND EFFORT
The Executive shall devote his entire time, ability, attention and
effort to the Company's business and shall serve its interests during the term
of this Agreement; provided, however, that the Executive may devote reasonable
periods of time to (a) serving on the Board of Directors of other corporations
and (b) engaging in charitable or community service activities, so long as such
additional activities do not materially interfere with the Executive's duties
under this Agreement.
3. TERM
Unless otherwise terminated pursuant to Section 7 hereof, the
Executive's term of employment under this Agreement shall expire on December 31,
1998.
4. COMPENSATION
4.1 BASE SALARY
The Company shall pay the Executive a base salary of Three Hundred
Twenty-Five Thousand Dollars ($325,000), payable in accordance with the
Company's standard payroll policy. Annually, the Board shall consider increases
in the Executive's base salary in light of the Executive's individual
performance, the Company's performance and other relevant factors.
4.2 ANNUAL BONUS
In addition to the base salary, the Executive shall be eligible to
receive an annual bonus, the amount of which, if awarded, shall be determined by
the Board in its sole discretion.
4.3 HOUSING ALLOWANCE
Effective as of April 1, 1995, as a continuation of the housing
allowance provided for in the Executive's relocation package, the Company shall
pay to the Executive a housing allowance in the amount of Three Thousand Dollars
($3,000) per month for twenty-four (24) months. In the event of the termination
of this Agreement (a) by the Company with Cause (as defined below) or (b) by the
Executive, no further payments shall be made by the Company under this Section
4.3.
-2-
<PAGE> 3
4.4 AUTOMOBILE ALLOWANCE
As a continuation of the automobile allowance provided for in the
Executive's relocation package, the Company shall pay to the Executive an
automobile allowance in the amount of Four Hundred Dollars ($400) per month for
eighteen (18) months. In the event of the termination of this Agreement (a) by
the Company with Cause or (b) by the Executive, no further payments shall be
made by the Company under this Section 4.4.
4.5 OPTIONS
On or before July 1, 1995, the Compensation Committee of the Board
shall grant to the Executive additional options to purchase one hundred thousand
(100,000) shares of the Company's Common Stock.
4.6 BENEFITS
During the term of his employment, the Executive shall be entitled to
the benefits that are generally made available to executive officers of the
Company, which shall include participation in the Company's key employee
insurance programs.
5. RELOCATION LOAN TO EXECUTIVE
5.1 MONTHLY ADVANCES
(a) As long as the Executive is an employee of the Company, the Company
shall periodically lend to the Executive an aggregate of Two Hundred Twenty-Six
Thousand Forty-One and 91/100 Dollars ($226,041.91) as a component of the loan
program provided in the Executive's relocation package.
(b) As of the date of this Agreement, the Company has made, and the
Executive hereby acknowledges receipt of, advances contemplated under Section
5.1(a) hereof in the amount of One Hundred Thirty-Six Thousand Forty-One and
91/100 Dollars ($136,041.91). The balance of the advances shall be disbursed in
eighteen (18) equal monthly advances in the amount of Five Thousand Dollars
($5,000). In the event that this Agreement is terminated (i) by the Company with
Cause or (ii) by the Executive, no additional advances shall be made under this
Section 5.1.
-3-
<PAGE> 4
5.2 INITIAL ADVANCE
(a) In connection with the relocation of the Executive to the Seattle,
Washington metropolitan area, the Company has loaned the Executive Five Hundred
Thousand Dollars ($500,000).
(b) The relocation advances described in Sections 5.1 and 5.2(a) hereof
shall be referred to herein collectively as the "Loan."
5.3 INTEREST
The Loan shall bear interest at Four and 94/100 percent (4.94%). If at
any future time it is determined by the Company that such rate is insufficient
to prevent the Loans from constituting "below market loans" within the meaning
of section 7872 of the Code, the interest rate will be increased to the minimum
rate necessary to prevent such treatment (but not, in any event, in excess of
eight percent (8%)).
5.4 NOTE
The Loan shall be evidenced by a promissory note (the "Note") in form
and substance satisfactory to the Company and to the Executive.
5.5 PAYMENT OF PRINCIPAL AND INTEREST
(a) Subject to Section 5.5(b) hereof, the principal and accrued
interest on the Loan shall be due and payable by the Executive to the Company
within six (6) months after the occurrence of a Triggering Event under Section
5.5(c)(i) hereof or within nine (9) months after the occurrence of a Triggering
Event under Section 5.5(c)(ii) hereof. Notwithstanding the foregoing, the
principal and accrued interest on the Loan shall be due and payable promptly
upon the termination of this Agreement (i) by the Company for Cause or (ii) by
the Executive.
(b) If a Triggering Event does not occur on or before September 1,
1998, or, in any event, upon the occurrence of an Acquisition (as defined below)
which is not a Triggering Event, then the principal, but not the accrued
interest, on the Loan shall be forgiven and the Company shall compensate the
Executive for federal income taxes associated with such forgiveness.
(c) For purposes of this Section 5, a Triggering Event shall be deemed
to occur when (i) the aggregate value of all securities of the Company currently
held or hereafter acquired by the Executive exceeds Four Million Dollars
($4,000,000) for a period of
-4-
<PAGE> 5
ninety (90) consecutive calendar days, the Company's Common Stock is traded
over-the-counter or on a national securities exchange, and the Executive is
permitted to freely sell his shares of Common Stock, subject to applicable
securities laws, (ii) the cash and securities received by the Executive in the
merger, reorganization or sale of substantially all of the assets of the Company
("Acquisition") exceeds Four Million Dollars ($4,000,000) and the securities
received, if any, are traded over-the-counter or on a national securities
exchange, or (iii) this Agreement is terminated under Section 7.3 hereof.
5.6 SECURITY
In order to secure the Executive's obligations under the Note, the
Executive shall pledge to the Company Seventy Thousand (70,000) shares of the
Common Stock of the Company (the "Collateral") pursuant to the terms and
conditions of a Stock Pledge Agreement in form and substance satisfactory to the
Company and the Executive. Except for the rights of the Company with respect to
the Collateral, the Loans shall be nonrecourse to the Executive.
6. RELEASE OF GUARANTIES
In connection with the construction of the Executive's Seattle area
home, the Company and Mayfield Fund have guaranteed certain of the Executive's
obligations to Seafirst Bank. On or before September 15, 1995, the Executive
shall obtain the full release and termination of such guaranties and the return
of any certificates of deposit or other collateral pledged in support of such
guaranties.
7. TERMINATION
7.1 TERMINATION BY THE COMPANY
With or without Cause (as defined below), the Company may terminate the
employment of the Executive at any time during the term of employment upon
giving Notice of Termination (as defined below).
7.2 TERMINATION BY THE EXECUTIVE
Employee may terminate his employment at any time, for any reason, upon
giving Notice of Termination.
-5-
<PAGE> 6
7.3 AUTOMATIC TERMINATION
This Agreement and the Executive's employment hereunder shall terminate
automatically upon the Executive's death or total disability. The term "total
disability" shall mean the Executive's inability to perform the duties as set
forth in Section 1 hereof for a period or periods aggregating ninety (90)
calendar days in any twelve-month period as a result of physical or mental
illness, loss of legal capacity or any other cause beyond the Executive's
control, unless the Executive is granted a leave of absence by the Board at its
discretion. Termination hereunder shall be deemed to be effective (a) at the end
of the calendar month in which the Executive's death occurs or (b) immediately
upon a determination by the Board of the Executive's total disability.
7.4 NOTICE
The term "Notice of Termination" shall mean at least fourteen (14)
days' written notice of termination of the Executive's employment, during which
period the Executive's employment and performance of services will continue;
provided, however, that the Company may upon notice to the Executive and without
reducing the Executive's compensation during such period, excuse the Executive
from any or all of his duties during such period. The effective date of the
termination of the Executive's employment hereunder shall be the date on which
such fourteen-day period expires.
8. TERMINATION PAYMENTS
8.1 GENERAL
In the event of termination of the employment of the Executive, all
compensation benefits set forth in this Agreement shall terminate except as
specifically provided in this Section 8.
8.2 TERMINATION BY THE COMPANY
If the Company terminates the Executive's employment without Cause
prior to the expiration of the term of this Agreement, the Executive shall be
entitled to receive termination payments equal to the aggregate base salary and
housing allowance payments the Executive would have received from the date of
his termination by the Company to the end of the term of this Agreement. In
addition, the Company shall continue to make advances under the Loan. If the
Executive is terminated by the Company for Cause, the Executive shall not be
entitled to receive any of the foregoing benefits other than any
-6-
<PAGE> 7
unpaid portion of base salary that has accrued for services already performed as
of the date termination of the Executive becomes effective.
8.3 TERMINATION BY THE EXECUTIVE
If the Executive terminates the Executive's employment, the Executive
shall not be entitled to any payments hereunder, other than any unpaid portion
of base salary that has accrued for services already performed as of the date
termination of the Executive becomes effective.
8.4 PAYMENT SCHEDULE
All payments under this Section 8 shall be made to the Executive at the
same interval as payments of the base salary were made to the Executive
immediately prior to termination.
8.5 CAUSE
Wherever reference is made in this Agreement to termination being made
with or without Cause, "Cause" means cause given by the Executive to the Company
and is limited to the occurrence of one or more of the following events:
(a) Violation by the Executive of a state or federal criminal law
involving the commission of a felony or a crime against the Company;
(b) Habitual or repeated misuse by the Executive of alcohol or
controlled substances; deception, fraud, misrepresentation or dishonesty by the
Executive with respect to the business of the Company; any incident materially
compromising the Executive's reputation or ability to represent the Company with
the public; any intentional act or omission by the Executive that substantially
impairs the Company's business, good will or reputation; or
(c) Any material violation of this Agreement.
9. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the Company and
the Executive with respect to the Executive's employment by the Company and
compensation therefor and supersedes all prior agreements and understandings,
whether written or oral, with respect to such subject matter, including, without
limitation, the First Employment Agreement.
-7-
<PAGE> 8
10. NOTICES
All notices, requests and other communications to the Company or the
Executive hereunder shall be in writing and shall refer specifically to this
Agreement and shall be personally delivered or sent by telecopy or other
electronic facsimile transmission or by registered mail, or certified mail,
return receipt requested, postage prepaid, in each case to addressed as follows:
To the Company: InControl, Inc.
6675 - 185th Avenue N.E.
Redmond, WA 98052
Attention: President
To the Executive: Kurt C. Wheeler
3248 78th Place NE
Medina, WA 98039
or to such other address as the party to receive the notice or request shall
designate by notice to the other. The effective date of any notice, request or
communication shall be five days (5) from the date on which it is sent by the
addressor, or when sent by facsimile or other electronic transmission, receipt
confirmed, or personally delivered.
11. FURTHER ASSURANCES
The Executive shall duly execute and deliver (to the Company or
otherwise), or cause to be duly executed and delivered (to the Company or
otherwise), such further instruments and do and cause to be done such further
acts that may be necessary or as the Company may at any time and from time to
time reasonably request in connection with its administration of this Agreement.
12. AMENDMENTS
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure by the Executive
thereof shall in any event be effective unless the same shall be in writing
specifically identifying this Agreement and the provision intended to be
amended, modified, waived, terminated or discharged and signed by the Company
and the Executive, and each such amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any
-8-
<PAGE> 9
other matter not set forth in a subsequent agreement in writing and signed by
the Company and the Executive.
13. EXECUTION IN COUNTERPARTS
This Agreement may be executed in any number of counterpart, each of
which, when so executed and delivered, shall be deemed to be an original, and
all of which taken together, shall constitute one and the same instrument.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the state of Washington
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
INCONTROL, INC. EXECUTIVE:
By: /s/ Donald F. Seaton III /s/ Kurt C. Wheeler
------------------------------- -----------------------------------
Title: Vice President, Finance Kurt C. Wheeler
Chief Financial Officer
-9-
<PAGE> 10
FIRST AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT, dated as of
September 30, 1996, between INCONTROL, INC., a Delaware corporation (the
"Company"), and KURT C. WHEELER (the "Executive").
RECITALS
A. The Company and the Executive have entered into that certain
Executive Employment Agreement dated as of April 1, 1995 (the "Agreement").
B. The Company and the Executive desire to amend the Agreement as
hereinafter set forth.
AGREEMENTS
1. AUTOMOBILE ALLOWANCE
Section 4.4 of the Agreement is hereby amended to read in its entirety
as follows:
The Company shall pay to the Executive an automobile allowance in the
amount of Four Hundred Dollars ($400) per month. Annually, the Board
shall reconsider the automobile allowance in light of the Executive's
individual performance, the Company's performance and other relevant
factors.
2. RELOCATION LOAN TO EXECUTIVE
Section 5.1 of the Agreement is hereby amended to read in its entirety
as follows:
5.1 MONTHLY ALLOWANCES
(a) As long as the Executive is an employee of the Company,
the Company shall periodically lend to the Executive an aggregate total
of Two Hundred Fifty-Six Thousand Forty-One and 93/100 Dollars
($256,041.93) as a component of the Executive's relocation package.
(b) As of the date of this Amendment, the Company has made,
and the Executive hereby acknowledges receipt of, advances under
Section 5.16(a) hereof in the amount of Two Hundred Twenty-Six Thousand
Forty-One and 93/100 Dollars ($226,041.93). The balance of the advance
shall be disbursed in six (6) equal monthly advances in the amount of
Five Thousand Dollars
<PAGE> 11
($5,000). In the event that this Agreement is terminated (i) by the
Company with Cause or (ii) by the Executive, no additional advances
shall be made under this Section 5.1.
3. NOTE
The Executive shall execute a promissory to evidence the maximum amount
of the Loan (the "Note") in form and substance satisfactory to the Company and
to the Executive.
4. CONFIRMATION
Except as expressly modified in this Amendment, all terms, conditions,
representations, warranties and covenants contained in the Agreement are hereby
confirmed and shall remain in full force and effect.
5. COUNTERPARTS
This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original if fully executed, but all of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
INCONTROL, INC.
By: /s/ Donald F. Seaton III
-------------------------------------------
Its: Vice President and Chief Financial Officer
EXECUTIVE
/s/ Kurt C. Wheeler
-------------------
-2-
<PAGE> 12
PROMISSORY NOTE
$500,000 Seattle, Washington
October 1, 1993
FOR VALUE RECEIVED, the undersigned KURT C. WHEELER ("Maker"), hereby promises
to pay to the order of INCONTROL, INC. (the "Company"), at its office in
Redmond, Washington, or at such other place as the holder of this Note may
designate in writing from time to time, (a) the principal sum of Five Hundred
Thousand Dollars ($500,000) or (b) the aggregate principal amount of all
advances made by the Company under this Note and outstanding on the date of
payment, whichever is less.
EXECUTIVE EMPLOYMENT AGREEMENT. This Note is issued pursuant to the
terms and conditions of the Executive Employment Agreement, dated as of April
23, 1992, between the Company and Maker, as amended (the "Employment
Agreement").
INTEREST. Interest shall accrue on the principal balance until final
maturity with interest compounded semi-annually at the rate of Four and 94/100
percent (4.94%) per annum.
PAYMENTS OF PRINCIPAL AND INTEREST. Principal, together with accrued
interest, shall be payable in accordance with the terms of the Employment
Agreement.
PREPAYMENT. Maker may prepay all or any portion of the principal due
under this Note without premium or penalty.
PENALTY INTEREST. In the event Maker fails to pay principal and
interest when due in the manner provided herein, the principal balance of this
Note and accrued but unpaid interest thereon shall thereafter bear interest at a
rate equal to fifteen percent (15%) per annum, until payment in full of the
amount owed. Notwithstanding the foregoing, the interest paid under this Note
shall never be greater than the maximum rate of interest permitted under
applicable law.
LIABILITY AND WAIVER. Maker hereby waives diligence, presentment,
demand, protest and notice of any kind whatsoever. The nonexercise by the holder
of this Note of its rights hereunder in any particular instance shall not
constitute a waiver thereof in that or any subsequent instance.
COSTS OF COLLECTION. Maker agrees to pay all costs of collection and
reasonable attorneys' fees in case of any default in any payment required under
this Note.
APPLICABLE LAW. This Note shall be governed by and construed in
accordance with the laws of the state of Washington.
COLLATERAL. This Note is secured by 80,000 shares of Common Stock
issued by the Company, together with all proceeds thereof (the "Collateral").
Except for the Collateral, this Note shall be nonrecourse to Maker.
/s/ Kurt C. Wheeler
------------------------------------
Kurt C. Wheeler
<PAGE> 13
STOCK PLEDGE AGREEMENT
STOCK PLEDGE AGREEMENT, dated as of the first day of October, 1993,
given by KURT C. WHEELER ("Grantor"), to INCONTROL, INC. (the "Company").
AGREEMENTS
1. DEFINITIONS
Terms capitalized in this Agreement which are not otherwise defined
shall have the meanings assigned to such terms in the Executive Employment
Agreement, dated as of April 23, 1992, between the Company and Grantor, as
amended (the "Employment Agreement").
2. PLEDGE OF THE COLLATERAL
Grantor hereby pledges to the Company, and grants to the Company a
security interest in, the following described property, together with all
proceeds thereof (the "Collateral"):
<TABLE>
<CAPTION>
No. of
Shares Title of Class Issuer
------ -------------- ------
<S> <C> <C> <C>
80,000 Common InControl, Inc.
</TABLE>
This pledge and security interest is given to secure the full, prompt, due and
timely payment, performance and observance by Grantor of each obligation,
covenant and condition owed, to be owed or to be performed at any time by
Grantor under the Notes and the performance by Grantor of his obligations under
this Agreement (together, the "Obligations").
3. REPRESENTATIONS
Grantor hereby represents that he owns the Collateral, free and clear
of all liens, charges and encumbrances on or with respect to the Collateral,
except as created by this Agreement.
4. DELIVERY OF CERTIFICATE
Prior to or concurrently herewith Grantor shall deliver to the Company
the stock certificates representing all of the Collateral, together with
appropriate
<PAGE> 14
assignments separate from the certificates naming the Company as assignee, duly
endorsed by Grantor for transfer in blank, in form and substance satisfactory to
the Company.
5. HANDLING OF COLLATERAL
The Company shall not exercise voting rights or collect cash dividends
with respect to the Collateral unless and until the occurrence of an Event of
Default, as defined in paragraph 9 hereof, and such rights may be exercised by
Grantor prior to any such occurrence. Upon an Event of Default, the Company is
authorized to transfer to itself or to any other person all or any of the
Collateral, and may fill in blanks in any transfers or other documents delivered
to it.
6. HOLDER OF RECORD; VOTING RIGHTS
So long as an Event of Default does not exist hereunder, Grantor shall
remain the holder of record of the Collateral and Grantor shall have all voting
rights with respect to the Collateral.
7. STOCK DIVIDENDS AND RECAPITALIZATIONS
In the event the Company shall declare a stock dividend or any stock
split with respect to the Collateral, or in the event the Collateral shall be
replaced as a result of any dissolution, merger, consolidation, reorganization,
recapitalization or other similar proceeding involving the Company, or in the
event there shall be a distribution of assets or securities with respect to the
Collateral, all such distributed assets or other securities to which Grantor is
entitled as a result of any such transactions shall be delivered to the Company
and shall automatically become subject to all of the terms and conditions of
this Agreement to the same extent as though they had been included as, and shall
be deemed to be, a part of the Collateral from the date hereof.
8. TERMINATION
This Agreement shall terminate upon Grantor's payment or satisfaction
in full of all of the Obligations.
9. EVENTS OF DEFAULT
9.1 EVENTS OF DEFAULT
Grantor's default in the payment or performance of any obligation under
the Notes or this Agreement shall constitute a default under this Agreement (an
"Event of Default").
-2-
<PAGE> 15
9.2 EFFECT
Upon the occurrence of any Event of Default, the Obligations shall then
or at any time thereafter, at the option of the Company, become immediately due
and payable without notice or demand, and the Company shall have an immediate
right to pursue the remedies provided herein.
10. REMEDIES
If an Event of Default occurs, the Company shall have all remedies
provided by law, including, without limitation, all rights of a secured party
under the Uniform Commercial Code as enacted in the State of Washington (the
"UCC"), whether or not this Agreement and the transactions contemplated hereby
are determined to be governed by the UCC. Without limiting the generality of the
foregoing, the Company shall be entitled to exercise all voting rights connected
with the Collateral and to transfer all right, title and interest in and to the
Collateral or cause all right, title and interest in and to the Collateral to be
transferred to the Company or to any purchaser acceptable to the Company upon
terms and conditions acceptable to the Company. Grantor hereby waives any notice
of the occurrence of any Event of Default.
11. CUMULATIVE RIGHTS
The security and the rights and remedies provided for in this Agreement
are cumulative, and are in addition to any rights or security or remedies of the
Company under other instruments or agreements, or under applicable law.
12. EXPENSES
Grantor shall pay on demand the costs of all filings and recordings
deemed desirable by the Company, and all expenses, including reasonable
attorneys' fees, which the Company may incur in protecting, defending or
realizing any part of the Collateral, or in protecting or defending the priority
of the security interest created hereby, whether or not a lawsuit be involved.
-3-
<PAGE> 16
13. MODIFICATIONS, CONSENTS AND WAIVERS
No failure or delay on the part of the Company in exercising any power
or right under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of such right or power preclude any other or further
exercise thereof or the exercise of any other right or power. No amendment,
modification or waiver of any provision of this Agreement, nor consent to any
departure therefrom shall be effective unless in writing and consented to by the
Company.
14. ADDITIONAL DOCUMENTS
Grantor shall at the Company's request, from time to time, at Grantor's
sole cost and expense, execute, reexecute, deliver and redeliver any and all
documents, and do and perform such other and further acts, as may reasonably be
required by the Company to enable the Company to perfect, preserve and protect
its security interest in the Collateral and its right and remedies under this
Agreement or granted by law and to carry out and effect the intents and purposes
of this Agreement.
15. APPLICABLE LAW
This Agreement shall be construed in accordance with and governed by
the laws of the state of Washington.
IN WITNESS WHEREOF, Grantor has executed this Stock Pledge Agreement as
of the date first above written.
/s/Kurt C. Wheeler
--------------------------------
Kurt C. Wheeler
ACCEPTED:
INCONTROL, INC.
By:/s/Glenn M Mueller
--------------------------------
Its:Chairman of the Board
4
<PAGE> 17
PROMISSORY NOTE
$256,041.93 Seattle, Washington
September 30, 1996
FOR VALUE RECEIVED, the undersigned KURT C. WHEELER ("Maker"), hereby promises
to pay to the order of INCONTROL, INC. (the "Company"), at its office in
Redmond, Washington, or at such other place as the holder of this Note may
designate in writing from time to time, (a) the principal sum of Two Hundred
Fifty-Six Thousand Forty-One and 93/100 Dollars ($256,041.93) or (b) the
aggregate principal amount of all advances made by the Company under this Note
and outstanding on the date of payment, whichever is less.
EXECUTIVE EMPLOYMENT AGREEMENT. This Note is issued pursuant to the
terms and conditions of the Executive Employment Agreement, dated as of April 1,
1995, between the Company and Maker, as amended (the "Employment Agreement").
INTEREST. Interest shall accrue on the principal balance until final
maturity with interest compounded semi-annually at the rate of Four and 94/100
percent (4.94%) per annum.
PAYMENTS OF PRINCIPAL AND INTEREST. Principal, together with accrued
interest, shall be payable in accordance with the terms of the Employment
Agreement.
PREPAYMENT. Maker may prepay all or any portion of the principal due
under this Note without premium or penalty.
PENALTY INTEREST. In the event Maker fails to pay principal and
interest when due in the manner provided herein, the principal balance of this
Note and accrued but unpaid interest thereon shall thereafter bear interest at a
rate equal to fifteen percent (15%) per annum, until payment in full of the
amount owed. Notwithstanding the foregoing, the interest paid under this Note
shall never be greater than the maximum rate of interest permitted under
applicable law.
LIABILITY AND WAIVER. Maker hereby waives diligence, presentment,
demand, protest and notice of any kind whatsoever. The nonexercise by the holder
of this Note of its rights hereunder in any particular instance shall not
constitute a waiver thereof in that or any subsequent instance.
COSTS OF COLLECTION. Maker agrees to pay all costs of collection and
reasonable attorneys' fees in case of any default in any payment required under
this Note.
APPLICABLE LAW. This Note shall be governed by and construed in
accordance with the laws of the state of Washington.
<PAGE> 18
COLLATERAL. This Note is secured by 60,000 shares of Common Stock
issued by the Company, together with all proceeds thereof (the "Collateral").
Except for the Collateral, this Note shall be nonrecourse to Maker.
/s/ Kurt C. Wheeler
-----------------------------------
Kurt C. Wheeler
<PAGE> 1
Exhibit 10.3
NINTH AMENDMENT TO LEASE
THIS NINTH AMENDMENT TO LEASE (this "Amendment") is entered into this 31st
day of January, 1997 by and between CARR REDMOND CORPORATION, a Washington
corporation, successor in interest to Redmond East, L.L.C. ("Lessor") and
INCONTROL, INC., a Washington corporation ("Lessee"), with respect to the
following facts:
RECITALS
A. Lessor and Lessee are parties to that certain Redmond East Lease, dated
August 19,1991, as amended by the First Addendum to Lease dated August 19, 1991,
the Amendment to Lease dated March 5, 1991, the Second Amendment to Lease dated
June 1, 1992, the Third Amendment to Lease dated October 15, 1992, the Fourth
Amendment of Lease dated August 24, 1993, the Fifth Amendment to Lease dated
September 9, 1994, the Sixth Amendment to Lease dated May 31, 1995, the Seventh
Amendment to Lease dated March 29, 1996 and the Eighth Amendment to Lease dated
April 29, 1996 (collectively the "Lease"). Capitalized terms used herein if not
defined herein have the meaning given them in the Lease.
B. Lessor and Lessee are also parties to that certain Agreement dated
August 19, 1991, as amended by the First Amended Agreement dated June 1, 1992,
the Second Amended Agreement dated October 15, 1992 and the Third Amended
Agreement dated August 24, 1993 (the "Agreement") and that certain Agreement
dated May 31, 1995 (the "1995 Agreement").
C. Pursuant to the terms of the Lease, Lessee currently leases from Lessor
42,444 square feet in Building 13 and approximately 22,260 square feet of
Building 14, which area includes the Sixth Expansion Premises consisting of
approximately 7,206 square feet on the second floor all as more fully described
in the Lease and Sixth Amendment to Lease.
D. Landlord and Tenant desire to amend, modify and supplement the Lease
and the 1995 Agreement to, among other things, provide for further expansion
space for Lessee, amend the term of the Lease, adjust the Basic Rental, and
modify the terms of payment by Lessor of certain tenant improvement allowances,
all as hereinafter set forth.
NOW, THEREFORE, Lessor and Lessee hereby agree as follows:
AMENDMENTS AND AGREEMENTS
1. Lessee hereby acknowledges and agrees that as of the date hereof,
Lessee has taken possession of the Sixth Expansion Premises pursuant to the
terms of the Lease and that the Sixth Expansion Premises constitutes a part of
the Building 14 Premises. Lessor acknowledges Lessee's payment of the January
1997 Basic Rental and Additional Rental.
<PAGE> 2
2. From and after April 1, 1997, Section 1 of the Lease is amended to
include within the definition of Building 14 Premises the approximately 4,000
square feet of warehouse space ("Warehouse Space") and the approximately 9,500
square feet of office space on the first and second floor (the "Office Expansion
Space") of Building 14 identified on Exhibit A attached hereto. From and after
April 1, 1997, the term Premises is amended to include the Warehouse Space and
Lessee shall have been deemed to have taken possession of the Warehouse Space as
of April 1, 1997. Lessee hereby acknowledges and agrees that the Warehouse Space
has been delivered by Lessor and Lessee accepts the Warehouse Space in its
current "AS IS" condition.
3. Effective not later than June 1, 1999, the Office Expansion Space shall
become part of the Premises and Lessor shall deliver and Lessee shall accept
possession of the office Expansion Space. At the time Lessor delivers possession
of the Office Expansion Space to Lessee, the floor area of the Premises shall be
increased by 9,500 square feet in accordance with this section and the Basic
Rental shall be increased as set forth in paragraph 5 below. Lessor agrees that
it shall provide Lessee a $5.00 per square foot tenant allowance for the Office
Expansion Space payable upon invoice and verification of completion of tenant
improvements approved by Lessor and otherwise constructed in accordance with the
terms of the Lease and this Amendment. Except for the tenant allowance provided
for herein, Lessee shall accept the Office Expansion Space in its then "AS IS"
condition. Notwithstanding the foregoing, in the event that Lessor is unable to
deliver possession of the Office Expansion Space to Lessee for the construction
of tenant improvements on or before April 1, 1999, the effective date of
Lessee's lease of the Office Expansion Space shall be adjusted by mutual
agreement of the parties for any such delay.
4. Lessor and Lessee hereby agree to amend Section 4 of the Lease to the
extent necessary to extend the term of the Lease eight years and five months,
from January 1, 1997 to May 31, 2005, on which date the Lease shall terminate.
5. Lessor and Lessee hereby agree to amend the Lease as necessary to
provide that from and after January 1, 1997, the Basic Rental for the Premises
shall be as follows:
Building 13 Premises
1/1/97 - 5/31/99 $14.00 per sq. ft. annually ($1.16/mo.)
6/1/99 - 5/31/02 $15.50 per sq. ft. annually ($1.29/mo.)
6/1/02 - 5/31/05 $17.50 per sq. ft. annually ($1.45/mo.)
Building 14 Premises
1/1/97 -5/31/99
Office Space $13.25 per sq. ft. annually ($1.10/mo.)
Warehouse Space $ 6.60 per sq. ft. annually ($0.55/mo.)
-2-
<PAGE> 3
6/1/99 - 5/31/02
Warehouse Space $15.50 per sq. ft. annually ($1.29/mo.)
Office Space $ 7.80 per sq. ft. annually ($0.65/mo.)
6/1/02 - 5/31/05
Warehouse Space $17.50 per sq. ft. annually ($1.45/mo.)
Office Space $ 8.88 per sq. ft. annually ($0.74/mo.)
Lessor hereby agrees that between and including January 1, 1997 and May 31,
1997, Lessee shall have a free rent period and not have to pay Basic Rental for
the area of the Premises in Building 14 referred to as the Sixth Expansion
Premises (7,260 sq. ft. on the second floor); provided, however, Lessee shall be
responsible for and pay any and all Additional Rent and other charges under the
Lease for the Sixth Expansion Premises. Lessor shall credit Lessee for January's
Basic Rental payment for the Sixth Expansion Premises referenced in Paragraph 1
above.
6. Lessor and Lessee hereby agree to amend the Lease and the 1995
Agreement as necessary to provide that Landlord shall provide Lessee with a
tenant improvement allowance (the Tenant Allowance") in the total amount of
$144,000 for the build out of the Sixth Expansion Premises. In addition, Lessor
shall provide the Sixth Expansion Premises the "shell HVAC" consisting of a roof
top unit and ducting to the Sixth Expansion Premises distribution box, and for
the purchase and installation of an elevator servicing the second floor space,
at Lessor's sole cost and expense. Lessor shall complete such work on or before
April 1, 1997. Lessor shall pay Lessee the Tenant Allowance upon satisfaction of
the following conditions by Lessee: (i) Lessor shall approve plans and
specifications, which approval shall not be unreasonably withheld; (ii)
presentment of invoice for the Tenant Allowance to Lessor; (iii) verification by
Lessor that the tenant improvements are completed in accordance with plans and
specifications approved by Lessor; (iv) lien releases or waivers satisfactory to
Lessor from any contractors and subcontractors; and (v) Lessee shall not be in
default under the Lease (subject to applicable cure periods).
7. Lessor and Lessee hereby agree to amend the Lease to provide that
Lessor shall provide Lessee up to a maximum of 3 parking spaces per 1000 sq. ft.
of Premises (excluding Warehouse Space of 4,000 sq. ft.). Lessor shall make
available and designate such parking spaces in accordance with the terms of the
Lease.
8. Provided that (i) the Lease is full force and effect, (ii) Lessee is in
possession of the Premises, and (iii) Lessee is not in Default under the Lease,
Lessee shall have One (1) five year option to extend the term of the Lease (the
"Extension Option"). At least one year prior to the expiration of the Lease,
Lessor shall request of Lessee a notification of whether or not Lessee intends
to exercise option to renew. Lessee shall give Lessor written notice of its
election to exercise the Extension Option at least nine (9) months (but not
earlier than One
-3-
<PAGE> 4
(1) year) prior to the expiration of the term of the Lease. Time is of the
essence with respect to Lessee's notice of exercise of the Extension Option.
Lessee's Extension Option shall be subject to the following terms and
conditions:
a. All terms and conditions of the Lease shall remain in full force
and effect during the extension term, except for Basic Rental for the Premises
which shall be determined in accordance with the terms of this paragraph. Basic
Rental during the option term shall be the then fair market base rent for
comparable vacant space on the Property, taking into account the commencement
date of the option term, the terms and conditions of the lease form that Lessor
is then using in the Building, but in no event shall the Basic Rental be less
than the Basic Rental payable during the last month of the term preceding the
option term. The term fair market base rent shall mean the base rent for that
space which would be paid by a willing tenant to a willing landlord, neither of
whom is compelled to rent, for a term of five years, disregarding "tenant
concessions," if any, then being offered on comparable vacant space only to
prospective new tenants in the Building. The term "tenant concessions" shall
include, without limitation, such inducements as free rent, free parking, over
standard tenant improvements, or other similar inducements. The fair market base
rent shall not reflect the value of any improvements to the Premises made by
Lessee which Lessee has the right to remove at the end of the Lease.
b. Lessor and Lessee shall conduct good faith negotiations to
establish and agree on the Basic Rental for the Premises during the option term
within 120 days of the date of Lessee's notice of exercise of the Extension
Option to Lessor. In the event that the parties are unable to agree on the Basic
Rental for the option term, the parties hereby agree to submit the issue to
binding arbitration in accordance with the following procedure. Upon the
expiration of the negotiation period, each party shall select one (1) qualified
real estate appraiser or professional within 15 days. In the event that one
party refuses to select an arbitrator, after notice to the breaching party, the
non-breaching parties arbitrator shall select the breaching party's arbitrator.
The arbitrators shall select a third arbitrator within ten days. Each party
shall submit to the arbitrators its opinion of Basic Rental based on fair market
base rent as defined above. The arbitrators shall be required to select one or
the other party's Basic Rental number, by at least two of the three arbitrators.
The non-prevailing party in the arbitration shall pay all costs and expenses of
the arbitration. The parties shall submit all written material to the
arbitrators within 30 days of the date the third arbitrator has been selected
and the arbitrators shall render a decision within 30 days of the receipt of the
parties written submissions. In the event either party defaults or refuses to
perform its obligations under this paragraph, such defaulting party shall be
deemed to have accepted the non-defaulting party's opinion of Basic Rental.
c. The Extension Option shall be personal to Lessee and may not be
exercised or be assigned, voluntarily or involuntarily, by or to any person or
entity other than Lessee, nor shall the Extension Option be assignable separate
and apart from the Lease.
-4-
<PAGE> 5
d. The Extension Option shall be terminated during any period in
which Lessee is in default under any provisions of the Lease until said default
has been cured. Time is of the essence. If Lessee fails to exercise its
Extension Option prior to the expiration of the applicable time period for the
exercise of such right, Lessee's rights under the extension option shall
thereafter be terminated, deemed null and void and of no further force or
effect. The period of time within which the Extension option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
such rights because of the foregoing provisions. All rights of Lessee under the
Extension Option shall terminate and be of no further force or effect even after
Lessee's due and timely exercise thereof, if, after the exercise, but prior to
the commencement date of the option term: (i) Lessee fails to pay to Lessor a
monetary obligation of Lessee's in accordance with the terms of the Lease; (ii)
Lessee fails to cure a material non-monetary default in accordance with the
terms of the Lease; or (iii) Lessor gives to Lessee three (3) or more notices of
default, whether or not such defaults are ultimately cured. Lessor's waiver of
its right to terminate the Lease due to Lessee's default in any instance shall
not be deemed a waiver of the foregoing conditions precedent and conditions
subsequent to the exercise of the Extension Option.
9. Any and all conditions or terms under the Lease to be performed by the
Lessor have been satisfied (including without limitation, the terms of the
Agreement); all non-monetary conditions under the Lease to be performed by the
Lessor have been satisfied; there are no existing claims, defenses or offsets
which the Lessee has against Lessor or the enforcement of the Lease by Lessor.
Lessee hereby acknowledges that the foregoing representation and warranty by
Lessee is a material consideration to Lessor in entering into this Amendment and
that Lessor is specifically relying on the statements of Lessee contained
herein.
10. Except as expressly amended by this Amendment, the terms and
conditions of the Lease, as previously amended, remain in full force and effect
and are hereby ratified and affirmed.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Amendment as of
the date first above written.
LESSOR: CARR REDMOND CORPORATION
By: /s/ Philip L. Hawkins
--------------------------------
It's: Managing Director
------------------------------
LESSEE: INCONTROL, INC.
By: /s/ Donald F. Seaton III
--------------------------------
It's: VP Finance
------------------------------
-5-
<PAGE> 6
DISTRICT OF COLUMBIA )
)
-----------)
I certify that I know or have satisfactory evidence that Philip L. Hawkins
is the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the Managing Director of CARR REDMOND
CORPORATION to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
DATED this 3rd day of March, 1997.
/s/ Olivia M. Kerr
--------------------------------
Notary Public in and for the District
of Columbia, residing at District of
Columbia
My Commission Expires: November 30,
2001
Olivia M. Kerr
--------------------------------
(print name)
STATE OF WASHINGTON )
)
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Donald F. Seaton
III is the person who appeared before me, and said person acknowledged that
he/she signed this instrument, on oath stated that he/she was authorized to
execute the instrument and acknowledged it as the Chief Financial Officer of
INCONTROL, INC. to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
DATED this 31st day of January, 1997.
/s/ K. Kay Hannah
---------------------------------------
Notary Public in and for the State of
Washington, residing at Redmond, WA
My Commission Expires: 2/14/00
(Notary Seal of K. Kay Hannah
K. Kay Hannah) --------------------------------
(print name)
-6-
<PAGE> 7
(Exhibit "A-1" - Record Drawing of Redmond East Bldg. 14 depicting
floor plan of first floor and "Office Expansion Space.")
<PAGE> 8
(Exhibit "A-2" - Record Drawing of Redmond East Bldg. 14 depicting
floor plan of second floor and "Office Expansion Space.")
<PAGE> 1
Exhibit 10.4
INCONTROL, INC.
RESTATED 1990 STOCK OPTION PLAN
AS AMENDED AND RESTATED AS OF JANUARY 1, 1997
SECTION 1. PURPOSES
The purpose of the InControl, Inc. Restated 1990 Stock Option Plan (this
"Plan") is to provide a means whereby selected employees, directors, officers,
agents, consultants, advisors and independent contractors of InControl, Inc.
(the "Company"), or of any parent or subsidiary (as defined in subsection 5.8
and referred to hereinafter as "related corporations") thereof, may be granted
incentive stock options and/or nonqualified stock options to purchase the Common
Stock (as defined in Section 3) of the Company, in order to attract and retain
the services or advice of such employees, directors, officers, agents,
consultants, advisors and independent contractors and to provide added incentive
to such persons by encouraging stock ownership in the Company.
SECTION 2. ADMINISTRATION
This Plan shall be administered by the Board of Directors of the Company
(the "Board") or a committee or committees (which term includes subcommittees)
appointed by and consisting of two or more members of, the Board. The
administrator of this Plan shall hereinafter be referred to as the "Plan
Administrator."
If and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Board shall consider in selecting the Plan Administrator and the membership
of any committee acting as Plan Administrator of the Plan with respect to any
persons subject or likely to become subject to Section 16 under the Exchange Act
the provisions regarding (a) "outside directors" as contemplated by Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and (b)
"nonemployee directors" as contemplated by Rule 16b-3 under the Exchange Act.
The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible Participants to different committees,
subject to such limitations as the Board deems appropriate. Committee members
shall serve for such term as the Board may determine, subject to removal by the
Board at any time.
2.1 PROCEDURES
The Board shall designate one of the members of the Plan Administrator as
chairman. The Plan Administrator may hold meetings at such times and places as
it shall determine. The acts of a majority of the members of the Plan
Administrator present at meetings at which a quorum exists, or acts reduced to
or approved in writing by all Plan Administrator members, shall be valid acts of
the Plan Administrator.
Page 1
<PAGE> 2
2.2 RESPONSIBILITIES
Except for the terms and conditions explicitly set forth in this Plan, the
Plan Administrator shall have the authority, in its discretion, to determine all
matters relating to the options to be granted under this Plan, including
selection of the individuals to be granted options, the number of shares to be
subject to each option, the exercise price, and all other terms and conditions
of the options. Grants under this Plan need not be identical in any respect,
even when made simultaneously. The interpretation and construction by the Plan
Administrator of any terms or provisions of this Plan or any option issued
hereunder, or of any rule or regulation promulgated in connection herewith,
shall be conclusive and binding on all interested parties, so long as such
interpretation and construction with respect to incentive stock options
correspond to the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder and any amendments
thereto.
2.3 RULE 16b-3 COMPLIANCE AND BIFURCATION OF PLAN
Notwithstanding anything in this Plan to the contrary, the Board, in its
absolute discretion, may bifurcate this Plan so as to restrict, limit or
condition the application of any provision of this Plan to participants who are
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning this Plan with respect to other participants.
SECTION 3. SHARES SUBJECT TO THE PLAN
The shares subject to this Plan shall be the Company's Common Stock, par
value $.01 per share (the "Common Stock"), currently authorized but unissued or
now held or subsequently acquired by the Company as treasury shares. Subject to
adjustment as provided in Section 7, the aggregate amount of Common Stock to be
delivered upon the exercise of all options granted under this Plan shall not
exceed 4,425,000 shares(1). If any option granted under this Plan shall expire
or be surrendered, exchanged for another option, cancelled or terminated for any
reason without having been exercised in full, the unpurchased shares subject
thereto shall thereupon again be available for purposes of this Plan, including
for replacement options which may be granted in exchange for such expired,
surrendered, exchanged, cancelled or terminated options.
SECTION 4. ELIGIBILITY
An incentive stock option may be granted only to an individual who, at the
time the option is granted, is an employee of the Company or a related
corporation. A nonqualified stock option may be granted to any employee,
director, officer, agent, consultant, advisor or independent contractor of the
Company or any related corporation, whether an individual or an entity. Any
party to whom an option is granted under this Plan shall be referred to
hereinafter as an "Optionee."
- --------
(1) As constituted on January 1, 1997.
Page 2
<PAGE> 3
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
Options granted under this Plan shall be evidenced by written agreements
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with this
Plan. Notwithstanding the foregoing, options shall include or incorporate by
reference the following terms and conditions:
5.1 NUMBER OF SHARES AND PRICE
The maximum number of shares that may be purchased pursuant to the
exercise of each option and the price per share at which such option is
exercisable (the "exercise price") shall be as established by the Plan
Administrator; provided, however, that the maximum number of shares with respect
to which an option or options may be granted to any Optionee in any one fiscal
year of the Company shall not exceed 200,000 shares (the "Maximum Annual
Optionee Grant"); provided further that the Plan Administrator shall act in good
faith to establish an exercise price which shall be not less than the fair
market value per share of the Common Stock at the time the option is granted and
not less than the par value per share of the Common Stock at the time the option
is granted with respect to nonqualified stock options and also provided that,
with respect to incentive stock options granted to greater than 10%
Stockholders, the exercise price shall be as required by subsection 6.1.
5.2 TERM AND MATURITY
Subject to the restrictions contained in Section 6 with respect to
granting incentive stock options to greater than 10% Stockholders, the term of
each incentive stock option shall be as established by the Plan Administrator
and, if not so established, shall be 10 years from the date it is granted but in
no event shall it exceed 10 years. The term of each nonqualified stock option
shall be as established by the Plan Administrator and, if not so established,
shall be 10 years. To ensure that the Company or related corporation will
achieve the purpose and receive the benefits contemplated by this Plan, any
option granted to any Optionee hereunder shall, unless the condition of this
sentence is waived or modified in the agreement evidencing the option or by
resolution adopted at any time by the Plan Administrator, be exercisable
according to the following schedule:
<TABLE>
<CAPTION>
PERIOD OF OPTIONEE'S CONTINUOUS PORTION OF
RELATIONSHIP WITH THE COMPANY OR TOTAL OPTION
RELATED CORPORATION FROM THE DATE WHICH IS
THE OPTION IS GRANTED EXERCISABLE
--------------------------------- -----------
<S> <C>
Less than twelve months 0%
Twelve months 25%
Twenty-four months 50%
Thirty-six months 75%
Forty-eight months or greater 100%
</TABLE>
Page 3
<PAGE> 4
5.3 EXERCISE
Subject to the vesting schedule described in subsection 5.2, each option
may be exercised in whole or in part at any time and from time to time;
provided, however, that no fewer than 100 shares (or the remaining shares then
purchasable under the option, if less than 100 shares) may be purchased upon any
exercise of any option hereunder and that only whole shares will be issued
pursuant to the exercise of any option and that the exercise price shall not be
less than the par value per share of the Common Stock at the time the option is
exercised. An Option shall be exercised by delivery to the Company of notice of
the number of shares with respect to which the option is exercised, together
with payment of the exercise price.
5.4 PAYMENT OF EXERCISE PRICE
Payment of the option exercise price shall be made in full at the time the
notice of exercise of the option is delivered to the Company and shall be in
cash, bank certified or cashier's check, or personal check (unless at the time
of exercise the Plan Administrator in a particular case determines not to accept
a personal check) for the shares being purchased.
The Plan Administrator can determine at any time before exercise that
additional forms of payment will be permitted. To the extent permitted by
applicable laws and regulations (including, but not limited to, federal tax and
securities laws and regulations and state corporate law), and unless the Plan
Administrator determines otherwise, an option also may be exercised, either
singly or in combination with one or more of the alternative forms of payment
authorized by this Section 5.4, by:
(a) tendering (either actually or by attestation) shares of Common
Stock of the Company held by an Optionee having a fair market value equal to the
exercise price, such fair market value to be determined in good faith by the
Plan Administrator; provided, however, that payment in stock held by an Optionee
shall not be made unless the stock shall have been owned by the Optionee for a
period of at least six months (or any shorter period necessary to avoid a charge
to the Company's earnings for financial accounts purposes); or
(b) delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, all in accordance with the regulations of
the Federal Reserve Board, to promptly deliver to the Company the amount of sale
or loan proceeds to pay the exercise price and any federal, state or local
withholding tax obligations that may arise in connection with the exercise.
In addition, the exercise price for shares purchased under an option may
be paid, either singly or in combination with one or more of the alternative
forms of payment authorized by this Section 5.4, by (y) delivery of a
full-recourse promissory note executed by the Optionee in an amount which shall
not exceed that portion of the exercise price which is in excess of the amount
determined to be stated capital pursuant to Section 154 of the Delaware General
Corporation Law; provided that (i) such note delivered in connection with an
incentive stock option shall, and such note delivered in connection with a
nonqualified stock option may, in the
Page 4
<PAGE> 5
sole discretion of the Plan Administrator, bear interest at a rate specified by
the Plan Administrator but in no case less than the rate required to avoid
imputation of interest (taking into account any exceptions to the imputed
interest rules) for federal income tax purposes, (ii) the Plan Administrator in
its sole discretion shall specify the term and other provisions of such note at
the time an incentive stock option is granted or at any time prior to exercise
of a nonqualified stock option, (iii) the Plan Administrator may require that
the Optionee pledge to the Company for the purpose of securing the payment of
such note the shares of Common Stock to be issued to the Optionee upon exercise
of the option and may require that the certificate representing such shares be
held in escrow in order to perfect the Company's security interest, and (iv) the
Plan Administrator in its sole discretion may at any time restrict or rescind
this right upon notification to the Optionee or (z) such other consideration as
the Plan Administrator may permit.
5.5 WITHHOLDING TAX REQUIREMENT
The Company or any related corporation shall have the right to retain and
withhold from any payment of cash or shares of Common Stock under this Plan the
amount of taxes required by any government to be withheld or otherwise deducted
and paid with respect to such payment. At its discretion, the Company may
require an Optionee receiving shares of Common Stock to reimburse the Company
for any such taxes required to be withheld by the Company and withhold any
distribution in whole or in part until the Company is so reimbursed. In lieu
thereof, the Company shall have the right to withhold from any other cash
amounts due or to become due from the Company to the Optionee an amount equal to
such taxes. The Company may also retain and withhold or the Optionee may elect,
subject to approval by the Company at its sole discretion, to have the Company
retain and withhold a number of shares having a market value not less than the
amount of such taxes required to be withheld by the Company to reimburse the
Company for any such taxes and cancel (in whole or in part) any such shares so
withheld.
5.6 HOLDING PERIODS
5.6.1 SECTION 16 OF THE EXCHANGE ACT
Shares of Common Stock obtained upon the exercise of any option granted
under this Plan may not be sold by persons subject to Section 16 of the Exchange
Act until six (6) months after the date the option was granted; provided that
this restriction shall lapse to the extent the vesting of an option is
accelerated pursuant to Section 7.
5.6.2 TAXATION OF STOCK OPTIONS
In order to obtain certain tax benefits afforded to incentive stock
options under Section 422 of the Code, an Optionee must hold the shares issued
upon the exercise of an incentive stock option for two years after the date of
grant of the option and one year from the date of exercise. An Optionee may be
subject to the alternative minimum tax at the time of exercise of an incentive
stock option.
Page 5
<PAGE> 6
Tax advice should be obtained by an Optionee when exercising any option
and prior to the disposition of the shares issued upon the exercise of any
option.
5.7 TRANSFERABILITY OF OPTIONS
No option granted under the Plan may be assigned, pledged or transferred
by the Optionee other than by will or by the laws of descent and distribution,
and during the Optionee's lifetime, such options may be exercised only by the
Optionee or a permitted assignee or transferee of the Optionee (as provided
below). Notwithstanding the foregoing, and to the extent permitted by Section
422 of the Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit an Optionee to designate
a beneficiary who may exercise the option after the Optionee's death; provided,
however, that any option so assigned or transferred shall be subject to all the
same terms and conditions contained in the instrument evidencing the option.
5.8 TERMINATION OF RELATIONSHIP
If the Optionee's relationship with the Company or any related corporation
ceases for any reason other than termination for Cause (as defined in Section
7.5.1), death or total disability, and unless by its terms the option sooner
terminates or expires, then the portion of the option which is not exercisable
at the time of such cessation shall terminate immediately upon such cessation,
unless the Plan Administrator determines otherwise, and the portion of the
option which is exercisable at the time of such cessation (i) may be exercised
for a three-month period after such cessation and (ii) shall terminate at the
end of such period following such cessation as to all shares for which it has
not theretofore been exercised, unless the Plan Administrator determines
otherwise. If, in the case of an incentive stock option, an Optionee's
relationship with the Company or any related corporation changes (i.e., from
employee to nonemployee, such as a consultant), such change shall constitute a
termination of an Optionee's employment with the Company or any related
corporation and the Optionee's incentive stock option shall terminate in
accordance with this subsection 5.8. Upon the expiration of the three-month
period following cessation of employment in the case of an incentive stock
option, or at any time prior to the expiration of the option in the case of a
nonqualified stock option, the Plan Administrator shall have sole discretion in
a particular circumstance to extend the exercise period following such cessation
to any date up to the termination or expiration of the option. If, however, in
the case of an incentive stock option, the Optionee does not exercise the
Optionee's option within three months after cessation of employment, the option
will no longer qualify as an incentive stock option under the Code.
If an Optionee's relationship with the Company or any related corporation
ceases because of a total disability, the portion of Optionee's option that is
exercisable at the time of such cessation shall not terminate or, in the case of
an incentive stock option, cease to be treated as an incentive stock option
until the end of the 12-month period following such cessation (unless by its
terms it sooner terminates or expires). As used in this Plan, the term "total
disability" refers to a mental or physical impairment of the Optionee which is
expected to result in death or which has lasted or is expected to last for a
continuous period of 12 months
Page 6
<PAGE> 7
or more and which causes the Optionee to be unable, in the opinion of the
Company and two independent physicians, to perform his or her duties for the
Company and to be engaged in any substantial gainful activity. Total disability
shall be deemed to have occurred on the first day after the Company and the two
independent physicians have furnished their opinion of total disability to the
Plan Administrator.
Options granted under the Plan shall not be affected by any change of
relationship with the Company so long as the Optionee continues to be an
employee, director, officer, agent, consultant, advisor or independent
contractor of the Company or of a related corporation; however, a change in an
Optionee's status from an employee to a nonemployee (e.g., consultant or
independent contractor) shall result in the termination of an outstanding
incentive stock option held by such Optionee. The Plan Administrator, in its
absolute discretion, may determine all questions of whether particular leaves of
absence constitute a termination of services; provided, however, that with
respect to incentive stock options, such determination shall be subject to any
requirements contained in the Code. The foregoing notwithstanding, with respect
to incentive stock options, employment shall not be deemed to continue beyond
the first 90 days of such leave, unless the Optionee's reemployment rights are
guaranteed by statute or by contract.
As used herein, the term "related corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) in,
at the time of the granting of the option, an unbroken chain of corporations
ending with the Company, if stock possessing 50% or more of the total combined
voting power of all classes of stock of each of the corporations other than the
Company is owned by one of the other corporations in such chain. When referring
to a parent corporation, the term "related corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if, at
the time of the granting of the option, each of the corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
5.9 DEATH OF OPTIONEE
If an Optionee dies while he or she has a relationship with the Company or
any related corporation or within the three-month period (or 12-month period in
the case of totally disabled Optionees) following cessation of such
relationship, any option held by such Optionee to the extent that the Optionee
would have been entitled to exercise such option, may be exercised within one
year after his or her death by the personal representative of his or her estate
or by the person or persons to whom the Optionee's rights under the option shall
pass (i) by will or by the applicable laws of descent and distribution or (ii)
by a designation or transfer pursuant to Section 5.7.
5.10 NO STATUS AS STOCKHOLDER
Neither the Optionee nor any party to which the Optionee's rights and
privileges under the option may pass shall be, or have any of the rights or
privileges of, a Stockholder of the
Page 7
<PAGE> 8
Company with respect to any of the shares issuable upon the exercise of any
option granted under this Plan unless and until such option has been exercised.
5.11 CONTINUATION OF RELATIONSHIP
Nothing in this Plan or in any option shall confer upon any Optionee any
right to continue in the employ or other relationship of the Company or of a
related corporation, or to interfere in any way with the right of the Company or
of any such related corporation to terminate his or her employment or other
relationship with the Company at any time.
5.12 MODIFICATION AND AMENDMENT OF OPTION
Subject to the requirements of Code Section 422 with respect to incentive
stock options and to the terms and conditions and within the limitations of this
Plan, the Plan Administrator may modify or amend any outstanding option granted
under this Plan. The modification or amendment of an outstanding option shall
not, without the consent of the Optionee, impair or diminish any of his or her
rights or any of the obligations of the Company under such option. Except as
otherwise provided in this Plan, no outstanding option shall be terminated
without the consent of the Optionee.
5.13 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS
As to all incentive stock options granted under the terms of this Plan, to
the extent that the aggregate fair market value of the shares (determined at the
time the incentive stock option is granted) with respect to which incentive
stock options are exercisable for the first time by the Optionee during any
calendar year (under this Plan and all other incentive stock option plans of the
Company, a related corporation or a predecessor corporation) exceeds $100,000,
such options shall be treated as nonqualified stock options, to the extent
required by Section 422 of the Code.
SECTION 6. GREATER THAN 10% STOCKHOLDERS
6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS
If an incentive stock option is granted under this Plan to any employee
who own more than 10% of the total combined voting power of all classes of stock
of the Company or any related corporation, the term of such incentive stock
options shall not exceed five years and the exercise price shall be not less
than 110% of the fair market value of the shares at the time the incentive stock
option is granted. This provision shall control notwithstanding any contrary
terms contained in an option agreement or any other document.
6.2 ATTRIBUTION RULE
For purposes of subsection 6.1, in determining stock ownership, an
employee shall be deemed to own the shares owned, directly or indirectly, by or
for his or her brothers, sisters, spouse, ancestors and lineal descendants.
Shares owned, directly or indirectly, by or for a
Page 8
<PAGE> 9
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its Stockholders, partners or beneficiaries. If an
employee or a person related to the employee owns an unexercised option or
warrant to purchase shares of the Company, the shares subject to that portion of
the option or warrant which is unexercised shall not be counted in determining
stock ownership. For purposes of this Section 6, shares owned by an employee
shall include all shares actually issued and outstanding immediately before the
grant of the incentive stock option to the employee.
SECTION 7. ADJUSTMENTS
7.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a cash dividend,
or other change in the Company's corporate or capital structure results in (a)
the outstanding shares, or any securities exchanged therefor or received in
their place, being exchanged for a different number or class of securities of
the Company or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Plan Administrator
shall make proportional adjustments in (i) the maximum number and class of
securities subject to the Plan as set forth in Section 3, (ii) the maximum
number and class of securities that may be made subject to options granted to
any individual participant as set forth in Section 5.1, and (iii) the number and
class of securities that are subject to any outstanding option and the per share
price of such securities, without any change in the aggregate price to be paid
therefor. The determination by the Plan Administrator as to the terms of any of
the foregoing adjustments shall be conclusive and binding.
7.2 CHANGE IN CONTROL
Except as otherwise provided in the instrument that evidences the option,
in the event of any Change in Control, each option that is at the time
outstanding shall automatically accelerate so that each such option shall,
immediately prior to the specified effective date for the Change in Control,
become 100% vested, except that such acceleration will not occur, if in the
opinion of the Company's accountants, it would render unavailable "pooling of
interest" accounting for a Change in Control that would otherwise qualify for
such accounting treatment. Such option shall not so accelerate, however, if and
to the extent that (a) such option is, in connection with the Change in Control,
either to be assumed by the successor corporation or parent thereof (the
"Successor Corporation") or to be replaced with a comparable award for the
purchase of shares of the capital stock of the Successor Corporation or (b) such
option is to be replaced with a cash incentive program of the Successor
Corporation that preserves the spread existing at the time of the Change in
Control and provides for subsequent payout in accordance with the same vesting
schedule applicable to such option. The determination of comparability under
clause (a) above shall be made by the Plan Administrator, and its determination
shall be conclusive and binding. All such options shall terminate and cease to
remain outstanding immediately following the consummation of the Change in
Control, except to the extent assumed by the
Page 9
<PAGE> 10
Successor Corporation. Any such options that are assumed or replaced in the
Change in Control and do not otherwise accelerate at that time shall be
accelerated in the event the Optionee's employment or services should
subsequently terminate within two years following such Change in Control, unless
such employment or services are terminated by the Successor Corporation for
Cause or by the Optionee voluntarily without Good Reason.
7.3 FURTHER ADJUSTMENT OF OPTIONS
Subject to the preceding Section 7.2, the Plan Administrator shall have
the discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or Change in Control of the Company to take such
further action as it determines to be necessary or advisable, and fair and
equitable to participants, with respect to options. Such authorized action may
include (but shall not be limited to) establishing, amending or waiving the
type, terms, conditions or duration of, or restrictions on, options so as to
provide for earlier, later, extended or additional time for exercise, lifting
restrictions and other modifications, and the Plan Administrator may take such
actions with respect to all participants, to certain categories of participants
or only to individual participants. The Plan Administrator may take such actions
before or after granting options to which the action relates and before or after
any public announcement with respect to such sale, merger, consolidation,
reorganization, liquidation or change in control that is the reason for such
action.
7.4 LIMITATIONS
The grant of options will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
7.5 DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
7.5.1 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or
disclosure of confidential information or trade secrets, or conviction or
confession of a crime punishable by law (except minor violations), in each case
as determined by the Plan Administrator, and its determination shall be
conclusive and binding.
7.5.2 CHANGE IN CONTROL
"Change in Control" means any of the following events:
(a) A change in the Board such that a majority of the seats (other
than vacant seats) on the Board have been occupied by individuals who were
neither (i) nominated or appointed by a majority of the Incumbent Directors nor
(b) nominated or appointed by directors so nominated or appointed. "Incumbent
Director" means a member of the Board who
Page 10
<PAGE> 11
has been either (x) nominated by a majority of the directors of the Company then
in office or (y) appointed by directors so nominated, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board.
(b) The acquisition (whether directly or indirectly, beneficially or
of record) by any Person of (i) fifteen percent (15%) or more of the combined
voting power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors, which acquisition is not
approved in advance by a majority of the Incumbent Directors; or (ii)
thirty-three percent (33%) or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors, which acquisition has been approved in advance by a
majority of the Incumbent Directors; provided, however, that the following
acquisitions shall not constitute a Change in Control: (x) any acquisition by
the Company, (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any company controlled by the Company,
or (z) any acquisition by any company pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of the following subsection
(c) are satisfied; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation in which the Company is not the continuing or surviving
corporation, or pursuant to which shares of the Company's Common Stock are
converted into cash, securities or other property, unless following such
reorganization, merger or consolidation (i) at least sixty-six and two-thirds
percent (66-2/3%) of the then outstanding shares of common stock of the company
resulting from such reorganization, merger or consolidation and the combined
voting power of the then outstanding voting securities of such company entitled
to vote generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners of the Company's voting securities
immediately prior to such reorganization, merger or consolidation, (ii) no
Person (excluding the Company, any employee benefit plan (or related trust) of
the Company or such company resulting from such reorganization, merger or
consolidation and any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, thirty-three
percent (33%) or more of the Company's voting securities) beneficially owns,
directly or indirectly, thirty-three percent (33%) or more of, respectively, the
then outstanding shares of common stock of the company resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such company entitled to vote generally in the
election of directors, and (iii) at least a majority of the members of the board
of directors of the company resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution
of the initial agreement providing for such reorganization, merger or
consolidation; or
Page 11
<PAGE> 12
(d) Approval by the shareholders of the Company of (i) any plan or
proposal for liquidation or dissolution of the Company or (ii) any sale, lease,
exchange or other transfer in one transaction or a series of transactions of all
or substantially all of the assets of the Company other than to a company with
respect to which following such sale or other disposition (A) at least sixty-six
and two-thirds percent (66-2/3%) of the then outstanding shares of common stock
of such company and the combined voting power of the then outstanding voting
securities of such company entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial owners
of the Company's voting securities immediately prior to such sale or other
disposition, (B) no Person (excluding the Company and any employee benefit plan
(or related trust) of the Company or such company and any Person beneficially
owning, immediately prior to such sale or other disposition, directly or
indirectly, thirty-three percent (33%) or more of the Company's voting
securities) beneficially owns, directly or indirectly, thirty-three percent
(33%) or more of, respectively, the then outstanding shares of common stock of
such company and the combined voting power of the then outstanding voting
securities of such company entitled to vote generally in the election of
directors, and (C) at least a majority of the members of the board of directors
of such company were approved by a majority of the Incumbent Board at the time
of the execution of the initial agreement or action of the Board providing for
such sale or other disposition of assets of the Company.
7.5.3 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Optionee:
"Good Reason" means, without the Optionee's written consent:
(a) (i) the assignment to the Optionee of duties, or limitation of
the Optionee's responsibilities, inconsistent with the
Optionee's title, position, duties, responsibilities and status
with the Company or any related corporation that employs the
Optionee as such duties and responsibilities existed
immediately prior to the date of the Change in Control, or (ii)
removal of the Optionee from, or failure to re-elect the
Optionee to, the Optionee's positions with the Company or any
related corporation that employs the Optionee immediately prior
to the Change in Control, except in connection with the
involuntary termination of the Optionee's employment by the
Company for Cause or as a result of the Optionee's death or
disability, as defined by the Plan Administrator; or
(b) failure by the Company to pay, or reduction by the Company of, the
Optionee's annual base salary, as reflected in the Company's payroll
records for the Optionee's last pay period immediately prior to the
Change in Control;
Page 12
<PAGE> 13
(c) the relocation of the principal place of the Optionee's employment
to a location that is more than 25 miles further from the Optionee's
principal residence than such principal place of employment
immediately prior to the Change in Control; or
(d) the breach by the Company of any material provision of any
material agreement between the Optionee and the Company.
7.6 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by any
option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
7.7 DETERMINATION OF BOARD TO BE FINAL
All Section 7 adjustments shall be made by the Board, and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. Unless an Optionee agrees otherwise, any
change or adjustment to an incentive stock option shall be made in such a manner
so as not to constitute a "modification" as defined in Code Section 425(h) and
so as not to cause his or her incentive stock option issued hereunder to fail to
continue to qualify as an incentive stock option as defined in Code Section
422(b).
SECTION 8. SECURITIES REGULATION
Shares shall not be issued with respect to an option granted under this
Plan unless the exercise of such option and the issuance and delivery of such
shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, any applicable state securities laws, 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, including the
availability, if applicable, of an exemption from registration for the issuance
and sale of any shares hereunder.
SECTION 9. AMENDMENT AND TERMINATION
9.1 BOARD ACTION
The Board may at any time suspend, amend or terminate this Plan, provided
that, to the extent required for compliance with Section 422 of the Code or
Section 162(m) of the Code or by any applicable law or regulation, the Company's
Stockholders must approve any amendment which will:
(a) increase the total number of shares that may be issued
under this Plan;
(b) modify the class of participants eligible for
participation in this Plan; or
Page 13
<PAGE> 14
(c) otherwise require Stockholder approval under any applicable law
or regulation.
Such Stockholder approval must be obtained (i) within 12 months of the
adoption by the Board of such amendment.
Any amendment made to this Plan since its original adoption which would
constitute a "modification" to incentive stock options outstanding on the date
of such amendment, shall not be applicable to such outstanding incentive stock
options, but shall have prospective effect only, unless the Optionee agrees
otherwise.
9.2 AUTOMATIC TERMINATION
Unless sooner terminated by the Board, this Plan shall terminate ten years
from the earlier of (a) the date on which this Plan is adopted by the Board or
(b) the date on which this Plan is approved by the Stockholders of the Company.
No option may be granted after such termination or during any suspension of this
Plan. The amendment or termination of this Plan shall not, without the consent
of the option holder, impair or diminish any rights or obligations under any
option theretofore granted under this Plan.
SECTION 10. EFFECTIVENESS OF THIS PLAN
This Plan shall become effective upon adoption by the Board so long as it
is approved by the Company's Stockholders at any time within 12 months of such
adoption of this Plan or, if earlier, and to the extent required for compliance
with Rule 16b-3 under the Exchange Act, at the next annual meeting of
Stockholders after adoption by the Board.
Original Plan adopted by the Board of Directors on November 16, 1990 and
approved by the Stockholders on December 14, 1990; restated by the Board of
Directors on May 4, 1993 and approved by the Stockholders on May 4, 1993;
restated by the Board of Directors on December 13, 1993 and approved by the
Stockholders on December 27, 1993; restated by the Board of Directors on June 1,
1994 and approved by the Stockholders on June 29, 1994; amended and restated by
the Board of Directors on February 2, 1995 and approved by the Stockholders on
May 9, 1995; amended and restated by the Board of Directors on February 27, 1996
and approved by the Stockholders on May 7, 1996. Amended and restated by the
Board on September 24, 1996; no Stockholder approval required. Amended and
restated by the Board on January 8, 1997 to be effective as of January 1, 1997;
no Stockholder approval required.
Page 14
<PAGE> 1
Exhibit 10.5
INCONTROL, INC.
1994 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
AS AMENDED AND RESTATED ON SEPTEMBER 24, 1996
SECTION 1. PURPOSES
The purpose of the InControl, Inc. Stock Option Plan for Nonemployee
Directors (this "Plan") is to attract and retain the services of experienced and
knowledgeable nonemployee directors for InControl, Inc. (the "Company") and to
provide added incentive to such directors by providing an opportunity for stock
ownership in the Company.
SECTION 2. ADMINISTRATION
The administrator of this Plan (the "Plan Administrator") shall be the
Board of Directors of the Company (the "Board"). Subject to the terms of this
Plan, the Plan Administrator shall have the power to construe the provisions of
this Plan, to determine all questions arising thereunder and to adopt and amend
such rules and regulations for the administration of this Plan as it may deem
desirable. No member of the Plan Administrator shall participate in any vote by
the Plan Administrator on any matter materially affecting the rights of any such
member under this Plan.
SECTION 3. SHARES SUBJECT TO THE PLAN
Subject to adjustment in accordance with Section 6 hereof, the total
number of shares of the Company's common stock (the "Common Stock") for which
options may be granted under this Plan is 200,000 as such Common Stock was
constituted on the effective date of this Plan (the "Shares").(1) The Shares
shall be shares currently authorized but unissued or subsequently acquired by
the Company and shall include shares representing the unexercised portion of any
option granted under this Plan which expires or terminates without being
exercised in full.
- ---------
(1) The number of shares subject to this Plan, and all other share numbers
referred to in this Plan, have been adjusted to reflect the 3:4 reverse stock
split, which was effective on June 29, 1994.
Page 1
<PAGE> 2
SECTION 4. ELIGIBILITY
Each member of the Board elected or appointed who is not otherwise an
employee of the Company or any parent or subsidiary corporation (an "Eligible
Director") shall be eligible to participate in this Plan. Each member of the
Board on the date of adoption of this Plan who is an Eligible Director shall
automatically receive the grant of an option to purchase 10,000 shares on the
effective date of this Plan. Each Eligible Director who is elected or appointed
for the first time after the date of adoption of this Plan shall automatically
receive the grant of an option to purchase 10,000 Shares on the day such
Eligible Director is initially elected or appointed, or, if later, the effective
date of this Plan.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
Each option granted to an Eligible Director under this Plan and the
issuance of Shares thereunder shall be subject to the following terms:
5.1 OPTION AGREEMENT
Each option shall be evidenced by an option agreement (an "Agreement")
duly executed on behalf of the Company. Each Agreement shall comply with and be
subject to the terms and conditions of this Plan. Any Agreement may contain such
other terms, provisions and conditions not inconsistent with this Plan as may be
determined by the Plan Administrator.
5.2 OPTION EXERCISE PRICE
The option exercise price for an option shall be the closing price, or if
there is no closing price, the mean between the high and the low sale price of
shares of Common Stock on the Stock Market on the day the option is granted or,
if no Common Stock was traded on such date, on the next succeeding day on which
Common Stock is so traded.
5.3 VESTING AND EXERCISABILITY
Subject to stockholder approval of the Plan, each option granted to an
Eligible Director shall vest and become exercisable in accordance with the
following schedule; provided, however, that options granted to Eligible
Directors who were members of the Board on the date of adoption of this Plan
shall be exercisable twelve months from the date such options are granted.
Page 2
<PAGE> 3
<TABLE>
<CAPTION>
Period of Eligible Director's Continuous
Service as a Director With the Company Portion of Total Option Which
From the Date the Option is Granted Is Exercisable
- ------------------------------------------ -----------------------------
<S> <C>
Less than twelve months 0%
Twelve months 33 1/3%
Twenty-four months 66 2/3%
Thirty-six months 100%
</TABLE>
5.4 TIME AND MANNER OF EXERCISE OF OPTION
Each option may be exercised in whole or in part at any time and from time
to time, subject to stockholder approval of this Plan; provided, however, that
no fewer than 20% of the Shares purchasable under the option (or the remaining
Shares then purchasable under the option, if less than 20%) may be purchased
upon any exercise of any option hereunder and that only whole Shares will be
issued pursuant to the exercise of any option.
Any option may be exercised by giving written notice, signed by the person
exercising the option, to the Company stating the number of Shares with respect
to which the option is being exercised, accompanied by payment in full for such
Shares, which payment may be in whole or in part (a) in cash or by check, (b) in
shares of Common Stock already owned for at least six months by the person
exercising the option, valued at fair market value at the time of such exercise,
or (c) by delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, to properly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price, all in accordance
with the regulations of the Federal Reserve Board.
5.5 TERM OF OPTIONS
Each option shall expire ten years from the date of the granting thereof,
but shall be subject to earlier termination as follows:
(a) In the event that an Optionee ceases to be a director of the
Company for any reason other than the death of the Optionee, the unvested
portion of the options granted to such Optionee shall terminate immediately and
the vested portion of the options granted to such Optionee may be exercised by
him or her only within three months after the date such Optionee ceases to be a
director of the Company.
(b) In the event of the death of an Optionee, whether during the
Optionee's service as a director or during the three-month period referred to in
Section 5.5(a), the unvested portion of the options granted to such Optionee
shall terminate immediately and the vested portion of the options granted to
such Optionee shall be exercisable, and such options shall expire
Page 3
<PAGE> 4
unless exercised within twelve months after the date of the Optionee's death, by
the legal representatives or the estate of such Optionee, by any person or
persons whom the Optionee shall have designated in writing on forms prescribed
by and filed with the Company or, if no such designation has been made, by the
person or persons to whom the Optionee's rights have passed by will or the laws
of descent and distribution.
5.6 TRANSFERABILITY
During an Optionee's lifetime, an option may be exercised only by the
Optionee or a permitted transferee or assignee. Options granted under this Plan
and the rights and privileges conferred thereby shall not be subject to
execution, attachment or similar process and may not be transferred, assigned,
pledged or hypothecated in any manner (whether by operation of law or otherwise)
other than by (a) will or by the applicable laws of descent and distribution,
(b) designation by the Optionee in writing during the Optionee's lifetime of a
beneficiary to receive and exercise options in the event of the Optionee's death
(as provided in Section 5.5(b) or (c) gift or other transfer to either (i) a
spouse or other immediate family member or (ii) any trust, partnership or other
entity in which the Optionee or such Optionee's spouse or other immediate family
member has a substantial beneficial interest, except that any option so assigned
or transferred shall be subject to all the same terms and conditions contained
in this Plan. Any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of any option under this Plan or of any right or privilege conferred
thereby, contrary to the provisions of this Plan, or the sale or levy or any
attachment or similar process upon the rights and privileges conferred hereby,
shall be null and void.
5.7 HOLDING PERIOD
Shares of Common Stock obtained upon the exercise of any option granted
under this Plan may not be sold by persons subject to Section 16 of the Exchange
Act until six (6) months after the date the option was granted; provided that
this restriction shall lapse to the extent the vesting of an option is
accelerated pursuant to Section 6.2.
5.8 PARTICIPANT'S OR SUCCESSOR'S RIGHTS AS STOCKHOLDER
Neither an Optionee nor the Optionee's successor in interest shall have
any rights as a stockholder of the Company with respect to any Shares subject to
an option granted to such person until such person becomes a holder of record of
such Shares.
5.9 LIMITATION AS TO DIRECTORSHIP
Neither this Plan, nor the granting of an option, nor any other action
taken pursuant to this Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that an Optionee has a right to continue as a
director for any period of time or at any particular rate of compensation.
Page 4
<PAGE> 5
5.10 REGULATORY APPROVAL AND COMPLIANCE
The Company shall not be required to issue any certificate or certificates
for Shares upon the exercise of an option granted under this Plan, or record as
a holder of record of Shares the name of the individual exercising an option
under this Plan, without obtaining to the complete satisfaction of the Plan
Administrator the approval of all regulatory bodies deemed necessary by the Plan
Administrator, and without complying, to the Plan Administrator's complete
satisfaction, with all rules and regulations under federal, state or local law
deemed applicable by the Plan Administrator.
SECTION 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
6.1 RECAPITALIZATION
The aggregate number and class of shares for which options may be granted
under this Plan, the number and class of shares covered by each outstanding
option and the exercise price per share thereof (but not the total price), shall
all be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock of the Company resulting from a split or
consolidation of shares or any like capital adjustment, or the payment of any
stock dividend.
6.2 EFFECT OF LIQUIDATION OR REORGANIZATION
Upon a merger (other than a merger of the Company in which the holders of
shares of Common Stock immediately prior to the merger have the same
proportionate ownership of shares of Common Stock in the surviving corporation
immediately after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or creation of a
holding company) or liquidation of the Company (each a "corporate transaction"),
as a result of which the stockholders of the Company receive cash, stock or
other property in exchange for or in connection with their shares of Common
Stock, then the exercisability of each option outstanding under the Plan shall
be automatically accelerated so that each such option shall, immediately prior
to the specified effective date for any such transaction, become fully
exercisable with respect to the total number of shares of Common Stock
purchasable under such option and may be exercised for all or any portion of
such shares. To the extent such option is not exercised, it shall terminate,
except that in the event of a corporate transaction in which stockholders of the
Company receive capital stock of another corporation in exchange for their
shares of Common Stock, such unexercised option shall be assumed or an
equivalent option shall be substituted by the successor corporation or a parent
or subsidiary of such successor corporation. Any such assumed or equivalent
option shall be 100% vested and exercisable with respect to the total number of
shares purchasable under such option. Upon a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock in the surviving corporation immediately
after the merger or a mere reincorporation or the creation of a holding company,
each option outstanding under the Plan shall be assumed or an equivalent option
shall be substituted by the successor
Page 5
<PAGE> 6
corporation or a parent or subsidiary of such corporation, and the vesting
schedule set forth in the option agreement shall continue to apply to such
assumed or equivalent option.
6.3 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by any
option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
SECTION 7. EXPENSES
All costs and expenses of the adoption and administration of this Plan
shall be borne by the Company; none of such expenses shall be charged to any
Optionee.
SECTION 8. COMPLIANCE WITH RULE 16B-3
It is the intention of the Company that this Plan comply in all respects
with the requirements for a "formula plan" within the meaning attributed to that
term for purposes of Rule 16b-3 under Section 16(b) of the Exchange Act.
Therefore, if any Plan provision is later found not to be in compliance with
such requirements, that provision shall be deemed null and void, and in all
events this Plan shall be construed in favor of its meeting such requirements.
SECTION 9. AMENDMENT AND TERMINATION
The Board may amend, terminate or suspend this Plan at any time, in its
sole and absolute discretion; provided, however, that if required to qualify
this Plan as a formula plan for purposes of Rule 16b-3 under Section 16(b) of
the Exchange Act, no amendment may be made more than once every six months that
would change the amount, price, timing or vesting of the options, other than to
comply with changes in the Internal Revenue Code of 1986, as amended, or the
rules and regulations thereunder; provided further that to the extent required
by any applicable law or regulation, no amendment shall be made without the
approval of the Company's stockholders.
SECTION 10. EFFECTIVE DATE AND DURATION
This Plan shall be effective on September 15, 1994, the fifth trading day
after the effective date of the Company's registration statement filed by the
Company under the Securities Act of 1933, as amended, in connection with the
Company's initial underwritten public offering, so long as this Plan receives
the approval of the Company's stockholders at or before the next annual meeting
of stockholders of the Company as defined in the Company's Bylaws. A "trading
day" shall be a day on which Shares of Common Stock are traded on the Nasdaq
Stock Market. This
Page 6
<PAGE> 7
Plan shall continue in effect until June 1, 2004 unless it is
sooner terminated by action of the Board or the Company's stockholders, but such
termination shall not affect the then-outstanding terms of any options.
Adopted by the Company's Board of Directors on June 1, 1994 and approved
by the Company's stockholders on June 29, 1994. Amended and Restated by the
Board on September 24, 1996.
Page 7
<PAGE> 1
Exhibit 10.6
INCONTROL, INC.
1996 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
AS AMENDED AND RESTATED ON SEPTEMBER 24, 1996
SECTION 1. PURPOSES
The purposes of the InControl, Inc. 1996 Stock Option Plan for Nonemployee
Directors (this "Plan") are to attract and retain the services of experienced
and knowledgeable nonemployee directors for InControl, Inc. (the "Company") and
to provide added incentive to such directors by providing an opportunity for
stock ownership in the Company.
SECTION 2. ADMINISTRATION
The administrator of this Plan (the "Plan Administrator") shall be the
Board of Directors of the Company (the "Board"). Subject to the terms of this
Plan, the Plan Administrator shall have the power to construe the provisions of
this Plan, to determine all questions arising hereunder and to adopt and amend
such rules and regulations for the administration of this Plan as it may deem
desirable. No member of the Plan Administrator shall participate in any vote by
the Plan Administrator on any matter materially affecting the rights of any such
member under this Plan.
SECTION 3. SHARES SUBJECT TO THE PLAN
Subject to adjustment in accordance with Section 6 hereof, the total
number of shares of the Company's common stock (the "Common Stock") for which
options may be granted under this Plan is 300,000, as such Common Stock was
constituted on the effective date of this Plan (the "Shares"). The Shares shall
be shares currently authorized but unissued or subsequently acquired by the
Company as treasury shares and shall include shares representing the unexercised
portion of any option granted under this Plan which expires or terminates
without being exercised in full.
SECTION 4. ELIGIBILITY; PARTICIPATION IN THE PLAN
4.1 ELIGIBLE DIRECTORS
Each member of the Board elected or appointed who is not otherwise an
employee of the Company or any parent or subsidiary corporation (an "Eligible
Director") shall be eligible to participate in this Plan.
4.2 INITIAL GRANTS
Each existing member of the Board immediately prior to the effective date
of this Plan who will continue service as an Eligible Director immediately
following the 1996 Annual Meeting of Stockholders shall automatically receive
the grant of an option to purchase 20,000 Shares on the effective date of this
Plan.
Page 1
<PAGE> 2
Commencing with the effective date of this Plan, immediately following his
or her initial election or appointment to the Board, each Eligible Director
shall automatically receive an Option to purchase 30,000 Shares.
4.3 ANNUAL GRANTS
Commencing with the 1997 Annual Meeting of Stockholders each Eligible
Director continuing service as an Eligible Director immediately following an
Annual Meeting of Stockholders shall automatically receive an option to purchase
10,000 Shares immediately following each year's Annual Meeting of Stockholders
as an annual grant; provided that an Eligible Director who has received an
initial grant of 30,000 Shares on such date shall not receive an annual grant
until the next Annual Meeting.
4.4 AVAILABILITY OF SHARES
No grant shall be made under this Plan if the effect of such grant would
be to obligate the Company to issue more Shares than are reserved under Section
3. If insufficient Shares are reserved under Section 3 to fully fund one or more
grants to be made under this Section 4 on the same date of grant, then the
Shares available shall be divided by the number of Eligible Directors then
entitled to a grant and each such Eligible Director shall be granted an option
for that number of Shares.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
Each option granted to an Eligible Director under this Plan (such an
Eligible Director, an "Optionee") and the issuance of Shares thereunder shall be
subject to the following terms:
5.1 OPTION AGREEMENT
Each option shall be evidenced by an option agreement (an "Agreement")
duly executed on behalf of the Company. Each Agreement shall comply with and be
subject to the terms and conditions of this Plan. Any Agreement may contain such
other terms, provisions and conditions not inconsistent with this Plan as may be
determined by the Plan Administrator.
5.2 OPTION EXERCISE PRICE
The option exercise price for an option shall be the closing price, or if
there is no closing price, the mean between the high and the low sales price of
shares of Common Stock as reported on the Nasdaq Stock Market on the day the
option is granted or, if no Common Stock was traded on such date, on the next
succeeding day on which Common Stock is so traded.
5.3 VESTING AND EXERCISABILITY
Each stock option granted hereunder shall vest and become exercisable in
accordance with the following schedule:
Page 2
<PAGE> 3
<TABLE>
<CAPTION>
Period of Eligible Director's Continuous Portion of Total
Service as a Director With the Company Option Which Is
From the Date the Option is Granted Exercisable
--------------------------------------- ----------------
<S> <C>
Less than twelve months 0%
Twelve months 33 1/3%
Twenty-four months 66 2/3%
Thirty-six months 100%
</TABLE>
5.4 TIME AND MANNER OF EXERCISE OF OPTION
Each option may be exercised in whole or in part at any time and from time
to time, subject to stockholder approval of this Plan; provided, however, that
no fewer than 20% of the Shares purchasable under the option (or the remaining
Shares then purchasable under the option, if less than 20%) may be purchased
upon any exercise of any option hereunder and that only whole Shares will be
issued pursuant to the exercise of any option.
Any option may be exercised by giving written notice, signed by the person
exercising the option, to the Company stating the number of Shares with respect
to which the option is being exercised, accompanied by payment in full for such
Shares, which payment may be in whole or in part (a) in cash or by check, (b) in
shares of Common Stock already owned for at least six months by the person
exercising the option, valued at fair market value at the time of such exercise,
or (c) by delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, to properly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price, all in accordance
with the regulations of the Federal Reserve Board.
5.5 TERM OF OPTIONS
Each option shall expire ten years from the date of the granting thereof,
but shall be subject to earlier termination as follows:
(a) In the event that an Optionee ceases to be a director of the
Company for any reason other than the death of the Optionee, the unvested
portion of the options granted to such Optionee shall terminate immediately and
the vested portion of the options granted to such Optionee may be exercised by
him or her only within three months after the date such Optionee ceases to be a
director of the Company.
(b) In the event of the death of an Optionee, whether during the
Optionee's service as a director or during the three-month period referred to in
Section 5.5(a), the unvested portion of the options granted to such Optionee
shall terminate immediately and the vested portion of the options granted to
such Optionee shall be exercisable, and such options shall expire unless
exercised within twelve months after the date of the Optionee's death, by the
legal representatives or the estate of such Optionee, by any person or persons
whom the Optionee shall have designated in writing on forms prescribed by and
filed with the Company or, if no such designation has been
Page 3
<PAGE> 4
made, by the person or persons to whom the Optionee's rights have passed by will
or the laws of descent and distribution.
5.6 TRANSFERABILITY
During an Optionee's lifetime, an option may be exercised only by the
Optionee or a permitted transferee or assignee. Options granted under this Plan
and the rights and privileges conferred thereby shall not be subject to
execution, attachment or similar process and may not be transferred, assigned,
pledged or hypothecated in any manner (whether by operation of law or otherwise)
other than by (a) will or by the applicable laws of descent and distribution,
(b) designation by the Optionee in writing during the Optionee's lifetime of a
beneficiary to receive and exercise options in the event of the Optionee's death
(as provided in Section 5.5(b)) or (c) by gift or other transfer of an option to
either (i) a spouse or other immediate family member of the Optionee or (ii) any
trust, partnership or other entity in which the original Optionee or such
Optionee's spouse or other immediate family member has a substantial interest
except that any option so assigned or transferred shall be subject to all the
same terms and conditions contained in this Plan . Any attempt to transfer,
assign, pledge, hypothecate or otherwise dispose of any option under this Plan
or of any right or privilege conferred thereby, contrary to the provisions of
this Plan, or the sale or levy or any attachment or similar process upon the
rights and privileges conferred hereby, shall be null and void.
5.7 HOLDING PERIOD
Shares of Common Stock obtained upon the exercise of any option granted
under this Plan may not be sold by persons subject to Section 16 of the Exchange
Act until six (6) months after the date the option was granted; provided that
this restriction shall lapse to the extent the vesting of an option is
accelerated pursuant to Section 6.2.
5.8 PARTICIPANT'S OR SUCCESSOR'S RIGHTS AS STOCKHOLDER
Neither an Optionee nor the Optionee's successor in interest shall have
any rights as a stockholder of the Company with respect to any Shares subject to
an option granted to such person until such person becomes a holder of record of
such Shares.
5.9 LIMITATION AS TO DIRECTORSHIP
Neither this Plan, nor the granting of an option, nor any other action
taken pursuant to this Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that an Optionee has a right to continue as a
director for any period of time or at any particular rate of compensation.
5.10 REGULATORY APPROVAL AND COMPLIANCE
The Company shall not be required to issue any certificate or certificates
for Shares upon the exercise of an option granted under this Plan, or record as
a holder of record of Shares the name of the individual exercising an option
under this Plan, without obtaining to the complete satisfaction of the Company
the approval of all regulatory bodies deemed necessary by the
Page 4
<PAGE> 5
Company, and without complying, to the Company's complete satisfaction, with all
rules and regulations under federal, state or local law deemed applicable by the
Company.
SECTION 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
6.1 RECAPITALIZATION
The aggregate number and class of shares for which options may be granted
under this Plan, the number and class of shares covered by each outstanding
option and the exercise price per share thereof (but not the total price), and
the number and class of shares that may be made subject to options as set forth
in Section 4 of the Plan, shall all be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock of the Company
resulting from a split or consolidation of shares or any like capital
adjustment, or the payment of any stock dividend.
6.2 EFFECT OF LIQUIDATION OR REORGANIZATION
Upon a merger (other than a merger of the Company in which the holders of
shares of Common Stock immediately prior to the merger have the same
proportionate ownership of shares of Common Stock in the surviving corporation
immediately after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or the creation of
a holding company) or liquidation of the Company (each a "corporate
transaction"), as a result of which the stockholders of the Company receive
cash, stock or other property in exchange for or in connection with their shares
of Common Stock, then the exercisability of each option outstanding under the
Plan shall be automatically accelerated so that each such option shall,
immediately prior to the specified effective date for any such transaction,
become fully exercisable with respect to the total number of shares of Common
Stock purchasable under such option and may be exercised for all or any portion
of such shares. To the extent such option is not exercised, it shall terminate,
except that in the event of a corporate transaction in which stockholders of the
Company receive capital stock of another corporation in exchange for their
shares of Common Stock, such unexercised option shall be assumed or an
equivalent option shall be substituted by the successor corporation or a parent
or subsidiary of such successor corporation. Any such assumed or equivalent
option shall be 100% vested and exercisable with respect to the total number of
shares purchasable under such option. Upon a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock in the surviving corporation immediately
after the merger or a mere reincorporation or the creation of a holding company,
each option outstanding under the Plan shall be assumed or an equivalent option
shall be substituted by the successor corporation or a parent or subsidiary of
such corporation, and the vesting schedule set forth in the option agreement
shall continue to apply to such assumed or equivalent option.
6.3 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by any
option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
Page 5
<PAGE> 6
SECTION 7. EXPENSES
All costs and expenses of the adoption and administration of this Plan
shall be borne by the Company; none of such expenses shall be charged to any
Optionee.
SECTION 8. COMPLIANCE WITH RULE 16B-3
It is the intention of the Company that this Plan comply in all respects
with the requirements for a "formula plan" within the meaning attributed to that
term for purposes of Rule 16b-3 under Section 16(b) of the Exchange Act.
Therefore, if any Plan provision is later found not to be in compliance with
such requirements, that provision shall be deemed null and void, and in all
events this Plan shall be construed in favor of its meeting such requirements.
SECTION 9. AMENDMENT AND TERMINATION
The Board may amend, terminate or suspend this Plan at any time, in its sole and
absolute discretion; provided, however, that if required to qualify this Plan as
a formula plan for purposes of Rule 16b-3 under Section 16(b) of the Exchange
Act, no amendment may be made more than once every six months that would change
the amount, price, timing or vesting of the options, other than to comply with
changes in the Internal Revenue Code of 1986, as amended, or the rules and
regulations thereunder; provided further that to the extent required by any
applicable law or regulation, no amendment shall be made without the approval of
the Company's stockholders.
SECTION 10. EFFECTIVE DATE AND DURATION
This Plan shall be effective upon approval of the Company's stockholders
at or before the next Annual Meeting of Stockholders of the Company as defined
in the Company's Bylaws. This Plan shall continue in effect unless it is
terminated by action of the Board or the Company's stockholders, but such
termination shall not affect the then-outstanding terms of any options.
Adopted by the Company's Board of Directors on February 27, 1996 and
approved by the Company's stockholders on May 7, 1996. Amended and Restated on
September 24, 1996.
Page 6
<PAGE> 1
EXHIBIT 10.7
August 17, 1994
InControl, Inc.
6675 185th Avenue N.E.
Redmond, WA 98052-6734
Telephone (206) 861-9800
Facsimile (206) 861-9301
Michel Lussier
19, Ave du Bois Ste. Catherine
1380 Lasme Belgium
Dear Michel:
Our proposal for you to join InControl is as follows:
Position: Vice President, General Manager, European Operations of InControl,
Inc. We will cause you to be elected to the board of directors of InControl
Europe, SA, our Belgian subsidiary, of which you will be named "administrateur
delegue" or managing director. You will report to the chief executive officer of
InControl, Inc. You will perform the services to be provided hereunder in
Belgium. You will be responsible for establishing and managing the European
operations of InControl.
Compensation for this position is in three areas; salary, equity and other
benefits. InControl, Inc. hereby guarantees to you the payment in full of all
such amounts, whether designated for payment by InControl Europe, SA or not.
Salary: $120,000 per year ($10,000 per month) net of and without deduction for
social charges, personal income and any other applicable taxes or fiscal or
parafiscal charges, and payable in monthly installments as is customary in
Belgium. This salary will be paid in Belgian Francs at the rate of 36BF/US$
fixed for four years. The exchange rate will then be evaluated and adjusted
annually thereafter. InControl will apply for you to have the special tax status
of nonresident and will pay the source contributions to the "mutuelle" for
independents. We agree to work together to minimize the tax impact of your
employment.
Equity: Subject to the approval of the company's Board of Directors, you will be
awarded options with a ten year term to purchase 100,000 shares of the company's
common stock. These options will be granted to you under the company's 1990
Stock Incentive Plan at a price equal to the fair market value on the date of
grant. If you accept this employment offer and enter into a consulting agreement
prior to August 25, 1994, we can price these options at $8.25 - the fair market
value the stock was priced at the last Board of Directors meeting. The stock
vesting schedule set
<PAGE> 2
Michel Lussier
August 17, 1994
Page 2
under the Plan is as follows: No vesting for the first twelve months. At the end
of the twelve months, 12/48 of the options will vest, with an additional 1/48
vesting each month thereafter. I previously sent you a copy of the ISO Plan and
Agreement for your review. These options will fully vest in the event of a
take-over of InControl in which the shareholders of InControl receive cash,
stock, or other property in exchange for their shares, under terms to be set
forth in such agreement.
Benefits: InControl will provide you and your family with full medical and
hospitalization insurance comparable to your present situation. In addition,
InControl will provide you with an automobile and cellular phone for business
use and will reimburse you for your home telephone and fax. Automobile and
cellular phone should be equivalent to your current situation. InControl will
also provide a pension plan equivalent to your current plan, which you have
indicated, without prejudice, will require a contribution by InControl, Inc. or
its affiliates of approximately US$7,000 annually.
Performance Review: All employees receive an annual performance review in
February with any compensation adjustments effective March 1. You will be
included in this performance review cycle.
Severance Provisions: Your employment with InControl is for an unspecified
duration and constitutes "at-will" employment. Your employment relationship may
be terminated at any time, with or without good cause or for any or no cause, at
the option of either you or the company, with a three month written notice.
During the first four years of employment, if you are dismissed for reasons not
constituting serious fault ("faute grave") under Belgian employment law, you
will be entitled to a one time lump sum payment resulting in a net payment to
you after tax (as specified above) of one year's net salary (initially $120,000)
plus the three month written notice salary, paid in Belgium and the U.S. in a
proportion to minimize tax liabilities. After four years of employment, the
Belgian law formula generally applied in employee dismissal cases will apply.
If your dismissal is based on acts of omissions constituting serious fault
("faute grave") under Belgian employment law, you will be entitled to a one time
lump sum payment resulting in a net payment to you after tax (as specified
above) of six months net salary plus the legal three months notice pay.
It is understood that the severance provisions set forth above are not intended
to create an employment relationship under Belgian law, and that the references
to Belgian
<PAGE> 3
Michel Lussier
August 17, 1994
Page 3
employment law are intended only to set forth the conditions for application of
the contractual severance provisions to which we have agreed. It is further
agreed that this severance undertaking constitutes an agreement of InControl,
Inc. and is made in order to induce you to accept this appointment as Vice
President, General Manager, European Operations of such company.
Confidentiality Agreement: Prior to the start of your employment you will be
required by the company to sign a Proprietary Information Agreement in the form
previously provided to you. In the event of a conflict between the terms of this
letter agreement and the Proprietary Information Agreement, the terms of this
letter will control.
Date of Employment: We are interested in you joining InControl as soon as
possible and as early as September 1, 1994. We both believe that Medtronic will
not want you to stay for a long period of time. It is our understanding that
Medtronic may require you to stay for up to six months. Your current plan is to
notify Medtronic that you are leaving within three months and they may require
you to pay an additional three months to them to compensate them for their loss
of your services. In the event this circumstance occurs, InControl will
reimburse you for this expense.
You represent and warrant that, other than the notice requirements described
above, you have not entered into any agreement that would prohibit or otherwise
conflict with your entering into this agreement or performing the services
described herein.
Indemnification: You will be indemnified, as all other officers of InControl,
Inc. are, under the attached Indemnification Agreement. You will be indemnified
under such Indemnification Agreement with respect to any dispute with Medtronic
arising from or relating to the matters discussed herein or generally your
agreements with InControl, Inc. and its affiliates, except to the extent that
such dispute arises from any agreement you have entered into that prohibits or
otherwise conflicts with your entering into this letter agreement or performing
the services described herein.
Applicable Law; Arbitration: This letter agreement shall be subject to the laws
of the state of Delaware, without application of its conflict of laws rules. Any
disputes arising in connection with the negotiation or performance of this
letter agreement shall be resolved by final and binding arbitration under the
International Arbitration Rules of the American Arbitration Association. Such
arbitration shall take place in Seattle, Washington, and in English.
<PAGE> 4
Michel Lussier
August 17, 1994
Page 4
I believe this covers our discussion points. We look forward to having you join
the InControl team.
Sincerely,
/s/ Kurt C. Wheeler
Kurt C. Wheeler
Chief Executive Officer
Accepted by:
/s/ Michel Lussier August 17, 1994
- ------------------------------ --------------------------------------
Michel Lussier Date
<PAGE> 1
Exhibit 10.16
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT, dated the ___ day of ______, 199_,
between INCONTROL, INC., a Delaware corporation (the "Company"), and
____________________ ("Executive").
RECITALS
A. Executive is currently employed by the Company or one of its
Subsidiaries.
B. The Board of Directors of the Company (the "Board") has determined that
it is appropriate to reinforce the continued attention and dedication of certain
members of the Company's management, including Executive, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a Change in Control of the Company, as defined in Schedule A
attached hereto.
AGREEMENTS
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the Company and Executive agree as follows:
1. DEFINITIONS
Terms capitalized in this Agreement which are not otherwise defined shall
have the meanings assigned to such terms in Schedule A attached hereto.
2. EFFECTIVENESS
Except with respect to Sections 6 through 10 of this Agreement which shall
be effective immediately, this Agreement shall become effective immediately upon
the occurrence of a Change in Control, provided that Executive is employed by
the Company immediately prior to such Change in Control.
3. TERM. Unless earlier terminated as provided herein, the initial term of
this Agreement shall be from the date hereof until the second anniversary date
of this Agreement; provided, however, that, unless terminated as provided herein
or there shall have occurred a Change in Control, on each annual anniversary
date of this Agreement this Agreement shall automatically be renewed for
successive two-year terms. In the event of a Change in Control, unless earlier
terminated as provided
<PAGE> 2
herein, this Agreement shall continue in effect until the second anniversary
date of the Change in Control at which time this Agreement shall expire.
4. BENEFITS UPON CHANGE IN CONTROL
Executive shall be entitled to the following payments and benefits
following a Change in Control, whether or not a Termination occurs:
(a) SALARY AND BENEFITS. Executive shall (i) receive an annual base
salary no less than the Executive's annual base salary in effect immediately
prior to the date that the Change in Control occurs, including any salary which
has been earned but deferred, and an annual bonus equal to at least the average
of the three annual bonuses paid to Executive in the three years prior to the
Change in Control, and (ii) be entitled to participate in all employee expense
reimbursement, incentive, savings and retirement plans, practices, policies and
programs (including any Company plan qualified under Section 401(a) of the Code)
available to other peer executives of the Company and its Subsidiaries, but in
no event shall the benefits provided to Executive under this item (ii) be less
favorable, in the aggregate, than the most favorable of those plans, practices,
policies or programs in effect immediately prior to the date that the Change in
Control occurs.
(b) WELFARE PLAN BENEFITS. The Company shall at the Company's
expense (except for the amount, if any, of any required employee contribution
which would have been necessary for Executive to contribute as an active
employee under the plan or program as in effect on the date of the Change in
Control) continue to cover Executive (and his or her dependents) under, or
provide Executive (and his or her dependents) with insurance coverage no less
favorable than, the Company's life, disability, health, dental and any other
employee welfare benefit plans or programs, as in effect on the date of the
Change in Control (such benefits, the "Welfare Benefits").
(c) DEATH OF EXECUTIVE. In the event of Executive's death prior to
Termination, but while employed by the Company or any Subsidiary, as the case
may be, his or her spouse, if any, or otherwise the personal representative of
his or her estate shall be entitled to receive (i) Executive's salary at the
rate then in effect through the date of death, as provided under the Company's
pay policy, (ii) any Accrued Benefits for the periods of service prior to the
date of death, and (iii) Welfare Benefits for a period of one year following the
death of Executive.
(d) DISABILITY OF EXECUTIVE. In the event of Executive's Disability
prior to Termination, but while employed by the Company or any Subsidiary, as
the case may be, Executive shall be entitled to receive (i) his or her salary at
the rate then in effect through the date of the determination of Disability, as
provided under the
-2-
<PAGE> 3
Company's pay policy, (ii) any Accrued Benefits for the periods of service prior
to the date of the determination of Disability, (iii) payments under the
Company's short and long term disability plans following the determination of
Disability, and (iv) Welfare Benefits for a period of one year following the
determination of Disability.
(e) CAUSE; UPON EXPIRATION OF THIS AGREEMENT; OTHER THAN FOR GOOD
REASON. If, prior to Termination, Executive's employment shall be terminated by
the Company for Cause or upon expiration of this Agreement or by Executive other
than for Good Reason, Executive shall be entitled to receive (i) his or her
salary at the rate then in effect through the date of such termination, as
provided under the Company's pay policy, and (ii) any Accrued Benefits for the
periods of service prior to the date of such termination.
(f) WITHHOLDING. All payments under this Section 4 are subject to
applicable federal and state payroll withholding or other applicable taxes.
5. PAYMENTS AND BENEFITS UPON TERMINATION
Executive shall be entitled to the following payments and benefits
following Termination:
(a) TERMINATION PAYMENT. In recognition of past services to the
Company by Executive, the Company shall make a lump sum payment in cash to
Executive as severance pay within ten (10) business days following the date of
Termination equal to two (2) times the sum of: (i) Executive's annual base
salary in effect immediately prior to the date that either a Change in Control
shall occur or such date of Termination, whichever salary is higher, provided
that if Executive is a part-time employee on the date of Termination then
Executive's base salary in effect immediately prior to the date of Termination
shall be used in calculating the payment to which Executive may be entitled
under this Section 5(a); plus (ii) a percentage of Executive's annual base
salary specified in subparagraph (i) above, which percentage is equal to the
percentage bonus paid to the Executive for the fiscal year ended immediately
prior to the Change in Control; provided, however, that if Termination occurs
prior to the determination of such percentage for a fiscal year that has ended
or if Executive has not received a percentage bonus in the previous year, such
percentage shall be ten percent (10%). All payments under this Agreement shall
be paid within ten (10) business days following the date of Termination.
(b) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding the
foregoing, if all or any portion of the payments or benefits provided under
Section 5(a) (such payments or benefits, the "Payments"), either alone or
together with all other payments and benefits which Executive receives or is
then
-3-
<PAGE> 4
entitled to receive (pursuant to this Agreement or otherwise) from the
Company or any Subsidiary (all such payments and benefits, the "Termination
Benefits"), would constitute a Parachute Payment and be subject to Excise Tax,
then the Payments to Executive under Section 5(a) shall be increased (such
increase, a "Gross-Up Payment"), but only to the extent necessary to ensure
that, after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Termination Benefits. The foregoing calculations shall be made, at the
Company's expense, by the Company and Executive. If no agreement on the
calculations is reached within thirty (30) business days after the date of
Termination, then the accounting firm which regularly audits the financial
statements of the Company (the "Auditors") shall review the calculations. The
determination of such firm shall be conclusive and binding on all parties and
the expense for such accountants shall be paid by the Company. Pending such
determination, the Company shall continue to make all other required payments to
Executive at the time and in the manner provided herein and shall pay the
largest portion of such payments and benefits that may be paid without
triggering the Excise Tax.
As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination of the Gross-Up payment
hereunder, it is possible that Gross-Up Payments will have been made by the
Company which should not have been made (an "Overpayment") or that additional
Gross-Up Payments which will not have been made by the Company should have been
made (an "Underpayment"). If it is determined by the Company and Executive, or,
if no agreement is reached by the Company and Executive, the Auditors, that
Overpayment has been made, such Overpayment shall be treated for all purposes as
a loan to the Executive which he shall repay to the Company, together with
interest at the applicable federal rate provided for in section 787(f)(2) of the
Code. In the event that the Company and Executive, or, if no agreement is
reached by the Company and Executive, the Auditors, determine that an
Underpayment has occurred, such Underpayment shall promptly be paid by the
Company to or for the benefit of the Employee, together with interest at the
applicable federal rate provided for in section 7872(f)(2)(A) of the Code. The
Company and Executive agree to give each other prompt written notice of any
information that could reasonable result in the determination that an
Overpayment or Underpayment has been made.
(c) ACCRUED BENEFITS. The Company shall make a lump sum payment in
cash to Executive in the amount of any Accrued Benefits for the periods of
service prior to the date of Termination.
-4-
<PAGE> 5
(d) WELFARE PLAN BENEFITS. The Company shall at the Company's
expense (except for the amount, if any, of any required employee contribution
which would have been necessary for Executive to contribute as an active
employee under the plan or program as in effect on the date of Termination)
continue to cover Executive (and his or her dependents) under, or provide
Executive (and his or her dependents) with Welfare Benefits (as in effect on the
date of the Change in Control or, at the option of Executive, on the date of
Termination) for a period of one year following the date of Termination (or, at
the Company's option, in lieu of providing such Welfare Benefits, a lump sum
cash payment may be made which will equal the then-present value of the cost to
the Company of such Welfare Benefits); provided, however, that if Executive is
provided by another employer during such one-year period with benefits
substantially comparable to the benefits provided by one or more of such plans
or programs, the benefits provided by the Company shall, unless a lump sum
payment has been made by the Company, be reduced by the benefits provided by
such other employer, but only to the extent of, and with respect to, the
benefits otherwise payable under the corresponding Company employee welfare
benefit plan or program.
(e) DEATH OF EXECUTIVE. In the event of Executive's death subsequent
to Termination and prior to receiving all benefits and payments provided for by
this Section 5, such benefits shall be paid to his or her spouse, if any, or
otherwise to the personal representative of his or her estate, unless Executive
has otherwise directed the Company in writing prior to his or her death.
(f) EXCLUSIVE SOURCE OF SEVERANCE PAY. Benefits provided hereunder
shall replace the amount of any severance payments to which Executive would
otherwise be entitled under any severance plan or policy generally available to
employees of the Company.
(g) NONSEGREGATION. No assets of the Company need be segregated or
earmarked to represent the liability for benefits payable hereunder. The rights
of any person to receive benefits hereunder shall be only those of a general
unsecured creditor.
(h) WITHHOLDING. All payments under this Section 5 are subject to
applicable federal and state payroll withholding or other applicable taxes.
6. NONCOMPETITION
(a) NONCOMPETITION. In the event that this Agreement is terminated
by the Company or by Executive for any reason, and provided that any payments
due Executive upon such termination are paid when due, then for a period of one
year
-5-
<PAGE> 6
after such termination, Executive shall not engage in any activities (including,
without limitation, activities for any subsequent employer of Executive) with
respect to any products or anything else directly competitive with the products
or inventions on which Executive worked at the Company, or about which Executive
learned confidential information during Executive's employment with the Company.
(b) COMPANY REMEDY. In the event of any breach by Executive of the
obligations set forth in Section 6(a), the Company shall be entitled to recover
an amount equal to the total of all amounts paid to Executive pursuant to
Sections 5(a) and 5(b) of this Agreement in addition to any other remedies
available to the Company at law or in equity.
7. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Seattle, Washington, in
accordance with the Rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any jurisdiction.
8. CONFLICT IN BENEFITS
This Agreement is not intended to and shall not adversely affect, limit or
terminate any other agreement or arrangement between Executive and the Company
presently in effect or hereafter entered into, including any employee benefit
plan under which Executive is entitled to benefits.
9. TERMINATION
(a) TERMINATION PRIOR TO A CHANGE OF CONTROL.
(i) At any time prior to a Change in Control, the Company may
terminate this Agreement upon sixty (60) days' prior written notice in the form
of a Notice of Termination, and this Agreement shall terminate upon the
effective date specified in such Notice of Termination; provided, however, such
Notice of Termination shall have no force or effect in the event of the
occurrence of a Change in Control prior to such effective date.
(ii) At any time prior to a Change of Control, Executive may
terminate this Agreement upon sixty (60) days' prior written notice in the form
of a Notice of Termination, and this Agreement shall terminate upon the
effective date specified in such Notice of Termination notwithstanding the
occurrence of a Change in Control prior to such effective date.
-6-
<PAGE> 7
(b) TERMINATION AFTER A CHANGE IN CONTROL. After a Change in
Control, either party may terminate this Agreement upon thirty (30) days' prior
written notice in the form of a Notice of Termination.
(c) EFFECT OF TERMINATION. Notwithstanding the termination or
expiration of this Agreement, the Company shall remain liable for any rights or
payments arising prior to such termination to which Executive is entitled under
this Agreement.
10. MISCELLANEOUS
(a) AMENDMENT. This Agreement may not be amended except by written
agreement between Executive and the Company.
(b) NO MITIGATION. All payments and benefits to which Executive is
entitled under this Agreement shall be made and provided without offset,
deduction or mitigation on account of income Executive could or may receive from
other employment or otherwise, except as provided in Section 5(d) and Section
6(b) hereof.
(c) EMPLOYMENT NOT GUARANTEED. Nothing contained in this Agreement,
and no decision as to the eligibility for benefits or the determination of the
amount of any benefits hereunder, shall give Executive any right to be retained
in the employ of the Company or rehired, and the right and power of the Company
to dismiss or discharge any employee for any reason is specifically reserved.
Except as expressly provided herein, no employee or any person claiming under or
through him or her shall have any right or interest herein, or in any benefit
hereunder.
(d) LEGAL EXPENSES. In connection with any litigation, arbitration
or similar proceeding, whether or not instituted by the Company or Executive,
with respect to the interpretation or enforcement of any provision of this
Agreement, the prevailing party shall be entitled to recover from the other
party all costs and expenses, including reasonable attorneys' fees and
disbursements, in connection with such litigation, arbitration or similar
proceeding. The Company shall pay prejudgment interest on any money judgment
obtained by Executive as a result of such proceedings, calculated at the
published commercial interest rate of Seattle-First National Bank for its best
customers, as in effect from time to time from the date that payment should have
been made to Executive under this Agreement.
(e) NOTICES. Any notices required under the terms of this Agreement
shall be effective when mailed, postage prepaid, by certified mail and addressed
to, in the case of the Company:
-7-
<PAGE> 8
InControl, Inc.
6675 - 185th Avenue N.E.
Redmond, WA 98052
Attention: Chief Executive Officer
and to, in the case of Executive
_____________________________
_____________________________
_____________________________
_____________________________
Either party may designate a different address by giving written notice of
change of address in the manner provided above.
(f) WAIVER; CURE. No waiver or modification in whole or in part of
this Agreement, or any term or condition hereof, shall be effective against any
party unless in writing and duly signed by the party sought to be bound. Any
waiver of any breach of any provision hereof or any right or power by any party
on one occasion shall not be construed as a waiver of, or a bar to, the exercise
of such right or power on any other occasion or as a waiver of any subsequent
breach. Other than a breach of the provisions of Section 6, any breach of this
Agreement may be cured by the breaching party within ten days of the date that
such breaching party shall have received written notice of such breach from the
party asserting such breach.
(g) BINDING EFFECT; SUCCESSORS. Subject to the provisions hereof,
nothing in this Agreement shall prevent the consolidation of the Company with,
or its merger into, any other corporation, or the sale by the Company of all or
substantially all of its properties and assets, or the assignment of this
Agreement by the Company in connection with any of the foregoing actions. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the Company and Executive and their respective heirs, legal representatives,
successors and assigns. If the Company shall be merged into or consolidated with
another entity, the provisions of this Agreement shall be binding upon and inure
to the benefit of the entity surviving such merger or resulting from such
consolidation. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, including the
successor to all or substantially all of the business or assets of any
Subsidiary, division or profit center of the Company, to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be
-8-
<PAGE> 9
required to perform it if no such succession had taken place. The provisions of
this Section 10(f) shall continue to apply to each subsequent employer of
Executive hereunder in the event of any subsequent merger, consolidation or
transfer of assets of such subsequent employer.
(h) SEPARABILITY. Any provision of this Agreement which is held to
be unenforceable or invalid in any respect in any jurisdiction shall be
ineffective in such jurisdiction to the extent that it is unenforceable or
invalid without affecting the remaining provisions hereof, which shall continue
in full force and effect. The enforceability or invalidity of a provision of
this Agreement in one jurisdiction shall not invalidate or render unenforceable
such provision in any other jurisdiction.
(i) CONTROLLING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the state of Washington applicable to
contracts made and to be performed therein.
IN WITNESS WHEREOF, the Company and Executive have executed this
Agreement as of the day and year first above written.
INCONTROL, INC.
By:________________________________
Title:_____________________________
EXECUTIVE:
___________________________________
-9-
<PAGE> 10
Schedule A
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms have the meanings indicated:
"Accrued Benefits" means the aggregate of any compensation previously
deferred by Executive (together with any accrued interest or earnings thereon),
any accrued vacation pay and, if the date of Termination occurs after the end of
a Fiscal Year for which a bonus is payable to Executive, such bonus, in each
case to the extent previously earned and not paid, plus an amount equal to the
product of the bonus paid to Executive the prior Fiscal Year and a fraction, the
numerator of which is the number of days since the end of the prior Fiscal Year,
and the denominator of which is 365.
"Beneficial Owner" and "Beneficial Ownership" have the meanings set forth
in Rules 13d-3 and 13d-5 of the General Rules and Regulations promulgated under
the Exchange Act.
"Board Change" means that a majority of the seats (other than vacant
seats) on the Board have been occupied by individuals who were neither (a)
nominated or appointed by a majority of the Incumbent Directors nor (b)
nominated or appointed by directors so nominated or appointed.
"Business Combination" means a reorganization, merger or consolidation or
sale of substantially all of the assets of the Company.
"Cause" means (a) willful misconduct on the part of Executive that has a
materially adverse effect on the Company and its Subsidiaries, taken as a whole,
(b) Executive's engaging in conduct which could reasonably result in his or her
conviction of a felony or a crime against the Company or involving substance
abuse, fraud or moral turpitude, or which would materially compromise the
Company's reputation, as determined in good faith by a written resolution duly
adopted by the affirmative vote of not less than two-thirds of all of the
directors who are not employees or officers of the Company, (c) unreasonable
refusal by Executive to perform the duties and responsibilities of his or her
position in any material respect. No action, or failure to act, shall be
considered "willful" if it is done by Executive in good faith and with
reasonable belief that his or her action or omission was in the best interests
of the Company.
-10-
<PAGE> 11
"Change in Control" means, and shall be deemed to occur upon the happening
of, any one of the following:
(a) A Board Change; or
(b) The acquisition, directly or indirectly, by any Person of Beneficial
Ownership of 15% or more of the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors, which acquisition is not approved in advance by a majority of the
Incumbent Directors; provided, however, that the following acquisitions shall
not constitute a Change in Control: (x) any acquisition by the Company, (y) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any company controlled by the Company, or (z) any
acquisition by any company pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation, the
conditions described in clause (d) below are satisfied;
(c) The acquisition, directly or indirectly, by any Person of Beneficial
Ownership of 33% or more of the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors, which acquisition has been approved in advance by a majority of the
Incumbent Directors; provided, however, that the following acquisitions shall
not constitute a Change in Control: (x) any acquisition by the Company, (y) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any company controlled by the Company, or (z) any
acquisition by any company pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation, the
conditions described in clause (d) below are satisfied;
(d) The approval by the stockholders of the Company of a Business
Combination unless, following such Business Combination, all or substantially
all of the individuals and entities who were the beneficial owners of the
outstanding Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of the then outstanding
voting securities entitled to vote generally in the election of directors of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the outstanding
Voting Securities; or
-11-
<PAGE> 12
(e) Approval by the stockholders of the Company of a liquidation or
dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Disability" means that (a) a person has been incapacitated by bodily
injury or physical or mental disease so as to be prevented thereby from
performance of his or her duties with the Company for 120 days in any 12-month
period, and (b) such person is disabled for purposes of any and all of the plans
or programs of the Company or any Subsidiary that employs Executive under which
benefits, compensation or awards are contingent upon a finding of disability.
The determination with respect to whether Executive is suffering from such a
Disability will be determined by a mutually acceptable physician or, if there is
no physician mutually acceptable to the Company and Executive, by a physician
selected by the then Dean of the University of Washington Medical School.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excise Tax" means the excise tax, including any interest or penalties
thereon, imposed by Section 4999 of the Code.
"Fiscal Year" means the 12-month period ending on December 31 in each year
(or such other fiscal year period established by the Board).
"Good Reason" means, without Executive's express written consent:
(a) (i) the assignment to Executive of duties, or limitation of
Executive's responsibilities, inconsistent with Executive's title,
position, duties, responsibilities and status with the Company or
any Subsidiary that employs Executive as such duties and
responsibilities existed immediately prior to the date of the Change
in Control, or (ii) removal of Executive from, or failure to
re-elect Executive to, Executive's positions with the Company or any
Subsidiary that employs Executive immediately prior to the Change in
Control, except in connection with the involuntary termination of
Executive's employment by the Company for Cause or as a result of
Executive's death or Disability; or
(b) failure by the Company to pay, or reduction by the Company of,
Executive's annual base salary, as reflected in the Company's
payroll records for Executive's last pay period immediately prior to
the Change in Control;
-12-
<PAGE> 13
(c) failure by the Company to pay, or reduction by the Company of,
Executive's bonus, as calculated in accordance with Section 5(b) of
this Agreement;
(d) the relocation of the principal place of Executive's employment to a
location that is more than 25 miles further from Executive's
principal residence than such principal place of employment
immediately prior to the Change in Control; or
(e) the breach of any material provision of this Agreement by the
Company, including, without limitation, failure by the Company to
bind any successor to the Company to the terms and provisions of
this Agreement in accordance with Section 10(g).
"Incumbent Director" means a member of the Board who has been either (a)
nominated by a majority of the directors of the Company then in office or (b)
appointed by directors so nominated, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board.
"Notice of Termination" means a written notice to Executive or to the
Company, as the case may be, which shall indicate those specific provisions in
this Agreement relied upon and which sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for the termination of Executive's
employment constituting a Termination, if any, under the provision so indicated.
"Parachute Payment" means any payment deemed to constitute a "parachute
payment" as defined in Section 280G of the Code.
"Person" means any individual, entity or group (as such term is used in
Section 13(d)(3) or 14(d)(2) of the Exchange Act).
"Subsidiary" with respect to the Company has the meaning set forth in Rule
12b-2 of the General Rules and Regulations promulgated under the Exchange Act.
"Termination" means, following the occurrence of any Change in Control by
the Company, (a) the involuntary termination of the employment of Executive for
any reason other than death, Disability or for Cause or (b) the termination of
employment by Executive for Good Reason.
-13-
<PAGE> 14
"Voting Securities" means the voting securities of the Company entitled to
vote generally in the election of directors.
-14-
<PAGE> 15
Schedule of Agreements
Senior Management Employment Agreements have been entered into between the
Company and the following parties as of the dates indicated:
5/24/96
-------
1. Adams, John M.
2. Adler, Steven C.
3. Alferness, Clifton A.
4. Gray, Richard O., Jr.
5. Griffin, Jerry C., M.D.
6. Lussier, Michel E. J.
7. Sears, Gena K.
8. Seaton, Donald F., III
9. Wheeler, Kurt C.
9/24/96
-------
10. Ayers, Gregory M.
11. Garee, Robert A.
12/5/96:
--------
12. John M. Cleary
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-92350) pertaining to the Stock Option Plan for Nonemployee Directors
and the 1990 Restated Stock Option Plan of InControl, Inc. of our report dated
January 29, 1997, with respect to the consolidated financial statements of
InControl, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
Seattle, Washington Ernst & Young LLP
March 25, 1997
38
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contais summary financial information extracted from InControl
Inc's 1996 10-K Balance Sheet and Statement of Operations.
</LEGEND>
<CIK> 0000871629
<NAME> INCONTROL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,288
<SECURITIES> 32,714
<RECEIVABLES> 311
<ALLOWANCES> 0
<INVENTORY> 2,315
<CURRENT-ASSETS> 40,044
<PP&E> 11,335
<DEPRECIATION> 6,473
<TOTAL-ASSETS> 45,917
<CURRENT-LIABILITIES> 3,472
<BONDS> 1,419
0
0
<COMMON> 129,238
<OTHER-SE> (88,212)
<TOTAL-LIABILITY-AND-EQUITY> 45,917
<SALES> 306
<TOTAL-REVENUES> 306
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 440
<INCOME-PRETAX> (28,267)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (28,267)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,267)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)
</TABLE>
