-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IVRwGP04PTpKR7GuD69qBIUrLQoTW6tPmXv4Jn/JePQeA7EJP/6UU7JPZm32g7lB B4G0Ov5WAo9rrVNTOw7LIA== 0001012870-99-002235.txt : 19990712 0001012870-99-002235.hdr.sgml : 19990712 ACCESSION NUMBER: 0001012870-99-002235 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19990709 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORATEC INTERVENTIONS INC CENTRAL INDEX KEY: 0001037165 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943180773 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-82511 FILM NUMBER: 99661163 BUSINESS ADDRESS: STREET 1: 3700 HAVEN COURT STREET 2: 415-369-9904 CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6503699904 MAIL ADDRESS: STREET 1: 3700 HAVEN COURT CITY: MENLO PARK STATE: CA ZIP: 94025 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on July 9, 1999 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- ORATEC INTERVENTIONS, INC. (Exact Name of Registrant as Specified in Its Charter) --------------- Delaware 3845 94-3180773 (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Industrial Classification Identification Number) Incorporation or Code Number) Organization) 3700 Haven Court Menlo Park, California 94025 (650) 369-9904 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------- Kenneth W. Anstey Chief Executive Officer ORATEC Interventions, Inc. 3700 Haven Court Menlo Park, California 94025 (650) 369-9904 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) --------------- Copies to: Mark B. Weeks Patrick T. Seaver Laurel Finch Charles R. Ruck Brooke Campbell Shayne Kennedy VENTURE LAW GROUP LATHAM & WATKINS A Professional Corporation 650 Town Center Drive 2800 Sand Hill Road Costa Mesa, CA 92626 Menlo Park, California 94025 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. --------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Aggregate Amount of Securities to be Registered Offering Price (1) Registration Fee - -------------------------------------------------------------------------------- Common stock, par value $0.001 per share.............................. $48,875,000 $13,588 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) and Rule 457(o) under the Securities Act. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This preliminary prospectus + +is not an offer to sell these securities and is not soliciting an offer to + +buy these securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion Preliminary Prospectus dated July 9, 1999 PROSPECTUS - ----------- Shares [ORATEC LOGO APPEARS HERE] Common Stock ------------ This is ORATEC's initial public offering of common stock. All the shares of common stock are being sold by ORATEC. We expect the initial public offering price to be between $ and $ . Currently, no public market exists for the shares. We have applied to list our common stock on the Nasdaq National Market under the symbol "OTEC." Investing in our common stock involves risks which are described in the "Risk Factors" section beginning on page 5 of this Prospectus. ------------
Per Share Total --------- ----- Public offering price.................................. $ $ Underwriting discount and commissions.................. $ $ Proceeds, before expenses, to ORATEC................... $ $
The underwriters may also purchase up to an additional shares of common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery in New York, New York on or about , 1999. ------------ Merrill Lynch & Co. J.P. Morgan & Co. U.S. Bancorp Piper Jaffray ------------ The date of this prospectus is , 1999. TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 5 Special Note Regarding Forward-Looking Statements........................ 12 Use of Proceeds.......................................................... 13 Dividend Policy.......................................................... 13 Capitalization........................................................... 14 Dilution................................................................. 15 Selected Financial Data.................................................. 16 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 17 Business................................................................. 24 Management............................................................... 37 Certain Transactions..................................................... 47 Principal Stockholders................................................... 49 Description of Capital Stock............................................. 51 Shares Eligible for Future Sale.......................................... 54 Underwriting............................................................. 56 Legal Matters............................................................ 58 Experts.................................................................. 58 Additional Information................................................... 59 Index to Financial Statements............................................ F-1
---------------- You should rely only on the information contained in this prospectus. We have not and the underwriters have not authorized any other person to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. In this prospectus, references to the "company," "ORATEC," "we," "us," and "our" refer to ORATEC Interventions, Inc. Until , 1999 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ---------------- We own or have rights to trademarks or tradenames that we use in conjunction with the sale of our products. The term "ORATEC" and our logo are registered trademarks owned by us. We have also filed for trademark protection for the use of the terms SpineCATH, IDET and ElectroThermal, which are used in conjunction with the sale of our products. This prospectus also makes reference to trademarks of other companies. Our principal offices are located at 3700 Haven Court, Menlo Park, CA 94025 and our telephone number is (650) 369-9904. We were incorporated in May 1993 as Dorsamed Incorporated, and we changed our name to ORATEC Interventions, Inc. in October 1995. i PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements. ORATEC Interventions, Inc. ORATEC Interventions is a leader in the development of medical devices that use controlled thermal energy to treat spine and joint disorders. We currently market two minimally invasive systems, the SpineCATH Intradiscal ElectroThermal Therapy, or IDET, system and the ElectroThermal Arthroscopy System. Our proprietary systems use heat to shrink and repair damaged or stretched soft tissue. We market our products to orthopedic surgeons, neurosurgeons, anesthesiologists, radiologists and physiatrists. Our SpineCATH IDET system offers a minimally invasive outpatient alternative to patients suffering from chronic low back pain caused by degenerative disc disease. The IDET system enables physicians to navigate to the location of damaged tissue within a spinal disc using a self-guiding single use catheter. Physicians can then apply heat directly to the disc wall, causing the tissue to contract and thicken. We believe that the application of heat desensitizes nerve fibers and results in a stiffening of the disc wall. Following the IDET procedure, many patients experience significant pain reduction, improved overall quality of life and reduce or eliminate pain medication. In addition, the procedure does not require general anesthesia or extended hospitalization and does not subject the patient to the post-operative complications often associated with spine surgery. The IDET system was formally launched in October 1998, and we estimate that, as of June 30, 1999, over 250 physicians had performed the IDET procedure on approximately 4,000 patients. The treatment of back pain costs the U.S. health care system more than any other health problem and represents the second most common reason for doctor visits. Specifically, it is estimated that, at any given time, five million individuals in the U.S. suffer from low back pain. Many of these cases are resolved within three months using non-operative therapies ranging from physical therapy to spinal injections. However, it is estimated that there are approximately 1.4 million people who have failed to improve with non-operative therapies and for whom spine surgery is not recommended. We believe these individuals are candidates for our IDET procedure. In addition to our spine products, we offer a proprietary ElectroThermal Arthroscopy System, which treats joint disorders through the application of controlled heat by shrinking soft tissue. The system provides a minimally invasive outpatient treatment option for patients who suffer from joint instability caused by loose or stretched ligaments and whose most viable option is often open surgery. In addition, we believe our system can improve on existing arthroscopic procedures, which may require tissue shrinkage in combination with tissue anchoring, cutting and tissue removal, or ablation. The ElectroThermal Arthroscopy System was launched in March 1997, and we estimate that, as of June 30, 1999, over 1,500 physicians had used our arthroscopy products in approximately 45,000 procedures. Approximately 2.2 million arthroscopic procedures were performed in the U.S. in 1998. However, many joint injuries and disorders are still treated using open surgery because, for many of these conditions, arthroscopic techniques are not available, not effective or are difficult to perform. Our products expand arthroscopic treatment options for surgeons treating joint disorders. We have a focused sales and marketing team for each of the spine and arthroscopy markets in order to address the different physician groups in these high growth areas. Our sales organizations include direct sales employees complemented by select sales agencies. We have recently entered into an exclusive distribution agreement with DePuy AcroMed, a division of Johnson & Johnson, for the international marketing and sales of our spine products. The marketing platform for both spine and arthroscopy is built on scientific and clinical data and extensive surgeon training programs. The products we currently market have received 510(k) premarket clearance from the FDA, and as of June 30, 1999 we had six issued patents, eight notices of allowance and 40 U.S. and foreign patent applications pending. 3 The Offering Common stock offered by ORATEC....... shares Common stock to be outstanding after the offering........................ shares Use of proceeds...................... Expanded sales and marketing activities, future product development, repayment of debt and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market sym- bol................................. "OTEC"
This table is based on shares outstanding as of March 31, 1999 and excludes: (a) 1,838,940 shares that were subject to outstanding options at a weighted average exercise price of $3.13 as of March 31, 1999; (b) 127,745 shares that were issuable upon exercise of outstanding warrants at a weighted average exercise price of $5.48 per share as of March 31, 1999; and (c) an aggregate of 208,831 shares that were available for future issuance under our 1995 stock plan as of March 31, 1999. Summary Financial Data (in thousands, except per share data)
Three Months Ended Years Ended December 31, March 31, -------------------------- -------------------- 1996 1997 1998 1998 1999 -------- -------- -------- --------- --------- (unaudited) Statement of Operations Data: Sales...................... $ -- $ 2,600 $ 11,129 $ 1,572 $ 5,197 Gross profit............... -- 859 4,563 585 2,368 Total operating expenses... 2,384 7,857 15,748 2,990 5,295 Net loss................... (2,302) (6,832) (11,342) (2,349) (3,033) Pro forma net loss per share, basic and diluted (unaudited)............... $ (1.51) $ (0.31) Shares used in computing pro forma net loss per share, basic and diluted (unaudited)............... 7,525 9,673
March 31, 1999 -------------------- Actual As Adjusted ------- ----------- (unaudited) Balance Sheet Data: Cash, cash equivalents and short term investments....... $15,841 $ Total assets............................................ 25,645 Long term obligations, net of current portion........... 6,133 Redeemable convertible preferred stock.................. 35,816 Common stock, additional paid-in capital and accumulated deficit................................................ (23,662)
- -------- The as adjusted numbers in the table above are adjusted to give effect to receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed offering price of $ per share, after deducting the estimated underwriting discount and commissions and estimated offering expenses payable by us. See also "Use of Proceeds," "Capitalization" and "Underwriting." Except as otherwise indicated, all information in this prospectus is based on the following assumptions: (a) the completion of our three for five reverse stock split prior to the completion of this offering, (b) the conversion of each outstanding share of redeemable preferred stock into one share of common stock immediately before the completion of this offering, (c) no exercise of the underwriters' overallotment option, (d) our reincorporation in Delaware before the effectiveness of this offering and (e) the filing of our amended and restated certificate of incorporation upon completion of this offering. 4 RISK FACTORS If you purchase our common stock and become an ORATEC stockholder, you will be subject to risks inherent in our business. Our stock price will fluctuate for many reasons, including how our business performs relative to, among other things, competition, market conditions and general economic and industry conditions. You should carefully consider the following risk factors as well as other information in this prospectus before purchasing our common stock. The risks and uncertainties described below are intended to be the ones that are specific to our company but are not the only ones that we face. Additional risks and uncertainties that generally apply to businesses in our industry or to companies that are going public may also impair our business. We are a new company operating largely in markets that we are creating, and thus we may fail to gain market acceptance for our products. All of our revenues are derived from sales of our spine and arthroscopy systems, neither of which has gained widespread market acceptance. Any failure to gain market acceptance of our products could result in lower sales and profits. We may not develop these markets, as a result of: . our failure to train a sufficient number of physicians to create demand for our products; . our inability to build and manage effective separate sales teams for either the spine or arthroscopy markets; . our dependence on the continued publication of independent clinical data to support the use of our products; and . the refusal of payors to authorize insurance reimbursement for procedures using our products. Our future sales growth substantially depends on the SpineCATH IDET system. Because the market for our spine products is new and evolving, we cannot accurately predict either the future growth rate, if any, or the ultimate size of the spine market. Physicians will not use our spine products unless they determine, based on experience, clinical data and recommendations from prominent physicians and mentors, that the SpineCATH IDET system is an effective means of treating spine disorders. In addition, physicians tend to be slow to change their medical treatment practices because of perceived liability risks arising from the use of new spine products and the uncertainty of third party reimbursement for the SpineCATH IDET system. Physicians and payors may not support the use of our products because there is only limited clinical data to support their effectiveness. Our product sales have mainly been to a group of early adopting physicians who are receptive to minimally invasive techniques. Further sales may require us to convince physicians who currently favor existing techniques to switch to our minimally invasive procedures. Many physicians will not purchase our products until there is sufficient, long term clinical evidence to convince them to alter their existing treatment methods. In addition, some payors require the publication of peer reviewed clinical data before authorizing payment. There has been no published clinical data for our spine products. We have been collecting clinical data on patients for only two years for our spine products and three years for our arthroscopy products. Thus, continued publication of positive clinical data and longer term patient follow-up are necessary for us to achieve significant sales growth. We have a history of losses and may never become profitable. Our sales may not continue to grow, and we may not be able to achieve or maintain profitability in the future. We have incurred net losses each year since inception. In particular, we incurred losses of $11.3 million in 1998 and $3.0 million in the three months ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of approximately $24.0 million. We anticipate that our operating expenses will increase 5 substantially in absolute dollars for the foreseeable future as we expand our sales and marketing, manufacturing, product development and administrative staff. You may have a difficult time evaluating an investment in our company because we have a limited operating history. You can only evaluate our business based on a limited operating history because we began selling arthroscopy products in 1997 and spine products in 1998. This short history may not be adequate to enable you to fully assess our ability to successfully develop our products, achieve market acceptance of our products and respond to competition. We face significant competition from companies with greater resources than we have and may face additional competition in the future. The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We compete with many larger companies that enjoy several competitive advantages, including: . established distribution networks; . established relationships with health care providers and payors; and . greater resources for product development, sales and marketing and patent litigation. Competition in the Arthroscopy Market Several larger companies sell products that compete directly with our ElectroThermal Arthroscopy System. For example, ArthroCare Corporation and Mitek, an Ethicon division of Johnson & Johnson, both offer tissue shrinkage products. We also compete in the cutting and tissue removal, or ablation, product market with ArthroCare, Mitek and CONMED Corporation. Competition in the Spine Market There are numerous treatments for low back pain, including physical therapy, medication and spinal injections. Our IDET procedure is sometimes offered to a patient as an alternative to spine fusion, and thus spine implant companies, such as Sofamor Danek, a division of Medtronic, Sulzer Spine-Tech, Surgical Dynamics, a U.S. Surgical division of Tyco International, DePuy AcroMed, a division of Johnson & Johnson, and Stratec/SYNTHES may be viewed as competitors. We are also aware that Radionics, a privately held medical device company, is marketing a radiofrequency, or RF, probe which is designed for lesioning in the spine. See "Business--Competition." These and other large companies may decide to dedicate substantial resources to develop more directly competitive products. If we do not protect our intellectual property rights, our competitive position may be impaired. Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure and confidentiality agreements and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our patents may be challenged, invalidated or circumvented by third parties. While we have received notices of allowance with respect to some patent claims for our spine products, none of these patents has issued. Our patent applications and the notices of allowance we have received, may not issue as patents in a form that will be advantageous to us. Our patents and applications cover particular aspects of our products and technology. There may be more 6 effective technologies, designs or methods. If the most effective treatment method is not covered by our products or applications, it could have an adverse effect on our sales. If we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Finally, even if our intellectual property rights are adequately protected, litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and result in a substantial diversion of management attention. If our intellectual property is not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products and compete more directly with which could result in a decrease in our market share. We may be sued for violating the intellectual property rights of others. While we attempt to ensure that our products do not infringe other parties' patents and proprietary rights, our products may infringe. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is, in many cases, not certain. In addition, because patent applications can take many years to issue, there may be applications now pending of which we are unaware, which may later result in issued patents which our products may infringe. There could also be existing patents that one or more of our products may inadvertently be infringing of which we are unaware. As the number of competitors in the markets for minimally invasive treatment of spinal and joint disorders grows, the possibility of a patent infringement claim against us increases. There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry generally and in the spinal and arthroscopy market segments particularly. Infringement and other intellectual property claims, whether with or without merit, can be expensive and time-consuming to litigate and divert management attention from our core business. Our spine and arthroscopy products and the methods they employ may be covered by U.S. patents held by our competitors. We have made a careful analysis in consultation with our experts and, based on such analysis, we believe that either such patents or claims are invalid or if valid we do not infringe. If the holder of patents brought an infringement action against us, the cost of litigating the claim could be substantial. In addition, if the relevant patent claims were upheld as valid and enforceable and our products were found to infringe the patent, we could be prevented from selling the relevant product unless we could obtain a license from the owner of the patent or were able to redesign our product to avoid infringement. A license may not be available or if available may be on terms unacceptable to us, or we may not be successful in any attempt to redesign our products to avoid any infringement. Modification of our products or development of new products may require us to conduct additional clinical trials for these new or modified products and to revise our filings with the FDA, which is time consuming and expensive. If we were not successful in obtaining a license or redesigning our product, our business could suffer. If health care providers cannot get reimbursed for the procedures using our products, our sales may decline. Physicians, hospitals and other health care providers are unlikely to purchase our products if they do not receive reimbursement from third party payors for the cost of the procedures using our products. Some payors have refused to reimburse for the cost of procedures using our products until peer reviewed clinical data has been published. In addition, even upon the publication of peer reviewed data, a payor still may not reimburse for the procedure. The advent of contracted rates per procedure has also made it difficult to receive reimbursement for disposable products, even if the use of these products improves clinical outcomes. See "Business--Third-Party Reimbursement." 7 We may be sued in a product liability action. We manufacture medical devices that are used on patients in surgery, and we may be subject to a product liability lawsuit. In particular, the market for spine products has a history of product liability litigation. We have reported to the FDA a few instances in which the tip of our SpineCATH catheter broke off in the patient's body as the catheter was being removed after the procedure. We believe that these instances did not result in any negative health effect and were not the result of a product malfunction. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. In addition, we would have to pay any amount awarded by a court in excess of policy limits. Our insurance policies have various exclusions and thus we may be subject to a product liability claim for which we have no insurance coverage, in which case we may have to pay the entire amount of any award. Even in the absence of a claim, our insurance rates may rise in the future to a point where we decide not to carry this insurance. Finally, even a meritless or unsuccessful product liability claim would be time-consuming and expensive to defend and could result in the diversion of management's attention from our core business. See "--Complying with FDA and other regulations is an expensive and time-consuming process, and any failure to comply could result in substantial penalties." Any failure to build and manage our sales organization may negatively affect our market share and revenues. We currently have two separate sales forces, one for each of our spine and arthroscopy product lines, and we rely on a combination of direct sales employees and sales agents to sell each product line in the U.S. We need to expand the spine sales team substantially over the next twelve months to achieve our market share and revenue growth goals. There are significant risks involved in building and managing our spine and arthroscopy sales forces, including: . failure to manage the development and growth of two distinct sales forces; . failure to adequately train both our employees and our outside sales agents in the use and benefits of our products; and . dependence on outside agencies, over which we have limited or no control. See "--We may fail to support our anticipated growth in operations." See also "Business--Sales and Marketing." Any failure in our physician training efforts could significantly reduce product sales. It is critical to the success of our sales effort to train a sufficient number of physicians and to provide them adequate instruction in the use of our products. We rely on physicians to spend their time and money to attend our training sessions. If physicians are not properly trained they may misuse or ineffectively use our products. This may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our product sales. We may fail to support our anticipated growth in operations. To succeed in the implementation of our business strategy, our management team must rapidly execute our sales strategy and further develop products, while managing anticipated growth by implementing effective planning and operating processes. To manage anticipated growth in operations, we must increase our manufacturing and quality assurance staff, expand our sales teams and expand our manufacturing facility. Our systems, procedures and controls may not be adequate to support our expected growth in operations. If we fail to manage our growth effectively, our business could suffer. We have a sole supplier of generators, and any disruption in supply could result in decreased sales. All of the generators we sell are currently manufactured according to our specifications by a sole source third party supplier. We believe there are no other third-party contractors who could readily assume this manufacturing function. Any delay in production of generators could result in our failure to meet customer demand. 8 We may fail to successfully transition the manufacture of our generators to internal operations. We intend to begin manufacturing generators internally in the second half of 1999, but have no experience in manufacturing generators. Any failure to manufacture a sufficient number of generators to keep pace with demand, or any failure to make generators of sufficient quality or at a commercially reasonable cost, will lead to lower than expected generator placements and a corresponding decrease in the sale of disposable products. Third-party distributors, over whom we have limited control, may fail to sell our products in international markets. We intend to rely on third-party distributors, over whom we have limited control, to sell our products in international markets. We have entered into an exclusive agreement with, and are dependent upon, DePuy AcroMed for the marketing and sales of our spine products internationally. We also have exclusive distributor relationships for the sale of our arthroscopy products in some foreign countries. Complying with FDA and other regulations is an expensive and time-consuming process, and any failure to comply could result in substantial penalties. We are subject to a host of federal, state, local and international regulations regarding the manufacture and marketing of our products. In particular, our failure to comply with FDA regulations could result in, among other things, recalls of our products, substantial fines and/or criminal charges against us and our employees. We received returns of approximately 500 TAC probes as a result of a March 1999 product recall, due to a faulty part supplied to us by an outside vendor. No patient complaints or claims were received by us. We informed the FDA about this recall, and the FDA determined that it was not a reportable event as defined under FDA regulations. These regulations require us to report any incident in which our products may have contributed to a death or serious injury, or in which our products malfunctioned in a way that would be likely to contribute to a death or serious injury. See "Business--Government Regulation." Product introductions or modifications may be delayed or canceled as a result of the FDA regulatory process, which could cause our sales to decline. Before we can sell a new medical device in the U.S., we must obtain FDA approval, which can be a lengthy and time-consuming process. To date, all of our products have either received clearances from the FDA through premarket notification under Section 510(k) of the Federal Food, Drug and Cosmetic Act or are exempt from the 510(k) clearance process. We have modified some of our products, but we do not believe these modifications require us to submit new 510(k) applications. However, if the FDA disagrees with us and requires us to submit a new 510(k) application for modifications to our existing products, or if the FDA requires us to go through a lengthier, more rigorous examination than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain premarket approval, or PMA, process. See "Business--Government Regulation." Off label use of our products could result in substantial penalties. 510(k) clearance only permits us to market our products for the uses indicated on their labels. We may request additional label indications for our current products, and the FDA may either deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared product as a condition of clearance. We received a warning letter from the FDA in April 1999 regarding information on our website which the FDA believed was broadening our label indications. We removed some information from our website and responded that the remaining information was not intended to expand label indications. In addition, our disposable probes have been approved by the FDA for single use, but we are aware that from time to time physicians reuse our disposable products. We have strongly advised physicians against reuse of our products. See "Business--Government Regulation." 9 Our stock price, like that of many early stage medical technology companies, may be volatile. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. Stock price fluctuations may be exaggerated if the trading volume of our common stock is low. The market price of our common stock may rise and fall in response to: . technological or competitive developments; . patent litigation or the issuance of patents to us or our competitors; . regulatory developments regarding us or our competitors; . acquisitions or strategic alliances by us or our competitors; . changes in estimates of our financial performance or changes in recommendations by securities analysts; and . general market conditions, particularly for companies with small market capitalizations. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its stock. Any securities litigation claims brought against us could result in substantial expense and the diversion of management's attention from our core business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations." We may need to raise additional capital in the future. We may need to raise additional funds for operations and to execute our business strategy. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have certain rights senior to holders of common stock, and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. We may acquire technologies or companies in the future, and these acquisitions could result in dilution to our stockholders and disruption of our business. We may acquire technologies or companies in the future. Entering into an acquisition could divert management attention. We could fail to assimilate the acquired company and our stockholders could be diluted as a result of an acquisition. We have no current agreements or negotiations underway with respect to any acquisitions. Any year 2000 problems that our customers experience in their internal systems could result in a delay in product orders or decrease in sales. Any year 2000 problems that hospitals or other providers encounter in their ordering and payment systems could result in the delay or cancellation of purchase orders for our products or the delay in payment for our products, any of which could result in a decline in our anticipated sales or cash flow. Any slowdowns in processing insurance claims or pre-certifications for our products or procedures by Medicare or other payors could result in a delay or cancellation of orders or a delay in our collection of accounts receivable. Our business could suffer if we cannot attract and retain the services of key employees. We depend substantially upon the continued service and performance of our existing executive officers. In addition, our success will depend in large part on our ability to attract and retain highly-skilled employees, particularly sales and product development personnel. If one or more of our key employees resigns, the loss of 10 that employee and any resulting loss of existing or potential customers to a competitor could harm our business. If we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. Our executive officers and directors own a large percentage of our voting stock and could exert significant influence over matters requiring stockholder approval after this offering. Immediately after this offering, our executive officers and directors, and their respective affiliates, will continue to own approximately % of our outstanding common stock. Accordingly, these stockholders may, as a practical matter, be able to exert significant influence over matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combinations. This concentration could have the effect of delaying or preventing a change in control. Our certificate of incorporation, our bylaws and Delaware law contain provisions that could discourage a takeover. Provisions of our certificate of incorporation, bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. See "Management--Board Composition" and "Description of Capital Stock--Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation and Bylaws." 11 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus are forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Such factors include those listed under "Risk Factors" in this prospectus. In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," or the negative of these and other similar words. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results. 12 USE OF PROCEEDS Our net proceeds from the sale of the shares of common stock we are offering are estimated to be $ ($ if the underwriters' over-allotment option is exercised in full), assuming an offering price of $ per share, after deducting the estimated underwriting discount and commissions and the estimated offering expenses. We estimate the net proceeds from the sale of shares of common stock in connection with this offering will be approximately $ based on an assumed initial public offering price of $ per share. We estimate the net proceeds will be $ if the underwriters over-allotment option is exercised in full. We currently intend to use the net proceeds from this offering for expansion of sales and marketing activities, future development of our product lines, repayment of debt and general corporate purposes. We may use a portion of the net proceeds to fund, acquire or invest in complementary businesses or technologies, although we have no present commitments with respect to any acquisition or investment. The amount of cash that we actually expend for any of the described purposes will vary significantly depending on a number of factors, including future sales growth, if any, and the amount of cash we generate from operations. Thus, management will have significant discretion in applying the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds in short term, investment grade, interest bearing securities. DIVIDEND POLICY We have never paid dividends on our common stock or preferred stock. We currently intend to retain any future earnings to fund the development of our business. In addition, there is a covenant in one of our loan agreements restricting our ability to pay dividends. Therefore, we do not currently anticipate paying any cash dividends in the foreseeable future. 13 CAPITALIZATION The following table sets forth the following information: . the actual capitalization of ORATEC as of March 31, 1999; . the pro forma capitalization of ORATEC, after giving effect to the automatic conversion of all outstanding shares of preferred stock into 7,247,923 shares of common stock; and . the as adjusted capitalization, after giving effect to the sale of shares of common stock at an assumed initial public offering price of $ per share in this offering, after deducting the estimated underwriting discount and commissions and estimated offering expenses that ORATEC expects to pay in connection with this offering. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes to the Financial Statements included elsewhere in this prospectus.
March 31, 1999 --------------------------------------------- Actual Pro Forma As Adjusted ------------- ------------- -------------- (in thousands, except per share data) (unaudited) Current portion of long term obligations..................... $ 1,074 $1,074 ============= ============= Long term obligations............ $ 6,133 $ 6,133 Redeemable convertible preferred stock, par value $0.001 per share; 7,440,000 shares authorized, actual, 7,247,923 shares issued and outstanding, actual; 5,000,000 shares authorized, none issued or outstanding, pro forma and as adjusted........................ 35,816 -- Common stock, par value $0.001 per share, 11,940,000 shares authorized actual, 2,455,186 shares issued and outstanding, actual; 75,000,000 shares authorized, pro forma, 9,703,109 issued and outstanding, pro forma; 75,000,000 shares authorized, as adjusted, shares issued and outstanding, as adjusted..................... 2 10 Additional paid-in capital....... 385 36,193 Accumulated deficit.............. (24,049) (24,049) ------------- ------------- --------- Total capitalization............. $ 18,287 $ 18,287 ============= ============= =========
- -------- This table excludes the following shares (in thousands, except per share data): . 1,838,940 shares that were issuable upon exercise of outstanding options at a weighted average exercise price of $3.13 per share as of March 31, 1999, . 127,745 shares that were issuable upon exercise of outstanding warrants at a weighted average exercise price of $5.48 per share as of March 31, 1999, and . an aggregate of 208,831 shares that were available for future issuance under our 1995 Stock Plan as of March 31, 1999. See "Management--Stock Plans" and Note 11 of Notes to Financial Statements. 14 DILUTION The pro forma net tangible book value of our common stock on March 31, 1999 was $ , or $ per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding, assuming the conversion of all outstanding shares of preferred stock into shares of common stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately following this offering. After giving effect to our sale of shares of common stock in this offering and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, our pro forma net tangible book value as of March 31, 1999 would have been $ or $ per share of common stock. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share....................... $ $ Pro forma net tangible book value per share as of March 31, 1999.... Increase per share attributable to new investors.................... ---- Pro forma net tangible book value per share after the offering...... ---- Dilution per share to new investors................................. $ ====
The following table summarizes, on a pro forma basis, as of March 31, 1999, the differences between the existing stockholders and new investors with respect to the number of shares of stock purchased from us, the total consideration paid to us, and the average price per share paid.
Shares Purchased Total Consideration -------------- --------------------- Average Price Number Percent Amount Percent Per Share ------ ------- --------- ---------- ------------- Existing stockholders...... % $ % $ New investors.............. --- ----- --------- ---------- Total.................... 100.0% $ 100.0% === ===== ========= ==========
This table excludes the following shares: . 1,838,940 shares issuable upon exercise of outstanding options at a weighted average exercise price of $3.13 per share as of March 31, 1999, . 127,745 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $5.48 per share as of March 31, 1999, and . an aggregate of 208,831 shares available for future issuance under our 1995 Stock Plan as of March 31, 1999. See "Management--Stock Plans" and Note 11 of Notes to Financial Statements. If the underwriters' over-allotment option is exercised in full, the following will occur: . the number of shares of common stock held by existing stockholders will decrease to approximately % of the total number of shares of our common stock outstanding after this offering; and . the number of shares held by new investors will be increased to or approximately % of the total number of shares of our common stock outstanding after this offering. 15 SELECTED FINANCIAL DATA (In thousands, except per share data) The following selected financial data should be read in conjunction with the Financial Statements and Notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1996, 1997 and 1998, and the balance sheet data at December 31, 1997 and 1998, are derived from audited financial statements included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1994 and 1995, and the balance sheet data as of December 31, 1994, 1995 and 1996, are derived from audited financial statements not included in this prospectus. The statement of operations data for the three-months ended March 31, 1998 and 1999 and balance sheet data as of March 31, 1999 are derived from unaudited financial statements included elsewhere in this prospectus.
Three Months Ended Years Ended December 31, March 31, ------------------------------------------ -------------------- 1994 1995 1996 1997 1998 1998 1999 ------ ------ ------- ------- -------- --------- --------- (unaudited) Statement of Operations Data: Sales................... $ -- $ -- $ -- $ 2,600 $ 11,129 $ 1,572 $ 5,197 Cost of sales........... -- -- -- 1,741 6,566 987 2,829 ------ ------ ------- ------- -------- --------- --------- Gross profit............ -- -- -- 859 4,563 585 2,368 Operating expenses: Research and development.......... 90 156 878 2,514 4,706 980 1,231 Sales and marketing... -- -- 561 2,622 8,318 1,512 3,254 General and administrative....... 110 187 945 2,721 2,724 498 810 ------ ------ ------- ------- -------- --------- --------- Total operating expenses........... 200 343 2,384 7,857 15,748 2,990 5,295 ------ ------ ------- ------- -------- --------- --------- Loss from operations.... (200) (343) (2,384) (6,998) (11,185) (2,405) (2,927) Interest income (expense), net......... -- 3 82 166 (157) 56 (106) ------ ------ ------- ------- -------- --------- --------- Net loss................ $ (200) $ (340) $(2,302) $(6,832) $(11,342) $ (2,349) $ (3,033) ====== ====== ======= ======= ======== ========= ========= Net loss per common share, basic and diluted................ $(0.20) $(0.17) $ (1.00) $ (2.91) $ (4.72) $ ( 0.99) $ (1.24) ====== ====== ======= ======= ======== ========= ========= Shares used in computing net loss per common share, basic and diluted................ 1,015 1,947 2,304 2,347 2,403 2,381 2,438 Pro forma net loss per share, basic and diluted................ $ (1.51) $ (0.31) ======== ========= Shares used in computing pro forma net loss per share, basic and diluted................ 7,525 9,673
December 31, March 31, 1999 ---------------------------------------- -------------- 1994 1995 1996 1997 1998 ----- ----- ------- ------- -------- (unaudited) Balance Sheet Data: Cash, cash equivalents and short term investments............ $ 1 $ 64 $ 1,778 $ 9,185 $ 15,581 $ 15,841 Working capital......... (78) (97) 1,545 8,717 13,997 14,719 Total assets............ 1 97 2,593 13,418 24,195 25,645 Long term obligations, net of current portion................ -- 35 221 404 2,702 6,133 Redeemable convertible preferred stock........ 120 474 4,792 20,324 35,816 35,816 Common stock, additional paid-in capital and accumulated deficit.... (198) (536) (2,838) (9,646) (20,746) (23,662)
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview ORATEC Interventions is a leader in the development of medical devices that use controlled thermal energy to treat spine and joint disorders. From inception in 1993 until February 1997, our operations consisted primarily of various start-up activities, including development of technologies central to our business, recruiting personnel and raising capital. In December 1995 we gained FDA clearance for our first product, our TAC probe for the treatment of joint disorders. In March 1997, after 18 months of funding scientific and clinical studies, we formally launched this product at the American Academy of Orthopedic Surgeons convention. We received FDA clearance for our SpineCATH product in March 1998 and formally launched this product at the North American Spine Society, or NASS, conference in October 1998. All of our revenues are generated from the sales of our spine and arthroscopy products. For the three months ended March 31, 1999, 93% of our total sales were derived from our disposable spine catheters and arthroscopy probes and 7% were derived from sales of generators and accessories. We incurred net losses of approximately $11.3 million in 1998 and $3.0 million during the three months ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of $24.0 million. For the quarter ended March 31, 1999, approximately 56% of our U.S. sales was generated by our direct sales employees and the remainder of our revenues was generated by independent sales agencies. These sales agencies do not purchase our products, but are paid a commission at the time they generate a product sale. We intend to continue building our direct sales force, and expect that in the future an increasing percentage of U.S. sales will be generated by our direct sales employees. In the quarter ended March 31, 1999, only 1% of our revenues was derived from sales of products in markets outside the U.S., and we do not expect international sales to increase significantly in the near future. In international markets, we expect to rely exclusively on third-party distributors. Our gross margins on sales through international third-party distributors are less than our gross margins on U.S. sales as a result of price discounts. In addition, we have limited or no control over the sales efforts of these third-party distributors. We recognize revenue upon shipment of products to customers, and in some cases when inventory provided to customers has been used at their facilities as evidenced by receipt of a purchase order. Our return policy allows customers to return unopened products up to 90 days after a sale. To date, returns have been insignificant. As is common in the arthroscopy market, we have retained title to the majority of arthroscopy generators, which we have placed with customers for their use with our disposable arthroscopy probes. In connection with the market launch of our spine products, we have been placing spine generators with customers for a demonstration period, after which we intend to convert these placements to sales. We have limited experience in selling the spine generators and may not be able to achieve spine generator sales for all placements. Our early product sales have mainly been to a group of early adopting physicians who are receptive to minimally invasive techniques. As we gain market share, our opportunity for further market penetration may slow and require additional sales efforts, longer term supporting clinical data and further training, in order to convince physicians who currently favor open surgery or other treatment alternatives to switch to our minimally invasive procedures. The medical device market is litigious and we may become a party to product liability or patent proceedings. The costs of such lawsuits may be material and could have an effect on our earnings. If we were to lose a patent lawsuit we may be forced to stop sales of affected products or to pay royalties which could have a negative effect on our results of operations. Our future growth depends on expanding our current markets and finding new high growth markets in which we can leverage our core technologies of applying thermal energy to treat soft tissue disorders. To the extent any current or additional markets do not materialize in accordance with our expectations, our revenues could be lower than expected. 17 Results of Operations Three Months Ended March 31, 1999 and 1998 Sales Overall sales increased 231% to $5.2 million for the three months ended March 31, 1999 from $1.6 million for the three months ended March 31, 1998, as a result of the commercial launch of our spine products and increased sales of our arthroscopy products. Sales of spine products were $1.5 million for the three months ended March 31, 1999. These sales followed the commercial launch of our SpineCATH product in October 1998 and training of spine specialists in the use of the product. Sales of our arthroscopy products increased 134% to $3.7 million for the three months ended March 31, 1999 from $1.6 million for the three months ended March 31, 1998. This increase in revenues was due primarily to higher unit sales of our TAC probes due to an increase in the number of physicians trained, as well as the introduction of new products and expanded applications for our existing products. Cost of sales Cost of sales increased by 187%, to $2.8 million for the three months ended March 31, 1999 from $1.0 million for the three months ended March 31, 1998. Cost of sales consists of material, labor and overhead costs, as well as depreciation on generators placed with customers for their use with our disposable probes. The growth in cost of sales was attributable primarily to the significant expansion of our manufacturing function, increased costs associated with additional product shipments, and depreciation charges on a larger number of generators placed with customers. For the quarter ended March 31, 1999, gross margins expanded to 46% from 37% for the quarter ended March 31, 1998 due to the increased leverage of higher sales over our manufacturing and depreciation costs. Research and development expenses Research and development expenses increased 26% to $1.2 million for the three months ended March 31, 1999 from $1.0 million for the three months ended March 31, 1998. This increase was attributable to increased headcount, new product development, the expansion of our intellectual property rights and additional clinical studies. Research and development expenses consist of costs related to our research and development, regulatory, quality assurance and patent functions, as well as costs associated with scientific and clinical studies. Research and development expenses were 24% of sales during the three months ended March 31, 1999. We expect to continue to make substantial investments in research and development and anticipate that research expenses will continue to increase in absolute dollars. Sales and marketing expenses Sales and marketing expenses increased 115% to $3.3 million for the three months ended March 31, 1999 from $1.5 million for the three months ended March 31, 1998. This increase reflected significantly increased personnel in both the spine and arthroscopy direct sales forces and the reimbursement group, as well as higher total commission expenses from increased unit sales. Sales and marketing expenses consist primarily of costs for sales, marketing and reimbursement staff, sales commissions, medical conference participation and physician training programs. Sales and marketing expenses were 63% of sales during the three months ended March 31, 1999. We anticipate that sales and marketing expenses will increase in absolute dollars as we continue to develop our sales forces and expand our physician training programs. General and administrative expenses General and administrative expenses increased 63% to $810,000 for the three months ended March 31, 1999 from $498,000 for the three months ended March 31, 1998. This increase was due primarily to the 18 addition of finance personnel and reserves for accounts receivable related to higher sales levels. General and administrative expenses consist primarily of personnel costs, professional service fees and general corporate expenses. General and administrative expenses were 16% of sales during the three months ended March 31, 1999. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional expenses related to our operation as a public company. Interest and other income (expense), net Net interest and other expense was $106,000 for the three months ended March 31, 1999 and net interest and other income was $56,000 for the three months ended March 31, 1998. The increase in overall interest expense was primarily attributable to significantly increased debt balances outstanding as we obtained equipment and other loans to fund operations during 1998. Net interest and other income (expense) is comprised primarily of interest earned on short term investments, offset by interest expense on equipment and debt obligations. Quarterly Results of Operations The following table sets forth our operating results for each of the five quarters in the period ended March 31, 1999. This data has been derived from unaudited financial statements that, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in conjunction with our annual audited financial statements and notes thereto appearing elsewhere in this prospectus. These operating results are not necessarily indicative of results for any future period.
Quarter Ended ------------------------------------------------ Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1998 1998 1998 1998 1999 -------- -------- --------- -------- -------- (in thousands, unaudited) Sales........................ $ 1,572 $ 2,535 $ 2,782 $ 4,240 $ 5,197 Cost of sales................ 987 1,368 1,867 2,344 2,829 ------- ------- ------- ------- ------- Gross profit................. 585 1,167 915 1,896 2,368 Gross margin................. 37% 46% 33% 45% 46% Operating expenses: Research and development... 980 1,113 1,227 1,386 1,231 Sales and marketing........ 1,512 1,879 2,284 2,643 3,254 General and administrative............ 498 694 832 700 810 ------- ------- ------- ------- ------- Total operating expenses................ 2,990 3,686 4,343 4,729 5,295 ------- ------- ------- ------- ------- Loss from operations......... (2,405) (2,519) (3,428) (2,833) (2,927) Interest and other income (expense), net.............. 56 68 (43) (238) (106) ------- ------- ------- ------- ------- Net loss..................... $(2,349) $(2,451) $(3,471) $(3,071) $(3,033) ======= ======= ======= ======= =======
We have historically experienced seasonal fluctuations in our sales of arthroscopy products. Sales of our arthroscopy products tend to flatten or decrease during the summer months when people often defer elective surgeries until the fall. In addition, sales of arthroscopy products tend to increase in the last quarter of the year as individuals seek to use health plan coverage before the end of the insurance year. For the quarter ended December 31, 1998, our revenues increased 52% to $4.2 million from $2.8 million for the quarter ended September 30, 1998 as a result of the commercial launch of our spine products and the seasonal strength of arthroscopy sales in the fourth quarter. This growth continued in the next quarter, with an increase of 23% in revenues during the quarter ended March 31, 1999 as a result of increased sales of our spine products. We expect spine sales to continue to account for a growing percentage of total sales for the foreseeable future. 19 Gross margin percentage tended to increase over the five quarter period ending March 31, 1999 as a result of the formal launch of our products and the leveraging of these sales over our manufacturing cost base. We expect gross margin to flatten or decline along with any leveling or decline in sales growth. There was a decline in gross margin percentage in the quarter ended September 30, 1998 due to a major investment in manufacturing infrastructure and personnel to accommodate an expected increase in product demand. The total number of our employees grew from 59 at December 31, 1997 to 162 at June 30, 1999. As a result of the growth in the number of employees in our sales and marketing, manufacturing, research and development, and general and administrative organizations, all of the related operational expenses have generally tended to increase on a quarter-to-quarter basis. Additionally, the increased product sales on a quarter-to-quarter basis have caused commission expenses paid to both employees and sales agents to increase. We have also increased spending on clinical studies, physician training, medical conferences and outside development costs during this five quarter period. We believe that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely on them to predict future performance. The amount and timing of our operating expenses may fluctuate significantly in the future as a result of a variety of factors. We face a number of risks and uncertainties encountered by early stage companies, particularly those in rapidly evolving markets such as the medical device industry. In addition, although we have experienced revenue growth recently, such revenue growth may not continue, and we may not achieve or maintain profitability in the future. Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter due to a number of factors, some of which are outside of our control. These factors include, but are not limited to: . the timing of training physicians in the use of our products; . the timing of publication of supporting clinical data; . delays in obtaining pre-certification for insurance reimbursement from payors; . the introduction of new products by us or our competitors; . possible intellectual property litigation; . changes in our pricing policies or those of our competitors or customers; . delays in introducing new products; . timing of regulatory approvals or other FDA action; and . delays in product orders or payment as a result of our customers' or payors' year 2000 problems. Most of our expenses, such as employee compensation and lease payments for facilities and equipment, are relatively fixed. In addition, our expense levels are based, in part, on our expectations regarding future sales. As a result, any shortfall in sales relative to our expectations could cause significant changes in our operating results from quarter-to-quarter. Years Ended December 31, 1998, 1997 and 1996 Sales Sales increased by 328% to $11.1 million in 1998 from $2.6 million in 1997. We formally launched our spine products during the fourth quarter of 1998, and sales of these products were $1.2 million in 1998. Sales of our arthroscopy products increased 280% to $9.9 million in 1998 from $2.6 million in 1997. This increase in arthroscopy sales was due primarily to increased unit shipments to an increased number of physicians who were trained in the use of our products and the higher level of staffing and overall effectiveness of the direct sales force in 1998. There were no sales of any products in 1996. 20 Cost of sales Cost of sales increased by 277% to $6.6 million in 1998 from $1.7 million in 1997. The growth in cost of sales was attributable primarily to higher material, labor and overhead costs on increased unit shipments, higher depreciation costs for generators placed with customers and additional manufacturing and other support personnel. Research and development expenses Research and development expenses increased 87% to $4.7 million in 1998 from $2.5 million in 1997, and increased 186% in 1997 from $878,000 in 1996. These increases were attributable primarily to increased headcount in all functional areas of research and development, including product development and regulatory compliance, as well as increased numbers of clinical studies and payments to outside contractors for the development of generators. Sales and marketing expenses Sales and marketing expenses increased 217% to $8.3 million in 1998 from $2.6 million in 1997, and increased 367% in 1997 from $561,000 in 1996. This increase reflected increased headcount expenses as we developed a direct field sales force in each of the spine and arthroscopy markets, as well as greater spending for physician training, medical conferences and higher commission expenses on an increased number of product shipments. General and administrative expenses General and administrative expenses remained constant at $2.7 million in 1998 compared with 1997, but increased 188% in 1997 from $945,000 in 1996. The increase from 1996 to 1997 was due primarily to hiring and relocating executive officers. Interest and other income (expense), net Net interest and other expense was $157,000 in 1998. Net interest and other income was $166,000 in 1997 and $82,000 in 1996. The year-to-year changes resulted from earnings on short term investment balances, which varied as a result of the timing of our private placement financings, and increased interest expense as a result of our drawdown of debt. Income Taxes As of December 31, 1998, we had net operating loss carryforwards of approximately $20.0 million for federal and $6.4 million for California income tax purposes. We also had research and development credit carryforwards of $200,000 for federal income tax purposes. The net operating loss and credit carryforwards will expire at various dates beginning in 2009 through 2018, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations of the Internal Revenue Service Code of 1986. The annual limitation may result in the expiration of the net operating losses before utilization. See Note 12 of Notes to Financial Statements. Liquidity and Capital Resources From inception through March 31, 1999, we financed our operations primarily through private sales, net of expenses, of $35.8 million of redeemable convertible preferred stock. To a lesser extent, we also financed our operations through equipment financing and other loans, which totaled $8.4 million in principal outstanding at March 31, 1999. As of March 31, 1999, we had $11.7 million of cash and cash equivalents, $4.1 million of short term investments and $14.7 million of working capital. Net cash used for operating activities was $3.0 million in the three months ended March 31, 1999, $9.3 million in 1998, $6.2 million in 1997 and $2.3 million in 1996. Cash used for operating activities was 21 attributable primarily to net losses after adjustment for non-cash depreciation and amortization charges and increases in accounts receivable and inventory, offset in part by increases in accounts payable, accrued compensation and other accrued liabilities. Net cash used for investing activities was $833,000 in the three months ended March 31, 1999, $4.0 million in 1998, $5.3 million in 1997 and $1.2 million in 1996. For each of these periods, cash used in investing activities reflected purchases of property and equipment and net purchases of short term investments. Net cash provided by financing activities was $4.0 million in the three months ended March 31, 1999, $19.4 million in 1998, $15.8 million in 1997 and $4.7 million in 1996. Cash provided during these periods was attributable to proceeds from the issuance of stock and debt obligations. As of March 31, 1999, our principal debt and other commitments consisted of $3.2 million outstanding under our equipment loans, $1.2 million under our accounts receivable credit line, $4.0 million under our subordinated debt facility and amounts payable under various operating leases. As of March 31, 1999, we had a commitment to purchase generators in the amount of $2.4 million from a third party supplier. We expect to increase capital expenditures consistent with our anticipated growth in manufacturing, infrastructure and personnel. We also may increase our capital expenditures as we expand our product lines or invest to address new markets. As of March 31, 1999, we had available debt facilities totaling $1.6 million, of which $324,000 was available under an equipment loan and $1.3 million was available under an asset-based line of credit. Some of our loan agreements require the lenders' consent before we can incur additional debt. One of our loan agreements contains financial covenants including a maximum debt to tangible net worth ratio of 2:1. We received a waiver from the lender for our failure to comply with all of these financial covenants during the third quarter of 1998. We believe that the net proceeds from this offering, together with our current cash and investment balances and cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 18 months. If existing cash and cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain an additional credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have certain rights senior to holders of common stock, and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our results of operations and financial condition. Year 2000 Readiness Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, software that records only the last two digits of the calendar year may not be able to distinguish between twentieth and twenty-first century dates. This may result in software failures or the creation of erroneous results. Our products are not date-sensitive, and therefore they are not affected by year 2000 issues. We are in the process of testing all of our internal systems for year 2000 compliance and anticipate completing this process in the third quarter of 1999. We have purchased almost all of our internal systems within the last three years, and we have not discovered, and do not expect, material year 2000 problems. We have contacted all of our major suppliers, and service and system providers. They have assured us that their products and operations are year 2000 compliant or will be compliant by 2000. Despite our testing and 22 assurances from developers of software used in our operations, our business may be disrupted by year 2000 problems. We do not have any information concerning the year 2000 compliance status of hospitals or other providers or the payors who reimburse those providers for our procedures and products. Any year 2000 compliance problems that providers or payors encounter in their internal systems could result in the delay or cancellation of purchase orders for our products or the delay in payment for our products. These delays could cause significant declines in sales in 2000 and longer accounts receivable collection cycles. To date, expenses related to year 2000 compliance have not been and are not expected to be material. We have not yet fully developed a contingency plan to address situations that may result if we are unable to achieve year 2000 readiness of our critical operations, but we intend to have a contingency plan in place in the fourth quarter of 1999. Finally, we are also subject to external forces that might generally affect industry and commerce, such as year 2000 compliance failures by utility or transportation companies and related service interruptions. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to interest rate risk at December 31, 1998 related to our investment portfolio and our borrowings. Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates. Floating rate investments may produce less income than expected if interest rates fall, and floating rate borrowings will lead to additional interest expense if interest rates increase. Due in part to these factors, our future investment income may fall short of expectations, and our interest expense may be above our expectations due to changes in U.S. interest rates. Further, we may suffer losses in investment principal if we are forced to sell securities which have declined in market value due to changes in interest rates. We invest our excess cash in debt instruments of the U.S. government and its agencies, and in high quality corporate issuers. The average contractual duration of all of our investments in 1998 was approximately two months. Due to the short term nature of these investments, we have assessed that there is no material exposure to interest rate risk arising from our investments. We enter into loan arrangements with banks and financial institutions when available on favorable terms. At December 31, 1998, we had bank borrowings of $1.2 million outstanding, which bear interest at 1% above the prime rate and are repayable in June 1999. We have determined that there is no material exposure to interest rate risk arising from these borrowings. 23 BUSINESS Overview ORATEC Interventions is a leader in the development of medical devices that use controlled thermal energy to treat spine and joint disorders. We currently market two minimally invasive systems, the SpineCATH Intradiscal ElectroThermal Therapy, or IDET, system and the ElectroThermal Arthroscopy System. These proprietary systems deliver heat to shrink and repair damaged or stretched tissue. Our SpineCATH IDET system is a minimally invasive treatment for low back pain caused by degenerative disc disease. The SpineCATH IDET system enables physicians to navigate a self-guiding catheter within a spinal disc to the location of damaged tissue and apply heat to tighten and stiffen the disc wall. We believe IDET is a new and effective solution for many patients facing few options to treat their chronic discogenic pain. Our ElectroThermal Arthroscopy System is a minimally invasive treatment for joint disorders. Our proprietary tissue temperature control technology enables physicians to treat damaged tissue in joints by shrinking tissue. We believe that this minimally invasive treatment not only complements existing arthroscopic procedures, but is a viable alternative to many open surgical procedures. All of the products we currently market have received 510(k) clearance from the FDA, and as of June 30, 1999 we had six issued patents, eight notices of allowance and 40 U.S. and foreign patent applications. Spine Market Opportunity The treatment of back pain costs the U.S. health care system more than any other health problem and represents the second most common reason for doctor visits. It is estimated that at any given time, five million individuals in the U.S. suffer from pain in the lumbar region, commonly known as low back pain. The prescribed treatment for low back pain depends on the severity and duration of the pain and the success or failure of non-operative therapies. Non- operative therapies include bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. It has been estimated that physicians are able to effectively treat most low back pain cases within three months using non-operative therapies. However, it is estimated that there are approximately 1.4 million people in the U.S. for whom non-operative therapies have not been successful and for whom spine surgery is not recommended. We believe these individuals are candidates for our IDET procedure. Spinal Anatomy and Back Pain The spinal column is segmented into 24 separate bones called vertebrae that are connected together to permit a normal range of motion, including forward, backward, lateral and twisting movement. The spinal cord, the body's central nerve column, is enclosed within the spinal column. [SPINE DIAGRAM INDICATING THE THREE REGIONS OF THE SPINE, INCLUDING CERVICAL, THORACIC AND LUMBAR.] Between each vertebra of the spine is a disc which allows for flexible movement between the vertebra. Discs act as shock absorbers that protect the spinal column during normal activities. Each disc consists of a "jelly-like" internal mass, known as the nucleus. The layered fibrous wall, known as the annulus, which surrounds the nucleus is composed primarily of collagen. In a healthy spine, the nucleus is elastic and is surrounded by a strong disc wall which allows the vertebra to be well supported and move normally. Everyday motion of our backs causes repeated stress on the spine. Over time, and after repeated stress, the wall of the disc may weaken and develop cracks and fissures. This condition is known as degenerative disc disease. The cracks and fissures may allow the nucleus to seep into the disc wall, which can sensitize nerve fibers and cause severe back pain. In addition, small blood vessels and tiny nerve fibers grow into the fissures, 24 causing ongoing pain. The weakened disc wall may also bulge or rupture under the pressure of the seeping nucleus, resulting in a disc herniation. This bulging or rupturing of the disc can injure the spinal nerve roots causing leg and hip pain, also known as sciatica. [DIAGRAMS OF SEVERAL VERTEBRA AND AN ENLARGED PHOTO OF A DEGENERATING DISC] Existing Surgical Alternatives Spine surgery is highly invasive and complex due to the proximity of major muscle groups, nerves, blood vessels and organs. The spinal cord, branching nerves and major muscle groups surround the rear portion of the spine, while blood vessels, nerves and organs surround the front portion of the spine. Discectomies, which involve the removal of a portion of the affected disc tissue, are the most commonly performed surgical treatment to treat severe leg pain caused by disc herniation. However, for patients suffering from chronic back pain caused by degenerative disc disease, spine fusion is the most viable surgical treatment option. Spine fusion involves the fusing together of adjoining vertebrae in cases where the patient has advanced disc degeneration or spine instability. This invasive procedure involves a surgical incision in the patient's back or abdomen. Fusions frequently require the removal of the affected disc material and the surgical attachment of a metal implant or a spine fusion cage to join the two surrounding vertebrae. In addition, this procedure often involves a second incision to remove bone from the patient's hip for implantation as a bone graft for insertion into the disc space. The operating time for low back spine fusion surgeries utilizing metal implants and spine cages averages over three hours with a post-operative hospital stay for the patient which averages over four days. The patient also generally requires significant post-operative pain medication. While the cost of these procedures varies widely, we estimate that the total cost of most spine fusion surgeries is approximately $45,000. We estimate that approximately 170,000 low back pain sufferers in the U.S. undergo spine fusion surgery annually. Only a small percentage of patients with chronic low back pain actually undergo spine fusion because it is permanent and highly invasive. In addition, clinical data has indicated that spine fusion often causes further deterioration of the discs on either side of the fusion site and only reduces pain in approximately 60% of patients treated. Further, there are spine disorders for which spine fusion is not the medically indicated treatment. We believe that the overall invasiveness of available therapies, as well as the uncertainty of the alleviation of pain, leads many patients to defer surgery and continue to live with their chronic pain. The ORATEC Catheter-Based Spine Solution Our SpineCATH Intradiscal ElectroThermal Therapy, or IDET, system offers a minimally invasive outpatient alternative to patients suffering from chronic low back pain caused by degenerative disc disease. The Procedure The SpineCATH IDET system uses thermal energy technology to treat the degenerated disc wall in a minimally invasive manner. The procedure begins with the insertion of our proprietary single use SpineCATH catheter through an introducer needle into the center of the disc. As the surgeon inserts the catheter into the spine, the catheter guides itself along the disc wall. The position of the catheter is confirmed by the physician using real time X-rays. The physician begins to treat the disc by applying controlled levels of heat to the disc wall. In response to the application of heat, the collagen in the disc shrinks, causing the wall to contract and thicken. We believe that the application of heat during the procedure desensitizes nerve fibers and that following the procedure the contracted collagen acts as a scaffold which supports the growth of new collagen, stiffening and repairing the disc wall. In contrast to spine surgery, our procedure does not remove or destroy disc tissue. [DIAGRAM OF THE SPINECATH IN THE DISC] 25 IDET is performed in an outpatient setting using local anesthesia and mild sedation. The patient is responsive during the procedure to enable the physician to closely monitor his or her condition. Depending on the condition of the disc, the procedure may require the insertion of more than one catheter for more complete treatment of the affected area of the disc wall. Multiple discs may be treated in a single IDET procedure. Once the therapy is completed, the catheter and needle are removed and an antibiotic is injected into the disc to prevent infection. The patient is sent home with a bandaid over the needle insertion site. The procedure costs approximately $8,000. We believe the disc generally takes from three to four months to heal following the procedure. During this period, the patient must exercise caution in the amount of stress the treated disc endures and is often advised by the physician to wear back support for the first six weeks and to adhere to activity and physical rehabilitation guidelines. Benefits of IDET Clinical experience to date has indicated that IDET has the following benefits: . Minimally invasive treatment option: With the IDET procedure, patients suffering from chronic low back pain have a new, minimally invasive alternative if non-operative therapies have failed. IDET treats the affected area of a specific disc in the lower back without the removal or destruction of tissue or the permanent alteration of spinal anatomy associated with conventional surgical treatments. Our procedure can be repeated and does not preclude physicians from subsequently prescribing more invasive surgical alternatives in the future. . IDET may be reparative: Clinical results indicate that the IDET enables physicians to apply controlled levels of heat to the disc wall causing the collagen in the disc wall to contract and thicken. We believe the contracted collagen, heated during the IDET procedure, acts as a scaffold for the growth of new collagen, stiffening and repairing the disc wall. Scientific studies are currently underway to investigate the healing process following the IDET therapy. . Significant reduction in reported patient pain levels and improvement in overall quality of life: Clinical data has indicated that 60%-85% of patients treated with IDET report a significant reduction in pain and a significant improvement in physical function, as measured by the Visual Analog Scale, or VAS pain score system and the SF-36 patient outcomes questionnaire. IDET benefits also include increased sitting tolerance and ability to return to work. Over 70% of patients report that they reduced or eliminated their intake of pain medication following the IDET procedure. . Significant decrease in overall time and cost: IDET takes approximately one hour to perform in an outpatient setting under local anesthesia. In contrast, spine fusions are inpatient procedures performed under general anesthesia, cost significantly more than the IDET procedure, require a prolonged hospital stay and may result in post-operative complications. Arthroscopy Market Opportunity Arthroscopy is the minimally invasive treatment of joint tissue assisted with a miniaturized camera, or arthroscope. Approximately 2.2 million arthroscopic procedures were performed in the U.S. in 1998. We believe the number of arthroscopic procedures is growing due to technological advancements, physician and patient demand for less invasive procedures, the increasing incidence of joint injuries caused by a greater emphasis on physical fitness, and an aging population. While we believe that shoulder arthroscopy is the fastest-growing portion of the market, with 450,000 procedures performed last year, knee arthroscopy continues to represent the greatest number of arthroscopic procedures, accounting for approximately 1.5 million of arthroscopic procedures performed in 1998. In addition, there were approximately 250,000 elbow, ankle, wrist and hip joint arthroscopic procedures performed last year. 26 Joint Anatomy and Soft Tissue Disorders Human joints are formed at the juncture of two or more bones and permit motion of the otherwise rigid human skeleton. The bones of the joints are joined by ligaments and separated by cartilage. The cartilage in the joints acts as a cushion and the ligaments work to stabilize the joints when they are stressed. As a result of injury or repetitive motion, soft tissue of the ligaments and cartilage can be damaged, become worn and begin to stretch, loosen or tear. This tissue damage can result in a wide range of joint disorders from joint instability to severe ligament tears. Existing Surgical Alternatives Many joint injuries and disorders, including loose shoulder ligaments, severe ankle sprains and torn and stretched knee ligaments, are treated using open surgery. Open surgery involves large incisions, a prolonged hospital stay, extensive rehabilitation over an extended recovery period and high overall costs. Many of these conditions are not treated arthroscopically either because arthroscopic techniques are not available, not effective, or are too difficult to perform. Arthroscopic surgery allows surgeons direct access to and a magnified view of most areas of the joint through several small incisions. Electrosurgical tools currently used in arthroscopic procedures are capable of cutting and ablating soft tissue utilizing a power output control mechanism. However, existing tools lack a tissue temperature feedback mechanism which allows physicians to monitor tissue temperature within an optimal temperature range. As a result, we believe these tools cannot be used to effectively shrink soft tissue. The invasiveness of open surgical procedures and the lack of effective arthroscopic shrinkage technology has led many patients to elect to live with their condition until pain or loss of motion becomes unmanageable. The ORATEC Temperature Control Arthroscopy Solution Our ElectroThermal Arthroscopy System for tissue shrinkage offers a minimally invasive alternative to some procedures that can only be performed with either open surgery or much more technically demanding arthroscopic procedures. In addition, we believe we can enhance patient outcomes by adding our shrinkage tools to many currently available arthroscopic procedures. The Procedure Our ElectroThermal Arthroscopy System utilizes the TAC probe, a single use device which applies heat to soft tissue in the joints utilizing our proprietary temperature control system. The procedure begins with the insertion of several small tubes into the joint. An irrigant is then flushed through the joint to permit clear visualization through the arthroscope and expand the space in the joint for the surgical procedure. The surgeon inserts the TAC probe into the joint and begins to paint the surface of the tissue with the tip of the probe, controlling the energy level and monitoring tissue temperature. In response to the application of heat, the collagen in the tissue of the joints shrinks and tightens. Our procedure is usually performed under general anesthesia, and the patient is sent home the same day with the joint immobilized by a brace or a sling. The post-operative healing period can extend to four months. Benefits of the ElectroThermal Arthroscopy System Clinical experience to date has indicated that our ElectroThermal Arthroscopy System has the following benefits: . Superior treatment option: Existing arthroscopic procedures do not allow physicians to effectively monitor the temperature of the treated tissue. Our proprietary temperature control feature allows physicians to effectively shrink tissue by heating it to an optimal temperature range. . Minimally invasive solution: The ElectroThermal Arthroscopy System offers physicians a minimally invasive alternative for patients who might otherwise avoid or delay open surgery. Compared to patients 27 who undergo open procedures, clinical data indicates that patients treated with our products require significantly less post-operative pain medication, experience a decreased risk of post-operative recovery complications and require less extensive rehabilitation. Open surgical treatments require large incisions and often result in a loss of range of motion and reduced athletic function. . Improvement of existing arthroscopic procedures: By combining our shrinkage technology with other arthroscopic tools, physicians can more completely treat certain joint disorders. For example, in connection with the arthroscopic repair of a torn ligament, the application of our shrinkage technology can improve patient outcomes by tightening the joint tissue after the tear is repaired. . Significant decrease in overall cost and time: For physicians, our products offer a much less technically complex procedure than open surgery and significantly reduced operating time. For patients, our procedures cost significantly less than comparable open surgical procedures and allow them to leave the hospital within two hours of the procedure as compared to open surgery which requires hospitalization. Business Strategy Our strategy is to be the leading provider of minimally invasive devices for the treatment of chronic back pain and joint injuries and disorders. The key elements of our strategy include: Target Large and Growing Markets. We target the spine and arthroscopy markets, two of the fastest growing segments of the medical device industry. In 1998, these segments represented U.S. product sales in excess of $1 billion. Provide Proprietary Minimally Invasive Techniques to Meet Unmet Medical Needs. We focus on providing proprietary minimally invasive products to overcome the limitations of existing treatment options, which can be highly invasive and expensive and can result in sub-optimal patient outcomes. Maintain Technology Leadership in Target Markets. We have an aggressive product development program designed to enhance our current products and develop new products for our target markets. Our ongoing focus will be to design products that improve patient outcomes, simplify techniques, shorten procedure and rehabilitation time and reduce costs. Expand Clinical Leadership to Promote Use of Our Products. We will continue to make substantial investments in the development of scientific and clinical research to support market acceptance of our innovative minimally invasive therapies. We have established strong relationships with leading physicians and have developed an extensive physician training and education program. Establish Sales Leadership. We are investing in, and marketing our products through, separate spine and arthroscopy sales forces. In the U.S. market, we have direct sales employees in most major markets and sales agents elsewhere. We also provide reimbursement support for our customers. Internationally, we use distributors to market our arthroscopy products and have an exclusive distribution agreement with DePuy Acromed for the sale of our spine products. Technology Our proprietary SpineCATH IDET system and ElectroThermal Arthroscopy System apply temperature-controlled thermal energy to achieve controlled contraction of soft tissue. Collagen, the fibrous tissue that composes all human ligaments, tendons and connective tissue, reacts to heat by shrinking. At optimal temperatures, collagen fibers shrink, yet the mechanical and structural integrity of the collagen is preserved so that it grows back in a reparative way, as opposed to charring or forming scar tissue. Heating the tissue above this range damages the collagen, making it weak and preventing optimal growth of new collagen. Our SpineCATH IDET system utilizes our proprietary technology to control the temperature of the catheter. The ElectroThermal Arthroscopy System includes the only products in the market that monitor tissue temperature. We believe our systems result in safer and more effective treatments than competing technologies. 28 Technology--SpineCATH IDET Our IDET system is based on the application of resistive heat, which is thermal energy generated by an electric heating coil. This resistive heat is delivered through a proprietary self-guiding spine catheter to achieve controlled contraction of collagen in the affected areas of the spinal disc. The thermal delivery system is a five-centimeter heating tip at the end of the catheter. The tip of the catheter contains a thermal monitoring mechanism, which continually measures and relays catheter temperature back to the energy source, the generator. Our research indicates that the optimal heating protocol for many procedures requires a 65(degrees)C initial catheter temperature, which then rises one degree every 30 seconds for 17 minutes until the temperature of the catheter reaches 90(degrees)C, where it remains for four additional minutes. Our temperature feedback mechanism enables the generator to continually adjust heat to achieve catheter temperatures consistent with these predetermined heating protocols. Technology--ElectroThermal Arthoscopy System Physicians use our patented electrothermal arthroscopy products to apply controlled radiofrequency energy to joint tissue. Radiofrequency, or RF, energy is a portion of the electromagnetic spectrum, in which the alternating current flow produces molecular friction and thus heat in soft tissue. All electrosurgical systems contain two electrodes for directing energy: an active electrode and a return electrode. In monopolar electrosurgery, the active electrode is located at the tip of a hand-held probe and the return electrode is a dispersive pad, which rests on the patient's body. In bipolar electrosurgery, both active and return electrodes are located at the tip of the probe. Consequently, in bipolar systems, the current travels through only a shallow portion of target tissue before traveling back through the probe. We have based our arthroscopic system for tissue shrinkage on monopolar technology because we believe that monopolar technology allows for more effective and consistent temperature control as well as deeper penetration of target tissue, allowing more complete shrinkage of soft tissue. Scientific and clinical studies indicate that heating the tissue to a range of 65(degrees)C to 75(degrees)C produces optimal shrinkage in the arthroscopic setting. The tip of our probe contains a thermostat which records tissue temperature and relays it back to the generator, enabling the generator to adjust energy output 50 times per second to maintain optimal tissue temperatures. Products We currently manufacture and sell the SpineCATH Intradiscal ElectroThermal Therapy system for the treatment of spine disorders and the ElectroThermal Arthroscopy System for the treatment of joint injuries and disorders. Each of these systems utilizes controlled thermal energy to enable physicians to perform minimally invasive treatments of these disorders. In addition, we market the ORAflex ElectroThermal Spine Probe for the treatment of spine disorders. SpineCATH IDET System Our SpineCATH IDET system provides a non-surgical alternative for patients suffering from degenerative disc disease in the lower back. Our SpineCATH IDET system received 510(k) premarket clearance from the FDA in March 1998 and was formally launched in October 1998. Our SpineCATH IDET system consists of the following products: . the SpineCATH Intradiscal Spine Catheter; . the ORA-50S ElectroThermal Spine Generator; and . an introducer needle and needle bender. Our SpineCATH Intradiscal disposable spine catheter is a 1.3 mm flexible, self-guiding catheter designed to deliver resistive thermal energy to affected disc walls in the lower back. Our proprietary SpineCATH product has the following features: . a broad five centimeter heating section for the delivery of thermal heat; 29 . a temperature sensing and control system; . a pre-curved navigation tip, designed to automatically follow the curvature of the human disc; . an ergonomic handle, which controls catheter direction; and . radiopaque indicators, which enable physicians to verify optimal catheter placement through the use of real time X-rays. The list price of this product is $795 per catheter. We estimate that approximately 1.5 catheters are used per procedure. Our ORA-50S ElectroThermal Spine Generator is the source of the resistive heat, which the SpineCATH catheter delivers to the affected disc. Our spine generator has the following features: . software that enables the physician to program optimal treatment temperatures, so that the catheter temperature is automatically elevated according to the pre-determined heating protocols; . a proprietary temperature feedback and control system, which monitors temperature in the tip of the catheter; and . an easy-to-read graphic display, which enables the physician to monitor catheter temperatures, delivered power and total treatment time. ORAflex ElectroThermal Spine Probe Our ORAflex ElectroThermal disposable spine probe is used for treating disc herniations by shrinking the nucleus using RF energy. The ORAflex is used with an endoscope and has the following main features: . a deflectable tip, which improves access to affected disc tissue; and . a thermostat, which provides direct temperature feedback during treatment. The list price of the ORAflex probe is $595. ElectroThermal Arthroscopy System Our ElectroThermal Arthroscopy System provides a minimally invasive alternative for patients suffering from joint injuries. Our first TAC probe and generator received 510(k) premarket clearance from the FDA in December 1995, and this system was formally launched in March 1997. We received 510(k) premarket clearance from the FDA for our ligament chisels in February 1997, and began marketing these products in September 1997. Our arthroscopy system consists of the following products: . the Temperature Control, or TAC, family of probes; . the Ligament Chisel family of electrosurgical cutting probes; and . the ORA-50 ElectroThermal Generator. Our disposable temperature control probes have been designed to treat a variety of joint disorders through low energy, soft tissue shrinkage. The main features of our TAC probes are: . a malleable tip, which can be bent up to 90 degrees for improved access and maneuverability in difficult-to-reach areas; . a thermostat in the tip of the probe, which measures and monitors actual tissue temperature; and . a variety of probe shapes and sizes for optimal tissue access. The list price for each disposable TAC probe is $295. Our line of disposable Ligament Chisel electrosurgical cutting probes is designed to treat a variety of joint pathologies that require treatment of small shallow tissue areas. The Ligament Chisel cutting probes cut and 30 ablate soft tissue while simultaneously cauterizing bleeding vessels. Our disposable cutting probes allow physicians to use higher voltage energy and have the following features: . a malleable tip for improved access and maneuverability in difficult-to- reach joint areas; . four different tip designs to allow precise matching of energy delivery to specific anatomy and procedures; and . a tip design that enhances tactile feedback for optimal control and access. Our cutting probes can be used with all irrigation fluids. The list price for each disposable Ligament Chisel is $95. We also sell a line of Micro Chisels for use in small joints at a list price of $110. Our ORA-50 ElectroThermal Generator is a dual mode generator, that provides the electromagnetic RF energy source and control mechanism required for temperature-controlled arthroscopic procedures. These two modes enable physicians to either precisely shrink affected tissue or to rapidly cut and ablate tissue with concurrent cauterization. The ORA-50 arthroscopy generator has the following features: . a proprietary temperature feedback and control mode, which automatically adjusts the power 50 times per second for precise, consistent temperature control of the target tissue; . a power mode, which provides a constant power source for high temperature tissue cutting and ablation with concurrent cauterization; and . an easy-to-read numeric display, which enables physicians to monitor actual tissue temperatures, total treatment time and delivered energy during treatment. Sales and Marketing We market our products in the U.S. directly to physicians who perform spine and arthroscopic procedures. For our spine products, these physicians include orthopedic spine surgeons, neurosurgeons, pain management specialists, anesthesiologists, interventional radiologists and physiatrists. For our arthroscopy products, these physicians are orthopedic surgeons, including sports medicine specialists. We estimate that there are approximately 8,500 spine specialists in the U.S. and 7,000 orthopedic surgeons who consider arthroscopy to be their major practice area. We have focused sales and marketing teams for each of the spine and arthroscopy markets in order to address the different physician groups in each of these two areas. Each of these two sales organizations includes sales employees covering most major markets, complemented by select sales agencies. We believe that a direct sales force is better able to attain in-depth expertise on the clinical benefits of our products. Sales agents typically support the direct sales strategy by covering more rural areas. Agents representing our product lines concurrently handle other related products and have been selected based on their stature and performance in their respective markets. The marketing platform for both spine and arthroscopy is built on scientific and clinical data and extensive surgeon training programs. To date, we have trained over 500 physicians in the use of the IDET procedure and plan to increase that number to over one thousand by the end of 1999. We expect to provide spine and arthroscopy product-related training for approximately 1,500 physicians during 1999. Course faculty is comprised of physicians with extensive procedure experience using our products. We expect to have scientific data presented at over 30 specialty meetings during 1999. Our spine products are marketed domestically by 10 direct sales employees, one national director, two regional sales managers and 14 independent sales agencies. We plan to significantly increase our sales force by the end of 1999. Our arthroscopy products are marketed domestically by 21 direct sales employees, one national director, four regional managers, one national training manager and 23 sales agencies. We have focused our resources on the rapid development of the U.S. market for our products. International sales have not been significant to date. Our arthroscopy products are distributed in select countries 31 by exclusive distributors in those countries. With the market introduction of the SpineCATH product, we have entered into an exclusive distribution agreement with DePuy AcroMed for the marketing and sales of our spine products internationally. The initial term of the agreement is five years and is automatically renewable subject to termination in some circumstances. We have the right to terminate the agreement if DePuy fails to meet negotiated minimum purchase requirements commencing in the year 2000. Third-Party Reimbursement Establishing reimbursement for any new technology is a challenge in the current environment of cost containment and managed care. The cost reduction orientation of the payor community makes it exceedingly difficult for new medical technologies and surgical techniques to be covered for reimbursement. We have a dedicated reimbursement group which: . assists physicians and surgery centers with obtaining pre-determination of procedures; . screens each case to determine that the procedure is appropriate for the patient's condition; and . assists physicians and providers in claim collections. We have been working with various medical associations responsible for determining reimbursement coding to develop our coding and reimbursement strategy. The codes define reimbursement levels and are used for billing purposes by health care providers. We have also introduced a new service for physicians. Based on physician authorization, we obtain payment pre- determination for the IDET procedure by contacting payors on behalf of the physician practice. The service is free to physicians and outpatient facilities and has proven to be effective. Our reimbursement staff of eight individuals educates the payor community on the IDET procedure from the local case managers to the national policy makers. To date, over 85% of pre-determination requests have been approved by the payors, however several large insurance plans have yet to approve payment for the procedure. It is our belief that published clinical data in peer reviewed journals will facilitate further acceptance by payors. Arthroscopy procedure costs, including the cost of our products, have been covered under the customary payment policies of most payors. Reimbursement for the incremental cost of our temperature control probes has been an issue for ambulatory surgical centers. We have assisted these facilities in understanding how to receive reimbursement for the incremental cost. Competition The medical device industry is subject to intense competition. Accordingly, our future success will depend on our ability to meet the clinical needs of physicians, improve patient outcomes, and remain cost-effective for payors. There are a number of medical treatments for low back pain ranging from medication and physical therapy to spinal injections and interbody spine fusion. Our IDET procedure is typically offered to a patient after medications, injections and physical therapy have failed, usually after six months of unresolved symptoms. The spine fusion market is highly competitive. However, spine fusion is not considered directly competitive with our product because it treats severe conditions that the IDET procedure is not designed to treat. However, spine implant companies including Sofamor Danek, Sulzer Spine-Tech, Surgical Dynamics, DePuy AcroMed and Stratec/SYNTHES may consider us to be a competitor because our IDET system may delay or eliminate the need for a spine fusion for certain patients. We are also aware that Radionics is currently marketing a probe which is designed for lesioning in the spine, not for tissue shrinkage. Several larger companies sell competitive products to our ElectroThermal Arthroscopy System. These competitors, ArthroCare, Mitek and CONMED, are focused on the tissue ablation market and offer directly 32 competitive cutting and ablating products. ArthroCare and Mitek also have low energy tissue coagulation products which compete directly with our shrinkage products and, we believe based on current estimates, currently control 10% of the tissue shrinkage market. We believe that the principal competitive factors in the markets for the treatment of spine and joint disorders include: .improved patient outcomes; .the publication of peer reviewed clinical studies; .acceptance by leading physicians; .ease of use for physicians; .sales and marketing capability; .timing and acceptance of product innovation; .patent protection; .product quality; and .cost effectiveness. Patents and Proprietary Technology We believe that in order to have a competitive advantage we must develop and maintain the proprietary aspects of our technologies. To this end, we file patent applications to protect technology, inventions and improvements that we believe are significant to the growth of our business. As of June 30, 1999, we had five issued U.S. patents, one issued foreign patent, eight notices of allowance, 20 pending U.S. patent applications and 20 pending foreign patent applications. None of our issued patents is spine specific. The issued and allowed patents cover, among other things, method and apparatus claims for directing energy to and sealing fissures in the spinal discs, including navigation within a disc and devices with a functional element at the tip, and the controlled contraction of tissue in all joints and spinal discs. Our patents also cover our temperature feedback system, probe tip technology, ligament shrinkage and controlled depth ablation. We require our employees, consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us. We also require our employees, consultants and some advisors to agree to disclose and assign to us all inventions conceived during the ORATEC work day, using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Finally, our competitors may independently develop similar technologies. See "Risk Factors--If we do not protect our intellectual property rights, our competitive position may be impaired." The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the possibility of an infringement claim against us grows. Our spine and arthroscopy products and the methods they employ may be covered by U.S. patents held by our competitors. We have made a careful analysis in consultation with our experts and, based on such analysis, we believe that either such patents or claims are invalid or if valid we do not infringe. See "Risk Factors--We may be sued for violating the intellectual property rights of others." Research and Development We have an aggressive product development program to develop and enhance products for the spine and arthroscopy markets. The ongoing focus of our research and development group is to design products that improve patient outcomes, simplify techniques, shorten procedure and rehabilitation time and reduce costs. As of June 30, 1999, we employed 29 people in our research and development organization. Our research and development group consisted of 15 people for our disposable probes and three people for our generators. We 33 had two people focused on the management of intellectual property, four responsible for clinical and regulatory affairs and five in quality assurance. New Product Development We are committed to leveraging our existing technologies into new orthopedic applications and responding to the clinical needs of physicians and patients in cost effective ways. We have a number of new projects and product enhancements under development by the research and development group. Product line extensions include: . the development of a spine catheter for the upper spine; . a line of probes designed for use in arthroscopic hip procedures; . variations of existing probes for improved access in the arthroscopic environment; . enhanced software and firmware elements for our electrothermal generators to provide improved temperature control functions; and . a new generation of electrothermal generators with enhanced capabilities. Clinical Research The clinical research department supports our development efforts by conducting in-house cadaveric and bench testing for the development and evaluation of products and managing the numerous scientific and clinical studies conducted by investigators and institutions studying the effects of our technologies. To date, there are seven clinical studies involving 651 patients using our spine products and 13 clinical studies involving 925 patients using our arthroscopy products. Some of these studies are still underway, and their outcomes are not yet determined. In addition to administrative support and funding, the department assists investigators in writing protocols and collecting data, when necessary, as well as by providing site monitoring and research support. To date there have been eight published reports in peer reviewed journals discussing the effects of our technologies. An additional seven manuscripts are pending publication, and 35 abstracts have been presented at medical conferences by both physicians affiliated with us as clinical and scientific advisors and unaffiliated physicians. Manufacturing Our manufacturing operations are focused primarily on the manufacture of disposable products. The manufacturing process includes the inspection, assembly, testing, packaging and sterilization of components that have been manufactured by us or to our specifications by outside contractors. We inspect each lot of components and finished products to determine compliance with our specifications. We have established quality assurance systems in conformance with the Quality System Regulation, or QSR, as mandated by the FDA. Our Menlo Park, California facility received ISO 9001/EN 46001 certification in March 1998 and is in conformance with the Medical Device Directive, or MDD, for sale of products in Europe. We inspect incoming components, and inspect and test products both during and after the manufacturing process. We also inspect packaged products and test the sterilization process to produce quality products. We subcontract the manufacture of the electrothermal generators to a single source supplier. The generators are tested by both the contract manufacturer and us before shipment to customers. We are currently preparing for in-house assembly of the generators in order to reduce the risk of a single source supplier, to control the quality and availability of the product and to leverage fixed costs. See "Risk Factors--We have a sole supplier of generators, and any disruption in supply could result in decreased sales" and "Risk Factors--We may fail to successfully transition the manufacture of our generators to internal operations." 34 Most purchased components and services are available from more than one supplier. For certain components and services, there are relatively few alternate sources of supply and establishment of additional or replacement suppliers for such components and services could not be accomplished quickly. As of June 30, 1999, we had a purchase order for $2.4 million in generators. Except for this purchase order, there are no contractual obligations by suppliers to continue to supply to us nor are we contractually obligated to purchase from a particular supplier. We utilize a gas plasma sterilization system that has been used extensively in hospital settings but only recently for industrial applications. The system received 510(k) clearance from the FDA in 1993. A contract sterilizer provides gas plasma sterilization services as a backup to our system. We also utilize a contract sterilizer that provides gamma sterilization services for those products that cannot be sterilized with gas plasma. Sterilization indicators for all products sterilized at our facilities are processed at an outside certified laboratory to verify the effectiveness of the sterilization process prior to the release of the product for distribution. Government Regulation Our products are regulated in the U.S. as medical devices by the FDA under the Federal Food, Drug, and Cosmetic Act and require clearance of a premarket notification under Section 510(k) of the FDC Act or approval of a PMA under Section 515 of the FDC Act by the FDA prior to commercialization. Material changes or modifications to medical devices are also subject to FDA review and clearance or approval. The FDA regulates the research, clinical testing, manufacturing, safety, labeling, storage, record keeping, advertising, distribution, sale and promotion of medical devices in the U.S. Non-compliance with applicable requirements can result in, among other actions, warning letters, fines, injunctions, civil and criminal penalties against us, our officers, and our employees, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals, and recommendation that we not be permitted to enter into government contracts. To date, all of our products have received 510(k) clearances or are exempt from the 510(k) clearance process. It generally takes three to 12 months from the date of the submission to obtain clearance of a 510(k) submission, but may take longer. Recently, the FDA has begun requiring a more rigorous demonstration of substantial equivalence, including clinical trials for some devices. While we have been successful to date in obtaining regulatory clearance of our products through the 510(k) notification process, our future products may not meet the requirements for 510(k) clearance. If the FDA concludes that any product does not meet the requirements for 510(k) clearance, then a PMA would be required and the time required for obtaining regulatory approval would be significantly lengthened. Once 510(k) clearance has been received, any products that we manufacture or distribute are subject to extensive and continuing regulation by the FDA. Modifications to devices cleared via the 510(k) process may require a new 510(k) submission. We have made modifications to some of our devices which we believe do not require the submission of new 510(k) notifications. If the FDA requires us to submit a new 510(k) notification for any device modification, we may be prohibited from marketing the modified device until the 510(k) is cleared by the FDA. We have been an FDA registered medical device facility since 1996 and obtained our manufacturing license from the California Department of Health Services, or CDHS, in 1997. We are inspected by both the FDA and CDHS for compliance with GMP, QSR and other applicable regulations. Our manufacturing processes are required to comply with GMP and QSR regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of our products. We are also required to comply with Medical Device Reporting regulations that require us to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury, or in which our product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. To date, we have filed two MDR reports with the FDA for burns caused by 35 improperly applied patient grounding pads, and six MDR reports relating to breakage of the SpineCATH Intradiscal catheter upon its removal after the completion of the procedure. In addition, approximately 500 TAC probes were returned to us as a result of a March 1999 recall for a faulty part supplied to us by an outside vendor. No patient complaints or claims were received. We informed the FDA about this recall,and the FDA determined that it was not a reportable event under FDA regulations. In addition, we received a warning letter from the FDA in April 1999 regarding information on our website which the FDA believed was broadening our label indications. We removed some information from our website and responded that the remaining information was not intended to expand label indications. We are also subject to regulations and product registration requirements in many of the foreign countries in which we sell our products, in the areas of product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements. Either we or our distributors have received registrations and approvals to market the ORA-50 ElectroThermal Generator and arthroscopy probes and accessories in Canada, the United Kingdom, Belgium, Italy, Spain, Australia and Taiwan. Registration for market approval for our spine products is in process in several international markets. We are seeking or intend to seek regulatory approvals in other international markets. We may not obtain these foreign approvals on a timely basis, or at all. The European Union has promulgated rules, under the MDD 93/42/EEC, which require medical devices to bear the "CE mark" by June, 1998. The CE mark is an international symbol of adherence to quality assurance standards. Our ISO9001/EN46001 registration and conformance with the MDD have allowed us to affix the CE mark to our devices and export our devices to any EC-member country. Employees As of June 30, 1999, we had 162 full-time employees, including 29 in research and development, 56 in manufacturing, 62 in sales and marketing and 15 in general and administrative functions. From time to time, we also employ independent contractors to support our engineering, marketing, sales and support and administrative organizations. Facilities We are headquartered in Menlo Park, California, where we lease two buildings with approximately 25,000 square feet of office, research and development and manufacturing space under leases expiring between September 2000 and July 2003. Beginning in the third quarter of fiscal 1999 we will lease an additional 5,000 square feet of manufacturing space. We also maintain an office for our reimbursement function in Dallas, Texas. We believe that our existing facilities are adequate to meet our current and foreseeable requirements for the next 12 months or that suitable additional or substitute space will be available as needed. Legal Proceedings From time to time we are a party to various legal proceedings arising in the ordinary course of our business. We are not currently subject to any material legal proceedings. 36 MANAGEMENT Executive Officers and Directors The following table sets forth specific information regarding our executive officers and directors as of June 30, 1999:
Name Age Position ---- --- -------- Kenneth W. Anstey....... 53 President, Chief Executive Officer and Director Hugh R. Sharkey......... 49 Executive Vice President, Chief Technical Officer and Director Nancy V. Westcott....... 46 Chief Financial Officer and Vice President, Administration Roger H. Lipton......... 41 Vice President, Sales and Marketing Calvin K. Lee........... 45 Vice President, Operations Richard M. Ferrari 45 Chairman of the Board (1)(2)................. Stephen Brackett (1).... 36 Director Gary S. Fanton, M.D. 47 Director (2).................... Patrick F. Latterell 41 Director (1).................... Jeffrey A. Saal, M.D. 49 Director (2)....................
- -------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Kenneth W. Anstey joined ORATEC in April 1996 as a director and has served as President and Chief Executive Officer of ORATEC since July 1997. From December 1995 to March 1997, Mr. Anstey was the Chief Executive Officer of Biofield Corporation, a cancer diagnostic company. From August 1991 to December 1995, he served as President and Chief Executive Officer of Mitek Surgical Products, an orthopedic implant company, which was subsequently acquired by Johnson & Johnson. He currently serves as a director of Vision Sciences, a medical device company. Mr. Anstey holds a B.A. degree in Advertising and an M.B.A. degree from Michigan State University. Hugh R. Sharkey co-founded ORATEC and has served as a director since inception. From July 1995 until July 1997, he served as Chief Executive Officer, President and Chief Financial Officer, and in June 1997 he became Executive Vice President and Chief Technical Officer. In March 1994, Mr. Sharkey co-founded ZoMed International (now RITA Medical Systems), a radiofrequency ablation company. In 1992, Mr. Sharkey co-founded VIDAMed, a urology company, and in 1987, he co-founded Danforth Biomedical, a medical device company. From May 1988 to May 1989, he served as Vice President and General Manager of EP Technologies, a cardiac electrode company, which was acquired by Boston Scientific, a minimally invasive medical device company. Mr. Sharkey is listed as an inventor on over 53 patents for medical devices. He holds an A.A. degree in Nursing and a B.S. degree in Business Administration from the University of Phoenix. Nancy V. Westcott joined ORATEC as its Chief Financial Officer and Vice President, Administration in November 1997. From November 1992, she served as Vice President of Corporate Communications for Caremark International, a health care services company, until its acquisition in September 1996. From June 1978 to November 1992, she held a number of management positions with Baxter International in pension management and international and domestic treasury. Ms. Westcott holds a B.A. degree in German from the University of Idaho and a Masters of International Management degree from the American Graduate School of International Management (Thunderbird). She earned her Professional Accounting Certificate at the J.L. Kellogg Graduate School of Management at Northwestern University. Roger H. Lipton joined ORATEC in January 1996 as Vice President, Sales and Marketing. From January 1989 to November 1995, Mr. Lipton held management positions in marketing and business development at AME Orthofix, an orthopedic and spine implant company. Prior to working at AME Orthofix, he served as a principal of Martek, a marketing consulting firm, and as Director of Sales and Marketing of Medmax, a start-up cardiovascular company. Mr. Lipton holds a B.S. degree in Business Administration from the University of Hartford. 37 Calvin K. Lee joined ORATEC as Vice President, Manufacturing in October 1996, and was promoted to Vice President, Operations in June 1999. From November 1987 to September 1996, Mr. Lee worked at Cardiometrics, a manufacturer of blood- flow monitors, most recently as Vice President of Manufacturing. Prior to working at Cardiometrics, Mr. Lee held several manufacturing management positions with Advanced Cardiovascular Systems, a cardiovascular device company. Mr. Lee holds a B.S. degree in Business Administration from California State University at San Jose. Richard M. Ferrari has served as a director of ORATEC since May 1996 and was elected Chairman of the Board in January 1997. Since June 1995, Mr. Ferrari has served as Chief Executive Officer of CardioThoracic Systems, a minimally invasive coronary bypass company. From January 1991 to September 1995, Mr. Ferrari was President and Chief Executive Officer of CVIS, a cardiovascular medical device company, which was recently acquired by Boston Scientific. From April 1990 to January 1991, he served as President and Acting Chief Executive Officer of Medstone International, a shockwave therapy company, and from January 1986 to April 1990, he was an Executive Vice President with ADAC Laboratories, a nuclear medical imaging and healthcare information systems company. Mr. Ferrari also serves as a director and advisor for several start-up companies in the medical device industry. Mr. Ferrari holds a B.S. degree in Health and Education from Ashland University and an M.B.A. from the University of South Florida. Stephen Brackett has served as a director of ORATEC since December 1998. Mr. Brackett founded MF Private Capital, Inc., a merchant bank and registered broker-dealer, in 1998 and currently serves as a managing director. From February 1995 to December 1997, Mr. Brackett managed the Corporate Advisory and Investment Banking services for The Bank of Tokyo-Mitsubishi Capital Corporation. From March 1994 to February 1995 Mr. Brackett was President and Chief Operating Officer of State Street Business Group, an investment banking firm. Mr. Brackett also serves on the board of directors of several private companies. Mr. Brackett holds a B.A. degree in Political Science from Bates College. Gary S. Fanton, M.D. is a co-founder of ORATEC and has served as a director since August 1995. Since, 1983, Dr. Fanton has been conducting his medical practice with Sports Orthopedic and Rehabilitation, or S.O.A.R., Medicine Associates. In addition, Dr. Fanton has been an Assistant Clinical Professor at Stanford University since 1983, the head orthopedic surgeon for the Stanford University football team since 1992 and the associate team physician for the San Francisco 49ers since 1984. Dr. Fanton founded the International Musculoskeletal Laser Society and has done extensive research on the effects of thermal energy on soft tissue. He is a member of the Orthopedic Research Society and the American Orthopedic Society for Sports Medicine. Dr. Fanton holds a B.S. degree in Zoology from the University of Michigan and an M.D. degree from the Medical College of Wisconsin, and completed his orthopedic residency training at the Cleveland Clinic and his fellowship training in sports medicine at the Kerlan-Jobe Orthopedic Clinic. Dr. Fanton is board certified in Orthopedic Surgery. Patrick F. Latterell has served as a director of ORATEC since October 1997, and previously served as a director and Chairman of the Board from August 1996 to January 1997. Mr. Latterell has been a general partner at Venrock Associates, a venture capital firm, since April 1989. Mr. Latterell also serves as a director of Vical, a gene-based pharmaceutical company, as well as several private companies. He holds S.B. degrees in both Biology and Economics from the Massachusetts Institute of Technology and an M.B.A degree from the Stanford University Graduate School of Business. Jeffrey A. Saal, M.D. is a co-founder of ORATEC and has been a director since August 1995. Since 1981, Dr. Saal has been conducting his medical practice with the S.O.A.R. Physiatry Medical Group. Since 1992, he has been an Associate Clinical Professor at Stanford University, and since 1981 he has served as team physician to various college sports teams. Dr. Saal is on the editorial boards of several peer review journals, including Spine. Dr. Saal holds several positions with professional societies, including Founding Chairman of PASSOR, the Physiatric Association of Spine Sports and Occupational Rehabilitation. He was also a former President of the North American Spine Society, or NASS. Dr. Saal holds a B.A. degree in Biology from the 38 State University of New York, Oneonta and an M.D. degree from Tulane Medical School. He completed his residency training at the Boston VA Hospital and Stanford University. Dr. Saal is board certified in Physical Medicine, Internal Medicine and Electrodiagnostic Medicine. Scientific and Clinical Advisory Boards for Spine The following individuals sit on our advisory boards for spine. Scientific Advisory Board
Name Position and Affiliation ---- ------------------------ Howard An, M.D. ............ Professor of Orthopedic Surgery, Rush Presbyterian St. Luke's Medical Center, Chicago, IL Gunnar Anderson, M.D. ...... Orthopedic Spine Surgeon, Rush Presbyterian St. Luke's Medical Center, Chicago, IL Charles Aprill, M.D. ....... Radiologist and Medical Director, Magnolia Diagnostics, New Orleans, LA David Casper, M.D. ......... Clinician of Orthopedic and Spine Surgery, Oklahoma Sports Science and Orthopedics, Oklahoma City, OK Richard Derby, M.D. ........ Medical Director, Spinal Diagnostics & Treatment Center, Daly City, CA Neil Kahanovitz, M.D. ...... Orthopedic Surgeon, Anderson Orthopedic Clinic, Arlington, VA Jeffrey Saal, M.D. ......... Associate Clinical Professor, Stanford University School of Medicine, Palo Alto, CA Joel Saal, M.D. ............ Assistant Clinical Professor, Stanford University School of Medicine, Palo Alto, CA Robert Watkins, M.D. ....... Orthopedic Spine Surgeon, Center for Orthopedic Spinal Surgery, Los Angeles, CA Hansen Yuan, M.D. .......... Professor of Orthopedic and Neurological Surgery, State University of New York, Syracuse, NY Clinical Advisory Board Name Position and Affiliation ---- ------------------------ Arnold Criscitiello, M.D. .. Assistant Professor, University Hospital Health Science Center, Syracuse, NY Steve Garfin, M.D. ......... Orthopedic Surgeon, Spine; Professor and Chair in the Department of Orthopedics, University of California, San Diego, CA Steve Hochschuler, M.D. .... Chairman, Texas Back Institute, Plano, TX Dennis Karasek, M.D. ....... Physician, Northwest Spine Group, Eugene, OR Michael Karasek, M.D. ...... President, Northwest Spine Group, Eugene, OR Casey Lee, M.D. ............ Clinical Professor, Department of Orthopedics, New Jersey Medical School, Newark, NJ John Peloza, M.D............ Clinical Assistant Professor, University of Texas, Southwestern Medical School, Department of Orthopaedic Surgery, Dallas, TX; Spine Surgeon, Center for Spine Care, Dallas, TX Ralph Rashbaum, M.D. ....... Clinical Medical Director, Texas Back Institute, Plano, TX John Regan, M.D. ........... Associate, Texas Back Institute, Plano, TX Kerry Thompson, M.D. ....... Neuroradiologist, Anne Arundel General Hospital, Annapolis, MD Todd Wetzel, M.D. .......... Associate Professor of Surgery, Section of Orthopedic Surgery and Rehabilitation, University of Chicago, Chicago, IL Scientific and Clinical Advisory Boards for Arthroscopy The following individuals sit on our advisory boards for arthroscopy. Scientific Advisory Board Name Position and Affiliation ---- ------------------------ David Drez, M.D ............ Clinical Professor of Orthopedics, Louisiana State University School of Medicine, Lake Charles, LA Lawrence Lemak, M.D. ....... Orthopedic Surgeon, Alabama Sports Medicine Orthopedic Center, Birmingham, AL Mark Markel, M.D. .......... Chair, Department of Medical Sciences, University of Wisconsin, Madison, WI Gary Poehling, M.D. ........ Chairman of Orthopedics, Wake Forest School of Medicine, Winston-Salem, NC Felix Savoie, M.D. ......... Director, Upper Extreme Service, Mississippi Sports Medicine, Jackson, MS James Tibone, M.D. ......... Orthopedic Surgeon, Kerlan-Jobe Orthopedic Clinic, Inglewood, CA Russell Warren, M.D. ....... Surgeon in Chief, Hospital for Special Surgery, New York, NY
39 Clinical Advisory Board
Name Position and Affiliation ---- ------------------------ Jeffrey Abrams, M.D. ..... Associate Medical Director, Princeton Orthopedic and Rehabilitation Associates, Princeton, NJ James Andrews, M.D. ...... Medical Director, American Sports Medicine Institute, Birmingham, AL James Bradley, M.D. ...... Director, Pittsburgh Center for Sports Medicine, Shadyside Hospital, Pittsburgh, PA Brian Cole, M.D. ......... Assistant Professor of Orthopedics, Sports Medicine, Rush Presbyterian St. Luke's Medical Center, Chicago, IL Michael Dillingham, M.D... Partner, Sports Orthopedic and Rehabilitation, or S.O.A.R., Medicine Associates, Menlo Park, CA Robert Eppley, M.D. ...... Orthopedic Consultant, University of California, Berkeley, CA Gary Gartsman, M.D........ Orthopedic Surgeon, Fondren Orthopedic Group, Houston, TX Jeffrey Halbrecht, M.D. .. Medical Director, Women's Professional Ski Tour; California Pacific Medical Center, San Francisco, CA Richard Hawkins, M.D. .... Orthopedic Surgeon, Steadman Hawkins Clinic, Vail, CO Darryl Kan, M.D. ......... Orthopedic Team Physician, University of Hawaii, Honolulu, HI Michael Krinsky, M.D. .... Chief of Staff, Health Surgery Center of Castro Valley, CA Craig Levitz, M.D. ....... Attending Physician, Long Island Jewish Hospital; Director, OCOA Cartilage Repair and Sports Medicine Center, Long Island, NY Walter Lowe, M.D. ........ Associate Clinical Professor, Baylor College of Medicine, Department of Orthopaedic Surgery, Houston, TX Bruce Moseley, M.D. ...... Clinical Associate Professor, Baylor College of Medicine, Houston, TX Lawrence Oloff, D.P.M. ... D.P.M. Surgeon, S.O.A.R., Menlo Park, CA Jeffrey Schubiner, M.D. .. Orthopedic Surgeon, Consultant, San Bruno, CA Pierce Scranton, M.D. .... Orthopedic Surgeon, Orthopedics International LTD P.S., Seattle, WA Eric Stahl, M.D. ......... Orthopedic Surgeon, Lakewood Orthopedic Clinic, Lakewood, CO George Thabit, M.D. ...... Orthopedic Surgeon, S.O.A.R., Menlo Park, CA Eric Verploeg, M.D. ...... Orthopaedics Surgeon, Orthopaedics of Steamboat Springs, CO Kenneth Zaslov, M.D. ..... Clinical Assistant Professor of Orthopaedic Surgery, Virginia Commonwealth University; Director of Sports Medicine, Advanced Orthopaedic Centers, Richmond, VA
Board Composition Our bylaws currently provide for a board of directors consisting of seven members. Beginning at the first annual meeting of stockholders after the date on which we shall have had at least 800 stockholders, the board of directors will be divided into three classes, each serving staggered three year terms: Class I, whose term will expire at the first annual meeting of stockholders after the date on which we have 800 stockholders; Class II, whose term will expire at the second annual meeting of stockholders after the date on which we have 800 stockholders; and Class III, whose term will expire at the third annual meeting of stockholders after the date on which we have 800 stockholders. As a result, only one class of directors will be elected at each annual meeting of stockholders of ORATEC, with the other classes continuing for the remainder of their terms. Messrs. Latterell and Brackett were elected to the board of directors pursuant to voting agreements between us and certain principal stockholders. These voting agreements will terminate upon completion of this offering. Our officers are appointed by the board of directors and serve at the discretion of the board of directors. Board of Directors Compensation Our directors do not currently receive compensation for their services as members of the board of directors. Employee directors are eligible to participate in our 1995 Stock Plan and will be eligible to participate in our 1999 Employee Stock Purchase Plan. Nonemployee directors are eligible to participate in our 1995 Stock Plan and will be eligible to participate in our 1999 Directors' Stock Option Plan. See "--Stock Plans." 40 Board Committees The compensation committee currently consists of Gary Fanton, M.D., Richard Ferrari and Jeffrey Saal, M.D. The compensation committee: . reviews and approves the compensation and benefits for our executive officers and grants stock options under our stock option plan; and . makes recommendations to the board of directors regarding such matters. The audit committee consists of Stephen Brackett, Richard Ferrari and Patrick Latterell. The audit committee: . makes recommendations to the board of directors regarding the selection of independent auditors; . reviews the results and scope of the audit and other services provided by our independent auditors; and . reviews and evaluates our audit and control functions. Compensation Committee Interlocks and Insider Participation The members of the compensation committee of the board of directors are currently Gary Fanton, M.D., Richard Ferrari and Jeffrey Saal, M.D., none of whom has ever been an officer or employee of ORATEC. Executive Compensation Summary Compensation. The following table sets forth the compensation received for services rendered to us during the fiscal year ended December 31, 1998 by our Chief Executive Officer and the four other most highly compensated executive officers who earned more than $100,000 during the fiscal year ended December 31, 1998. Summary Compensation Table
Annual Compensation Long Term Compensation --------------------------------- ---------------------- All Other Restricted Securities Compensation Stock Underlying Name and Principal Position Salary ($) Bonus ($) ($) Awards ($) Options (#) - --------------------------- ---------- --------- ------------ ---------- ----------- Kenneth W. Anstey,...... President and Chief Executive Officer $200,000 $38,000 $101,629(1) $40,001 -- Hugh R. Sharkey,........ Executive Vice President and Chief Technical Officer $150,000 $37,500 $ 6,000(2) -- -- Nancy V. Westcott,...... Chief Financial Officer and Vice President, Administration $150,000 $50,000 $103,738(3) -- -- Roger H. Lipton,........ Vice President, Sales and Marketing $150,000 $45,000 $ 3,600(2) -- 3,000 Calvin K. Lee,.......... Vice President, Operations $135,000 $10,000 -- 6,000
- -------- (1) Consists of $95,629 in payments for moving and relocation costs and $6,000 car allowance. (2) Consists of car allowance. (3) Consists of $63,366 in payments for moving and relocation costs and $40,372 in tax reimbursement in connection with relocation. 41 Option Grants. The following table shows information regarding stock options granted to our executive officers during the year ended December 31, 1998. No stock appreciation rights were granted to these individuals during the year. Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates Number of of Stock Price Shares Percentage of Appreciation for Underlying Total Options Option Term(2) Options Granted to Exercise Price Expiration ----------------- Name Granted(1) Employees per Share Date 5% 10% ---- ---------- ------------- -------------- ---------- -------- -------- Roger H. Lipton......... 3,000 0.7% $2.92 1/18/08 Calvin K. Lee........... 6,000 1.4% $2.92 1/18/08
- -------- (1) These stock options, which were granted under our 1995 plan, become exercisable at the rate of 1/48th of the total number of shares on the monthly anniversary of the date of grant, as long as the optionee remains an employee with, consultant to, or director of ORATEC. (2) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the Securities and Exchange Commission and are based on the assumption that the assumed initial public offering price of $ was the fair market value of the common stock on the date of grant. There is no assurance provided to any executive officer or any other holder of our securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the common stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. Aggregate Option Exercises and Holdings. The following table provides summary information concerning the shares of common stock represented by outstanding stock options held by each of our executive officers as of December 31, 1998. Fiscal Year-End Option Values
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Number of Options at at December 31, 1998 Shares Value December 31, 1998 (#) ($)(2) Acquired on Realized ------------------------- ------------------------- Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable ---- ------------ -------- ----------- ------------- ----------- ------------- Kenneth W. Anstey....... -- -- 137,250 162,750 Hugh R. Sharkey......... -- -- 24,000 -- -- Nancy V. Westcott....... -- -- 24,375 65,625 Roger H. Lipton......... -- -- 46,187 27,313 Calvin K. Lee........... -- -- 33,875 32,125
- -------- (1) The amount set forth represents the difference between the fair market value of the shares on the date of exercise as determined by the Board of Directors and the exercise price of the option. (2) The amount set forth represents the difference between the fair market value of the underlying common stock at December 31, 1998, using an assumed initial public offering price of $ per share as the fair market value, and the exercise price of the option. 42 Employment Agreements. We have entered into employment agreements with some of our executive officers, which provide for the payment of severance or the acceleration of unvested stock, options and warrants in some circumstances. Mr. Anstey's agreement provides that if he is involuntarily terminated without cause, including his constructive termination, he will receive a severance payment, paid in two installments, equal to 12 months of his base salary and target bonus earned, as well as acceleration of vesting on 50% of his unvested options. If, as a result of a change of control of ORATEC, Mr. Anstey is involuntarily terminated other than for cause, all of his unvested options and stock shall vest immediately. Mr. Sharkey's agreement provides that if we terminate him without cause, he will receive continued payment of his base salary and a pro rata amount of his prior year's annual bonus for a period of six months after his termination date. In addition, upon a change of control of ORATEC, his unvested stock and options shall immediately vest. Ms. Westcott's agreement provides that if we terminate her without cause, she will receive continued payment of base salary on a monthly basis for (a) 12 months, if the termination occurs on or before October 30, 1999, (b) six months, if the termination occurs after October 30, 1999, or (c) 12 months, if she is involuntarily terminated, including her constructive termination, in connection with a change of control. In addition, if Ms. Westcott is involuntarily terminated, including her constructive termination, within 12 months after a change of control of ORATEC, 100% of her unvested options will vest immediately. Mr. Lipton's agreement provides that, upon a change of control of ORATEC, 100% of his unvested options will vest immediately. Stock Plans 1995 Stock Plan. Our 1995 plan provides for the grant of incentive stock options to employees, including employee directors, and of nonstatutory stock options and stock purchase rights to employees, directors, including employee and non-employee directors, and consultants. The purposes of the 1995 plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants and to promote the success of our business. The 1995 plan was originally adopted by our board of directors in July 1995 and approved by our stockholders in September 1995. Our board of directors approved amendments to the 1995 plan to increase the number of shares reserved under the 1995 plan in April 1996, July 1997 and November 1998, and our stockholders approved these amendments to the 1995 plan in May 1996, July 1997 and November 1998. As of June 30, 1999, an aggregate of 2,250,000 shares was reserved for issuance under the 1995 plan. The 1995 plan was amended by our board of directors on July 1, 1999 to increase the total number of shares reserved for issuance by 750,000 shares, and to incorporate certain other changes, after which a total of 3,000,000 shares of common stock was reserved for issuance under the 1995 plan. In addition, the 1995 plan was amended to provide for an automatic annual increase on the first day of each of our fiscal years beginning in 2000, 2001 and 2002 equal to the lesser of 750,000 shares, 4% of our outstanding common stock on the last day of the immediately preceding fiscal year, or such lesser number of shares as the board of directors determines. This amendment to the 1995 plan will be submitted to our stockholders for approval prior to the completion of this offering. Unless terminated earlier by the board of directors, the 1995 plan will terminate in July 2005. As of June 30, 1999, options to purchase 1,881,000 shares of common stock were outstanding under the 1995 plan at a weighted average exercise price of $3.39 per share, 244,666 shares had been issued upon exercise of outstanding options or pursuant to restricted stock purchase agreements and 124,334 shares remained available for future grant. The 1995 plan may be administered by the board of directors or a committee of the board, each known as the administrator. The administrator determines the terms of options and stock purchase rights granted under 43 the 1995 plan, including the number of shares subject to the award, the exercise or purchase price, and the vesting and/or exercisability of the award and any other conditions to which the award is subject. In no event, however, may an employee receive awards for more than 1,000,000 shares under the 1995 plan in any fiscal year. Incentive stock options granted under the 1995 plan must have an exercise price of at least 100% of the fair market value of the common stock on the date of grant, and not less than 110% of the fair market value in the case of incentive stock options granted to an employee who holds more than 10% of the total voting power of all classes of our stock or any parent or subsidiary's stock. Prior to this offering, nonstatutory stock options and stock purchase rights granted under the 1995 plan were required to have an exercise or purchase price of at least 85% of the fair market value of the common stock on the date of grant, and grants vested at the rate of at least 20% per year. After the date of this offering, the exercise price of nonstatutory stock options and the purchase price of stock purchase rights will no longer be subject to these restrictions, although nonstatutory stock options and stock purchase rights granted to our Chief Executive Officer and our four other most highly compensated officers will generally equal at least 100% of the fair market value on the grant date if we intend that awards to those individuals will qualify as performance-based compensation under applicable tax law. Payment of the exercise or purchase price may be made in cash or other consideration as determined by the administrator. With respect to options granted under the 1995 plan, the administrator determines the term of options, which may not exceed 10 years, or five years in the case of an incentive stock option granted to an employee who holds more than 10% of the total voting power of all classes of our stock or a parent or subsidiary's stock. Generally, an option granted under the 1995 plan is nontransferable other than by will or the laws of descent and distribution, and may be exercised during the lifetime of the optionee only by such optionee. However, the administrator may in its discretion provide for the limited transferability of nonstatutory stock options granted under the 1995 plan under some circumstances. Stock issued pursuant to stock purchase rights granted under the 1995 plan is generally subject to a repurchase right at the purchaser's original purchase price exercisable by ORATEC upon the termination of the holder's employment or consulting relationship with us for any reason, including death or disability. This repurchase right will lapse in accordance with the terms of the stock purchase right determined by the administrator at the time of grant. If we sell all or substantially all of our assets or if we are acquired by another corporation, each outstanding option and stock purchase right may be assumed or an equivalent award substituted by the acquiror or purchaser. However, if the acquirer does not agree to this assumption or substitution, then outstanding options will terminate. Upon the closing of the transaction, outstanding repurchase rights will terminate unless assigned to the acquiror or purchaser. The administrator has the authority to amend or terminate the 1995 plan, but no action may be taken that impairs the rights of any holder of an outstanding option or stock purchase right without the holder's consent. In addition, we must obtain stockholder approval of amendments to the plan as required by applicable law. 1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan was adopted by the board of directors in July 1999 and will be submitted for approval by our stockholders prior to completion of this offering. A total of 250,000 shares of common stock has been reserved for issuance under the 1999 purchase plan, none of which have been issued as of the date of this offering. The number of shares reserved for issuance under the 1999 purchase plan will be subject to an automatic annual increase on the first day of each of our fiscal years beginning in 2001, 2002 and 2003 equal to the lesser of 250,000 shares, 2% of our outstanding common stock on the last day of the immediately preceding fiscal year, or such lesser number of shares as the board of directors determines. The 1999 purchase plan becomes effective upon the date of this offering. Unless terminated earlier by the board of directors, the 1999 purchase plan shall terminate in 2009. The 1999 purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, will be implemented by a series of offering periods of approximately six months' duration, with new offering periods, other than the first offering period, commencing generally on May 1 and November 1 of each year. At the end of each offering period an automatic purchase will be made for participants. The initial offering period is expected to commence on the date of this offering and end on April 30, 2000. The 1999 purchase plan will 44 be administered by the board of directors or by a committee appointed by the board. Employees, including officers and employee directors of ORATEC or of any majority-owned subsidiary designated by the board, are eligible to participate in the 1999 purchase plan if they are employed by us or any subsidiary for at least 20 hours per week and more than five months per year. The 1999 purchase plan permits eligible employees to purchase common stock through payroll deductions, which in any event may not exceed 15% of an employee's base salary. The purchase price is equal to the lower of 85% of the fair market value of the common stock at the beginning of each offering period or at the end of each offering period. Employees may end their participation in the 1999 purchase plan at any time during an offering period, and participation ends automatically on termination of employment. An employee cannot be granted an option under the 1999 purchase plan if immediately after the grant the employee would own stock and/or hold outstanding options to purchase stock equaling 5% or more of the total voting power or value of all classes of our stock or stock of our subsidiaries, or if the option would permit an employee's rights to purchase stock under the 1999 purchase plan to accrue at a rate that exceeds $25,000 of the fair market value of the stock for each year in which the option is outstanding. In addition, no employee may purchase more than 2,000 shares of common stock under the 1999 purchase plan in any one offering period. If we merge or consolidate with or into another corporation or sell all or substantially all of our assets, each right to purchase stock under the 1999 purchase plan will be assumed or an equivalent right substituted by the successor corporation. However, the board of directors will shorten any ongoing offering period so that employees' rights to purchase stock under the 1999 purchase plan are able to be exercised prior to the transaction if the successor corporation refuses to assume each purchase right or to substitute an equivalent right. The board of directors has the power to amend or terminate the 1999 purchase plan and to change or terminate an offering period as long as this action does not adversely affect any outstanding rights to purchase stock. However, the board of directors may amend or terminate the 1999 purchase plan or an offering period even if it would adversely affect outstanding options in order to avoid our incurring adverse accounting charges. 1999 Directors' Stock Option Plan. The 1999 directors' stock option plan was adopted by the board of directors in July 1999 and will be submitted to our stockholders for approval prior to completion of this offering. It will become effective upon the date of this offering. A total of 200,000 shares of common stock has been reserved for issuance under the 1999 directors' plan, all of which remain available for future grants. The directors' plan provides for the grant of nonstatutory stock options to our nonemployee directors. The directors' plan is designed to work automatically without administration; however, to the extent administration is necessary, it will be performed by the board of directors. To the extent a conflict of interest arises, it will be addressed by abstention of any interested director from both deliberations and voting regarding matters in which the director has a personal interest. Unless terminated earlier, the directors' plan will terminate in July 2009. The directors' plan provides that each person who becomes a nonemployee director after the completion of this offering will be granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date on which the individual first becomes a member of our board of directors. Thereafter, on the date of each annual shareholder meeting, each nonemployee director will be granted a nonstatutory stock option to purchase 5,000 shares of common stock, if on the date of that meeting, the nonemployee director has been a member of the board of directors for at least six months. All options granted under the directors' plan will have a term of 10 years and an exercise price equal to the fair market value of the common stock on the date of grant and will generally be nontransferable. All options granted under the directors' plan shall be vested and exercisable in full immediately upon grant of such option. If a nonemployee director ceases to serve as a director for any reason other than death or disability, he or she may, but only within 60 days after the date he or she ceases to be a director, exercise options granted under the directors' plan. If he or she does not exercise the option within this 60-day period, the option shall 45 terminate. If a director's service terminates as a result of his or her disability or death, or if a director dies within three months following termination for any reason, the director or his or her estate will have 12 months after the date of termination or death, as applicable, to exercise options that were vested as of the date of termination. If we are acquired by another corporation, each option outstanding under the directors' plan will be assumed by the acquiror or equivalent options substituted, unless our acquiror does not agree to such assumption or substitution, in which case the options will terminate upon consummation of the acquisition to the extent not previously exercised. Our board of directors may amend or terminate the directors' plan as long as such action does not adversely affect any outstanding option and we obtain stockholder approval for any amendment to the extent required by applicable law. Limitation of Liability and Indemnification Matters Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derives an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our directors and executive officers in addition to indemnification provided for in our bylaws. These agreements provide, among other things, for indemnification of our directors and executive officers for expenses specified in the agreements, including attorneys' fees, judgments, fines and settlement amounts incurred by any director or officer in any action or proceeding arising out of his or her services as a director or executive officer of ORATEC, any subsidiary of ORATEC or any other entity to which the person provides services at our request. In addition, we maintain directors' and officers' insurance. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. At present, we are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 46 CERTAIN TRANSACTIONS From October 1, 1995 through June 30, 1999, we issued shares of preferred stock in private placement transactions as follows: . an aggregate of 2,034,356 shares of Series B preferred stock at $2.25 per share in October 1995, February 1996, April 1996 and February 1999; . an aggregate of 865,511 shares of Series C preferred stock at $5.00 per share in March 1997 through December 1997; . an aggregate of 1,937,133 shares of Series D preferred stock at $5.83 per share in November 1997 and December 1997; and . an aggregate of 2,254,678 shares of Series E preferred stock at $7.08 per share in December 1998. The following table summarizes the shares of preferred stock purchased since October 1, 1995 and held as of June 30, 1999 by our executive officers, directors, holders of more than 5% of our outstanding stock and their affiliates:
Series B Series C Series D Series E Name Preferred Preferred Preferred Preferred ---- --------- --------- --------- --------- Entities affiliated with Venrock Associates(1).......... 555,554 342,857 105,881 Entities affiliated with Delphi Ventures................ 555,555 257,142 Entities affiliated with Pequot Private Equity Fund, L.P.................................................... 685,714 141,179 Gerlach & Co. as nominee for The Manufacturers Life Insurance Company (U.S.A.)(2).......................... 564,705 Hugh R. Sharkey......................................... 27,554 21,000 Gary S. Fanton, M.D..................................... 19,999 9,000 Jeffrey A. Saal, M.D.................................... 26,666 Roger H. Lipton......................................... 20,470(3) Calvin K. Lee........................................... 6,000 7,200
- -------- (1) Patrick Latterell, a general partner of Venrock Associates, is a director of ORATEC. (2) Stephen Brackett, a managing director of MF Private Capital, an affiliate of The Manufacturers Life Insurance Company, is a director of ORATEC. (3) Issued on exercise of a warrant to purchase shares of Series B preferred stock. Shares held by affiliated persons and entities have been aggregated. See "Principal Stockholders." See "Management--Executive Compensation" for description of employment agreements with some of our executive officers, which provide for the payment of severance or the acceleration of unvested stock and options in some circumstances. We have entered into indemnification agreements with our officers and directors containing provisions which may require us, among other things, to indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. 47 The following table summarizes the options granted to, and the shares of common stock purchased since January 1, 1996 and held as of June 30, 1999 by, our executive officers, directors, holders of more than 5% of our outstanding stock and their affiliates:
Common Issuance Vesting Name Stock Options Price Date Schedule ---- ------ ------- ------ ---------- -------- Kenneth W. Anstey.................. 5,647(1) $ 7.08 Aug. 1998 48,000 $ 0.17 April 1996 (2) 252,000 $ 1.25 July 1997 (3) 60,000 $ 7.08 Feb. 1999 (4) Gary S. Fanton, M.D................ 24,000 $ 0.17 April 1996 (2) 6,000 $ 2.92 Feb. 1998 (2) 6,000 $ 7.08 Mar. 1999 (2) Richard M. Ferrari................. 48,000 $ 1.25 Aug. 1996 (2) 6,000 $ 7.08 Mar. 1999 (2) Patrick F. Latterell............... 3,000(5) $ 1.25 Sept. 1996 Calvin K. Lee...................... 60,000 $ 1.25 Dec. 1996 (3) 6,000 $ 2.92 Jan. 1998 (4) Roger H. Lipton.................... 16,500(6) $0.002 Jan. 1997 15,000 $ 0.17 June 1996 (7) 6,000 $ 1.25 June 1997 (2) 3,000 $ 2.92 Jan. 1998 (4) Jeffrey A. Saal, M.D............... 24,000 $ 0.17 April 1996 (2) 6,000 $ 2.92 Feb. 1998 (2) 6,000 $ 7.08 Mar. 1999 (2) Hugh R. Sharkey.................... 24,000(6) $ 0.17 April 1999 Nancy V. Westcott.................. 28,125(6) $ 2.50 Feb. 1999 7,500(6) $ 2.50 June 1999 54,375 $ 2.50 Nov. 1997 (7)
- -------- (1) Shares were issued as a bonus to Mr. Anstey. (2) Shares vest at the rate of 1/24th per month after the vesting commencement date. (3) Shares vest at the rate of 6/48ths six months after the vesting commencement date and 1/48th per month thereafter. (4) Shares vest at the rate of 1/48th per month after the vesting commencement date. (5) Shares were purchased with cash. (6) Shares were purchased with cash pursuant to an option exercise. (7) Shares vest as follows: 1/4th of the total shares vest on the one year anniversary of the vesting commencement date and 1/48th of the total shares vest on the monthly anniversary thereafter. 48 PRINCIPAL STOCKHOLDERS The following table sets forth information known to us with respect to beneficial ownership of our common stock as of June 30, 1999, as adjusted to reflect the sale of common stock offered hereby, by: . each person, or group of affiliated persons, known by us to own beneficially more than 5% of our outstanding common stock, . each director, . our Chief Executive Officer and our four other most highly compensated executive officers, and . all directors and officers as a group.
Percent Beneficially Owned(2) -------------------- Number of Before After Name Shares Offering Offering(1) ---- --------- -------- ----------- Patrick F. Latterell(3)......................... 1,007,292 10.3% Entities Associated with Venrock Associates(4).. 1,004,292 10.3% 30 Rockefeller Plaza, Suite 5508 New York, NY 10112 Entities Associated with Pequot Private Equity 826,893 8.5% Fund, L.P.(5).................................. 500 Nayala Farm Road Westport, CT 06880 Entities Associated with Delphi Ventures(6)..... 812,697 8.4% 3000 Sand Hill Road Building 1, Suite 135 Menlo Park, CA 94025 Stephen Brackett(7)............................. 564,705 5.8% Gerlach & Co. as nominee for The Manufacturers 564,705 5.8% Life Insurance Company (U.S.A.)............................... 45 Milk Street, Suite 600 Boston, MA 02109-5105 Hugh R. Sharkey(8).............................. 548,761 5.6% Gary S. Fanton, M.D.(9)......................... 392,248 4.0% Jeffrey A. Saal, M.D.(10)....................... 368,915 3.8% Kenneth W. Anstey(11)........................... 202,396 2.0% Roger H. Lipton(12)............................. 98,657 1.0% Calvin K. Lee(13)............................... 58,075 * Richard M. Ferrari(14).......................... 49,250 * Nancy V. Westcott(15)........................... 39,375 * All directors and officers as a group (ten persons)(16)................................... 3,329,674 32.8%
- -------- * Less than 1% of the outstanding shares of common stock. (1) Assumes no exercise of the underwriters' over-allotment option. Except under applicable community property laws or as indicated in the footnotes to this table, to our knowledge, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of common stock shown as beneficially owned by that stockholder. (2) Options vested as of August 29, 1999 are included as shares beneficially owned. For the purposes of calculating percent ownership, as of June 30, 1999, 9,745,546 shares were issued and outstanding, and, for any individual who 49 beneficially owns shares represented by options vested as of August 29, 1999, these shares are treated as if outstanding for that person, but not for any other person. Unless otherwise indicated, the address of each of the individuals named below is: c/o ORATEC Interventions, Inc., 3700 Haven Court, Menlo Park, CA 94025. (3) Includes 1,004,292 shares held by entities associated with Venrock Associates, of which Mr. Latterell is a general partner. Mr. Latterell disclaims ownership of the shares held by the entities except to the extent of his pecuniary interest therein. (4) Consists of 477,176 shares held by Venrock Associates II, L.P. and 527,116 shares held by Venrock Associates. (5) Consists of 608,652 shares held by Pequot Private Equity Fund, L.P. and 218,241 shares held by Pequot Offshore Private Equity Fund, L.P. (6) Consists of 798,325 shares held by Delphi Ventures III, L.P. and 14,372 shares held by Delphi Bioinvestments III, L.P. (7) Consists of 564,705 shares held by Gerlach & Co. as nominee for The Manufacturers Life Insurance Company (U.S.A.), of which Mr. Brackett is a managing director. Mr. Brackett disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (8) Includes 32,153 shares held in trust for Mr. Sharkey's children and 281,400 shares held by the Sharkey-Daly Family Trust. (9) Includes 29,750 shares issuable upon exercise of options vested as of August 29, 1999. (10) Includes 29,750 shares issuable upon exercise of options vested as of August 29, 1999 and 69,600 shares held in trust for Mr. Saal's children. (11) Includes 186,750 shares issuable upon exercise of options vested as of August 29, 1999. (12) Includes 61,687 shares issuable upon exercise of options vested as of August 29, 1999. (13) Includes 44,875 shares issuable upon exercise of options vested as of August 29, 1999. (14) Consists of 49,250 shares issuable upon exercise of options vested as of August 29, 1999. (15) Includes 3,750 shares issuable upon exercise of options vested as of August 29, 1999. (16) Includes 405,812 shares issuable upon exercise of options vested as of August 29, 1999 held by all directors and officers. 50 DESCRIPTION OF CAPITAL STOCK Upon the completion of this offering, we will be authorized to issue 75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value. The following description of our capital stock does not purport to be complete and is qualified in its entirety by our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. Common Stock As of June 30, 1999, there were 9,745,546 shares of common stock outstanding, held of record by approximately 324 stockholders, which reflects the conversion of all outstanding shares of preferred stock into common stock. In addition, as of June 30, 1999, there were 1,881,000 shares of common stock subject to outstanding options and 127,745 shares of common stock subject to outstanding warrants. Upon completion of this offering, there will be shares of common stock outstanding, assuming no exercise of the underwriters' overallotment option or additional exercise of outstanding options under our stock option plan and warrants. The holders of common stock are entitled to one vote per share on all matters to be voted upon by stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably dividends as may be declared by the board of directors out of funds legally available for that purpose. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding preferred stock. The common stock has no preemptive or conversion rights, other subscription rights, or redemption or sinking fund provisions. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable. Preferred Stock Immediately before the closing of the offering, all outstanding shares of preferred stock will be converted into 7,247,923 shares of common stock and automatically retired. Thereafter, the board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each such series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock or delaying or preventing our change in control without further action by the stockholders. We have no present plans to issue any shares of preferred stock. Warrants As of June 30, 1999 there were the following warrants outstanding: . a warrant to purchase 33,333 shares of Series B preferred stock with an exercise price of $2.25, which expires on March 20, 2001; . warrants to purchase an aggregate of 21,000 shares of Series C preferred stock with an exercise price of $5.00, which expire five years after the closing of this initial public offering; and . a warrant to purchase 73,412 shares of Series E preferred stock with an exercise price of $7.08, which expire two years after the closing of this initial public offering. All of these warrants become exercisable for shares of common stock upon the closing of this initial public offering. Registration Rights The holders of 7,247,923 shares of common stock, the "registrable securities," are entitled to have their shares registered by us under the Securities Act under the terms of an agreement between us and the holders of 51 the registrable securities. Subject to limitations specified in the agreement, these registration rights include the following: . The holders of at least 40% of the registrable securities may require, on two occasions beginning six months after the date of this prospectus, that we use our best efforts to register the registrable securities for public resale, provided that the aggregate offering price for such registrable securities is more than $5,000,000. This right is subject to the ability of the underwriters to limit the number of shares included in the offering in view of market conditions. . If we register any common stock, either for our own account or for the account of other security holders, the holders of registrable securities are entitled to include their registrable securities in such registration. This right is subject to the ability of the underwriters to limit the number of shares included in the offering in view of market conditions. . The holders of at least 30% of the then outstanding registrable securities may require us to register all or a portion of their registrable securities on Form S-3 when use of such form becomes available to us, provided that the proposed aggregate offering price is more than $1,000,000. The holders of registrable securities may only exercise these Form S-3 registration rights twice, and may not exercise this right within six months after the effective date of a previous registration. Holders of warrants exercisable for a total of 127,745 shares of common stock have the right to include these shares in a piggyback or Form S-3 registration. We will bear all registration expenses other than underwriting discounts and commissions, except that we shall only pay registration expenses for one Form S-3 registration in any twelve month period. All registration rights terminate on the date five years after the closing of this offering, or, with respect to each holder of registrable securities, at such time as the holder owns less than 1% of the voting stock, or can sell all of his or her shares in any three month period under Rule 144 of the Securities Act. Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation and Bylaws Provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult our acquisition by a third-party and the removal of our incumbent officers and directors. These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of ORATEC to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited acquisition proposal outweigh the disadvantages of discouraging such proposals because, among other things, negotiation could result in an improvement of their terms. We are subject to Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder, unless: . the board of directors approved the transaction in which such stockholder became an interested stockholder prior to the date the interested stockholder attained such status; . upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, he or she owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers; or . on or subsequent to such date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders. A business combination generally includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. In general, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. 52 Our certificate of incorporation and bylaws do not provide for the right of stockholders to act by written consent without a meeting or for cumulative voting in the election of directors. In addition, our certificate of incorporation permits the board of directors to issue preferred stock with voting or other rights without any stockholder action. Our certificate of incorporation provides that at our first annual meeting of stockholders following the date on which we have at least 800 stockholders, the board of directors shall be divided into three classes, with staggered three year terms. As a result, only one class of directors will be elected at each annual meeting of stockholders. The other classes of directors will continue to serve for the remainder of their three year terms. These provisions, which require the vote of stockholders holding at least 66 2/3% of the outstanding common stock to amend, may have the effect of deterring hostile takeovers or delaying changes in our management. Transfer Agent and Registrar The transfer agent and registrar for the common stock is Equiserve, and its address and telephone number are Newport Tower, 525 Washington Blvd, Jersey City, NJ, 07310 (tel.) (201) 222-4444. 53 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. As described below, only 31,200 shares currently outstanding will be available for sale immediately after this offering because of contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and impair our ability to raise equity capital in the future. Upon completion of the offering, we will have outstanding shares of common stock. Of these shares, the shares sold in the offering, plus any shares issued upon exercise of the underwriters' overallotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our affiliates as that term is defined in Rule 144 under the Securities Act. In general, affiliates include officers, directors and 10% stockholders. The remaining 9,745,546 shares outstanding are "restricted securities" within the meaning of Rule 144. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the restricted securities in the public market, or the availability of such shares for sale, could adversely affect the market price of the common stock. Our directors, officers and security holders have entered into lock-up agreements in connection with this offering generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of Merrill Lynch & Co. Notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be salable until such agreements expire or are waived by each of Merrill Lynch & Co. and ORATEC. Taking into account the lock-up agreements, and assuming Merrill Lynch & Co. and we do not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: . Beginning on the effective date of this prospectus, the shares sold in the offering and 31,200 additional shares will be immediately available for sale in the public market. . Beginning 180 days after the effective date, approximately 8,109,813 shares will be eligible for sale, 2,947,862 of which will be subject to volume, manner of sale and other limitations under Rule 144. . The remaining 1,604,533 shares will be eligible for sale pursuant to Rule 144 upon the expiration of various one-year holding periods during the six months following 180 days after the effective date. In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three- month period a number of shares that does not exceed the greater of: . one percent of the number of shares of common stock then outstanding which will equal approximately shares immediately after the offering; or . the average weekly trading volume of the common stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at anytime during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. 54 Rule 701, as currently in effect, permits our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract to resell such shares in reliance upon Rule 144 but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell such shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, we intend to file registration statements under the Securities Act as promptly as possible after the effective date to register shares to be issued pursuant to our employee benefit plans. As a result, any options or rights exercised under the 1995 plan, the 1999 employee stock purchase plan, the 1999 directors' stock option plan or any other benefit plan after the effectiveness of the registration statements will also be freely tradable in the public market. However, shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resalable under Rule 701. As of June 30, 1999 there were outstanding options for the purchase of 1,881,000 shares of common stock, of which options to purchase 846,328 shares were exercisable. 55 UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of each of the underwriters named below. Subject to the terms and conditions described in a purchase agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters severally and not jointly has agreed to purchase from us, the number of shares of common stock listed opposite its name below.
Number of Underwriter Shares ----------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated........................................... J.P. Morgan Securities Inc...................................... U.S. Bancorp Piper Jaffray Inc.................................. --- Total......................................................... ===
In the purchase agreement, the several underwriters have agreed, subject to the terms and conditions described in the purchase agreement, to purchase all of the shares of common stock being sold pursuant to this agreement if any of the shares of common stock being sold pursuant to the agreement are purchased. In the event of a default by an underwriter, the purchase agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreement may be terminated. We have agreed to indemnify the underwriters against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make. Commission and Discounts The representatives have advised us that the underwriters propose initially to offer the shares of common stock to the public at the initial public offering price described on the cover page of this prospectus, and to some dealers at that price less a concession not in excess of $ per share of common stock. The underwriters may allow, and those dealers may reallow, a discount not in excess of $ per share of common stock to other dealers. After the initial public offering, the public offering price, concession and discount may change. The following table shows the per share and total public offering price, the underwriting discount we will pay to the underwriters and the proceeds we will receive before expenses. This information is presented assuming either no exercise or full exercise by the underwriters of their over-allotment options.
Per Total Without Total With Share Option Option ----- ------------- ---------- Public offering price............................ $ $ $ Underwriting discount............................ $ $ $ Proceeds, before expenses, to ORATEC............. $ $ $
The expenses of the offering, not including the underwriting discount, are estimated at $ million and are payable by us. The shares of common stock are being offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of some legal matters by counsel for the underwriters and other conditions. The underwriters reserve the right to withdraw, cancel or modify their offer and to reject orders in whole or in part. 56 Over-allotment Options We have granted options to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price described on the cover page of this prospectus, less the underwriting discount. The underwriters may exercise these options solely to cover over-allotments, if any, made on the sale of the common stock. To the extent that the underwriters exercise these options, each underwriter will be obligated, subject to some conditions, to purchase a number of additional shares of common stock proportionate to that underwriter's initial amount reflected in the above table. Reserved Shares At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares to be sold to directors, officers, employees, business associates and related persons of ORATEC. The number of shares of common stock available for sale to the general public will be reduced to the extent those persons purchase reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same terms as the other shares offered hereby. No Sales of Similar Securities We and our executive officers and directors and almost all of existing stockholders have agreed, with some exceptions, not to directly or indirectly, for a period of 180 days after the date of this prospectus: . offer, sell, contract to sell, grant any option or warrant for the sale of, register, or otherwise transfer, dispose of, loan, pledge or grant any rights with respect to any shares of capital stock of ORATEC or securities convertible into or exchangeable or exercisable for, or any rights to purchase or acquire, shares of capital stock of ORATEC, including, without limitation, common stock which may be deemed to be beneficially owned by the stockholder in accordance with the rules and regulations of the SEC. The foregoing restriction is expressly agreed to preclude stockholders from engaging in any hedging or other transaction which is designed to result in a disposition of securities during the 180-day lock-up period, even if such securities would be disposed of by someone other than the stockholder. Initial Public Offering Price Prior to the offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the representatives. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are . price-earnings ratios of publicly traded companies that the representatives believe to be comparable to ORATEC; . certain financial information about us and the industry in which we compete; and . an assessment of our management, our past and present operations, our prospects for, and timing of, future revenue, and the present state of our development. An active trading market for our common stock may not develop and the price at which our stock trades after the offering may be below the initial public offering price. Price Stabilization, Short Positions and Penalty Bids Until the distribution of the common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and some selling group members to bid for and purchase the common stock. As an exception to these rules, the representatives are permitted to engage in transactions that stabilize the price of the common stock. These transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock. 57 If the underwriters create a short position in the common stock in connection with the offering, i.e., if they sell more shares of common stock than are set forth on the cover page of this prospectus, the representatives may reduce that short position by purchasing common stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment options described above. The representatives may also impose a penalty bid on other underwriters and selling group members, which means that if the representatives purchase shares of common stock in the open market to reduce the underwriters' short position or to stabilize the price of the common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of those purchases. The imposition of a penalty bid might also have an effect on the price of the common stock to the extent that it discourages resales of the common stock. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in any stabilizing transactions or that these transactions, once commenced, will not be discontinued without notice. LEGAL MATTERS The validity of our common stock offered hereby will be passed upon for ORATEC by Venture Law Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park, California 94025. Mark Weeks, a director of Venture Law Group, is the Secretary of ORATEC. Certain legal matters with respect to information contained in this prospectus under the captions "Risk Factors--We may be sued for violating the intellectual property rights of others" and "--If we do not protect our intellectual property rights, our competitive position may be impaired" and "Business--Patents and Proprietary Technology" will be passed upon for ORATEC by Wilson Sonsini Goodrich & Rosati, a Professional Corporation, patent counsel to ORATEC. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins, 650 Town Center Drive, 20th floor, Costa Mesa, CA 95626. As of the date of this prospectus, an investment partnership controlled by Venture Law Group beneficially owns 16,800 shares of ORATEC'S common stock. As of the date of this prospectus, partners of Wilson Sonsini Goodrich & Rosati, a Professional Corporation, beneficially own 27,000 shares of ORATEC's common stock. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The statements set forth in this prospectus under the captions "Risk Factors--We may be sued for violating the intellectual property rights of others" and "--If we do not protect our intellectual property rights, our competitive position may be impaired" and "Business--Patents and Proprietary Technology" have been reviewed and approved by Wilson Sonsini Goodrich & Rosati, a Professional Corporation, patent counsel to ORATEC, as experts in such matters, and are included herein in reliance upon its review and approval. 58 ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement, which includes any amendments to the registration statement, on Form S-1 under the Securities Act with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement. Some items are contained in exhibits to the registration statement as permitted by the rules and regulations of the Securities and Exchange Commission. For further information with respect to ORATEC and the common stock offered by this prospectus, reference is made to the registration statement and its exhibits, and the financial statements and notes filed as a part of the registration statement. Statements made in this prospectus concerning the contents of any document are not necessarily complete. With respect to each document filed with the Securities and Exchange Commission as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved. The registration statement, including the exhibits, financial statements and notes filed as a part of the registration statement, as well as reports and other information filed with the Securities and Exchange Commission, may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Securities and Exchange Commission located at Seven World Trade Center, 13th Floor, New York, New York, 10048, and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from the Securities and Exchange Commission upon payment of fees prescribed by the Securities and Exchange Commission. These reports and other information may also be inspected without charge at a website maintained by the Securities and Exchange Commission. The address of the SEC site is http://www.sec.gov. 59 ORATEC INTERVENTIONS, INC. INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors......................... F-2 Balance Sheets............................................................ F-3 Statements of Operations.................................................. F-4 Statement of Redeemable Convertible Preferred Stock and Stockholders' Equity................................................................... F-5 Statements of Cash Flows.................................................. F-6 Notes to Financial Statements............................................. F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders ORATEC Interventions, Inc. We have audited the accompanying balance sheets of ORATEC Interventions, Inc. as of December 31, 1997 and 1998, and the related statements of operations, cash flows, and statement of redeemable convertible preferred stock and stockholders' equity for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of 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 financial statements referred to above present fairly, in all material respects, the financial position of ORATEC Interventions, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Palo Alto, California February 25, 1999 The foregoing report is in the form that will be signed upon the completion of the stock split described in Note 14 to the financial statements. /s/ Ernst & Young LLP Palo Alto, California February 25, 1999 F-2 ORATEC INTERVENTIONS, INC. BALANCE SHEETS (In thousands, except share and per share data)
December 31, Pro forma at ----------------- March 31, March 31, 1997 1998 1999 1999 ------- -------- --------- ------------ (unaudited) Assets Current assets: Cash and cash equivalents........ $ 5,535 $ 11,583 $ 11,715 Short term investments........... 3,650 3,998 4,126 Accounts receivable, less allowance for doubtful accounts of $106 in 1997, $216 in 1998, and $357 in 1999................ 897 2,905 3,633 Inventories...................... 502 1,421 1,708 Prepaid expenses and other current assets.................. 593 513 895 ------- -------- -------- Total current assets........... 11,177 20,420 22,077 Property and equipment, net........ 2,241 3,775 3,568 ------- -------- -------- $13,418 $ 24,195 $ 25,645 ======= ======== ======== Liabilities and stockholders' equity Current liabilities: Bank borrowings.................. $ -- $ 1,178 $ 1,178 Accounts payable................. 1,469 1,672 1,761 Accrued compensation and benefits........................ 276 1,327 1,114 Other accrued liabilities........ 432 1,637 2,231 Current portion of notes payable......................... -- -- 295 Current portion of equipment financing obligations........... 283 609 779 ------- -------- -------- Total current liabilities...... 2,460 6,423 7,358 Long term notes payable............ -- -- 3,705 Long term equipment financing obligations....................... 404 2,702 2,428 Commitments Redeemable convertible preferred stock, $0.001 par value, issuable in series; 5,400,000 shares authorized in 1997, 7,440,000 shares authorized in 1998 and 1999 (5,000,000 shares pro forma); 4,972,775, 7,227,453, and 7,247,923 shares issued and outstanding in 1997, 1998, and 1999, respectively (none pro forma); aggregate redemption value of $36,380 at December 31, 1998 and $36,426 at March 31, 1999 (none pro forma).................. 20,324 35,816 35,816 $ -- Common stock, $0.001 par value; 9,600,000 shares authorized in 1997, 11,940,000 shares authorized in 1998 and 1999 (75,000,000 shares pro forma); 2,370,632, 2,415,805, and 2,455,186 shares issued and outstanding in 1997, 1998, and 1999, respectively (9,703,109 shares pro forma)...... 2 2 2 10 Additional paid-in capital......... 26 268 385 36,193 Receivable from stockholder........ (124) -- -- -- Accumulated deficit................ (9,674) (21,016) (24,049) (24,049) ------- -------- -------- $13,418 $ 24,195 $ 25,645 ======= ======== ========
See accompanying notes. F-3 ORATEC INTERVENTIONS, INC. STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months Years ended December 31, ended March 31, -------------------------- ---------------- 1996 1997 1998 1998 1999 ------- ------- -------- ------- ------- (unaudited) Sales............................ $ -- $ 2,600 $ 11,129 $ 1,572 $ 5,197 Cost of sales.................... -- 1,741 6,566 987 2,829 ------- ------- -------- ------- ------- Gross profit..................... -- 859 4,563 585 2,368 Operating expenses: Research and development....... 878 2,514 4,706 980 1,231 Sales and marketing............ 561 2,622 8,318 1,512 3,254 General and administrative..... 945 2,721 2,724 498 810 ------- ------- -------- ------- ------- Total operating expenses......... 2,384 7,857 15,748 2,990 5,295 ------- ------- -------- ------- ------- Loss from operations............. (2,384) (6,998) (11,185) (2,405) (2,927) Interest and other income........ 100 196 265 75 165 Interest and other expense....... (18) (30) (422) (19) (271) ------- ------- -------- ------- ------- Net loss......................... $(2,302) $(6,832) $(11,342) $(2,349) $(3,033) ======= ======= ======== ======= ======= Net loss per common share, basic and diluted..................... $ (1.00) $ (2.91) $ (4.72) $ (0.99) $ (1.24) ======= ======= ======== ======= ======= Shares used in computing net loss per common share, basic and diluted......................... 2,304 2,347 2,403 2,381 2,438 Pro forma net loss per share, basic and diluted (unaudited)... $ (1.51) $ (0.31) ======== ======= Shares used in computing pro forma net loss per share, basic and diluted (unaudited)......... 7,525 9,673
See accompanying notes. F-4 ORATEC INTERVENTIONS, INC. STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (In thousands, except share data)
Redeemable Convertible Preferred Stock Common Stock Additional ----------------- ---------------- Paid-In Receivable from Accumulated Shares Amount Shares Amount Capital Stockholder Deficit --------- ------- --------- ------ ---------- --------------- ----------- Balances at December 31, 1995................... 255,933 $ 474 2,298,000 $ 2 $ 2 $ (45) $ (540) Cash payments on receivables from stockholders........... -- -- -- -- -- 45 -- Issuance of common stock upon exercise of stock options, net........... -- -- 21,450 -- 1 -- -- Issuance of Series B redeemable convertible preferred stock........ 1,914,198 4,307 -- -- -- -- -- Issuance of warrants to purchase 30,000 shares of Series B redeemable convertible preferred stock.................. -- 11 -- -- -- -- -- Net and comprehensive loss................... -- -- -- -- -- -- (2,302) --------- ------- --------- --- ---- ----- -------- Balances at December 31, 1996................... 2,170,131 4,792 2,319,450 2 3 -- (2,842) Issuance of Series C redeemable convertible preferred stock........ 865,511 4,328 -- -- -- -- -- Issuance of Series D redeemable convertible preferred stock (net of issuance costs of $96)................... 1,937,133 11,204 -- -- -- (124) -- Issuance of common stock upon exercise of stock options................ -- -- 51,182 -- 23 -- -- Net and comprehensive loss................... -- -- -- -- -- -- (6,832) --------- ------- --------- --- ---- ----- -------- Balances at December 31, 1997................... 4,972,775 20,324 2,370,632 2 26 (124) (9,674) Warrants to purchase 73,412 shares of Series E preferred stock for loan arrangement....... -- 146 -- -- -- -- -- Compensation expense for non-employee options... -- -- -- -- 102 -- -- Issuance of common stock upon exercise of options, net........... -- -- 39,525 -- 100 -- -- Grant of common stock in lieu of compensation... -- -- 5,648 -- 40 -- -- Cash payments on receivable from stockholders........... -- -- -- -- -- 124 -- Issuance of Series E preferred stock (net of issuance costs of $625).................. 2,254,678 15,346 -- -- -- -- -- Net and comprehensive loss................... -- -- -- -- -- -- (11,342) --------- ------- --------- --- ---- ----- -------- Balances at December 31, 1998................... 7,227,453 35,816 2,415,805 2 268 -- (21,016) Issuance of common stock upon exercise of options (unaudited).... -- -- 39,381 -- 92 -- -- Compensation expense for non-employee options (unaudited)............ -- -- -- -- 25 -- -- Exercise of warrants for Series B redeemable convertible preferred stock (unaudited)...... 20,470 -- -- -- -- -- -- Net and comprehensive loss (unaudited)....... -- -- -- -- -- -- (3,033) --------- ------- --------- --- ---- ----- -------- Balances at March 31, 1999 (unaudited)....... 7,247,923 $35,816 2,455,186 $ 2 $385 $ -- $(24,049) ========= ======= ========= === ==== ===== ========
See accompanying notes. F-5 ORATEC INTERVENTIONS, INC. STATEMENTS OF CASH FLOWS Increase in cash and cash equivalents (In thousands)
Three months Years ended December 31, ended March 31, -------------------------- ------------------ 1996 1997 1998 1998 1999 ------- ------- -------- -------- -------- (unaudited) Operating activities Net loss...................... $(2,302) $(6,832) $(11,342) $ (2,349) $ (3,033) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 69 573 2,097 382 912 Compensation expense for options granted to non- employees.................. -- -- 102 -- 25 Issuance of equity for non- cash benefits.............. -- -- 186 -- -- Changes in operating assets and liabilities: Accounts receivable....... -- (897) (2,008) (471) (728) Inventories............... (84) (419) (919) (134) (287) Prepaid expenses and other current assets........... (93) (491) 80 267 (382) Accounts payable.......... 138 1,654 203 1,258 89 Accrued compensation and benefits................. (13) 228 1,051 (89) (213) Other accrued liabilities.............. -- -- 1,205 (388) 594 ------- ------- -------- -------- -------- Net cash used in operating activities................... (2,285) (6,184) (9,345) (1,524) (3,023) ------- ------- -------- -------- -------- Investing activities Purchases of short term investments.................. (561) (3,500) (3,998) (8) (1,662) Sales of short term investments.................. -- 411 3,650 -- 1,534 Capital expenditures.......... (674) (2,183) (3,631) (1,266) (705) ------- ------- -------- -------- -------- Net cash used in investing activities................... (1,235) (5,272) (3,979) (1,274) (833) ------- ------- -------- -------- -------- Financing activities Proceeds from issuance of preferred stock.............. 4,318 15,408 15,346 -- -- Proceeds from issuance of common stock................. 1 23 100 -- 92 Receipts from stockholder receivables.................. 45 -- 124 124 -- Payment of note payable....... (35) -- -- -- -- Proceeds from bank borrowings................... -- -- 1,178 -- -- Proceeds from notes payable... -- -- -- -- 4,000 Proceeds from equipment financing obligations........ 395 506 3,000 33 -- Repayment of equipment financing obligations........ (51) (163) (376) (13) (104) ------- ------- -------- -------- -------- Net cash provided by financing activities................... 4,673 15,774 19,372 144 3,988 ------- ------- -------- -------- -------- Net increase in cash and cash equivalents.................. 1,153 4,318 6,048 (2,654) 132 Cash and cash equivalents at beginning of period.......... 64 1,217 5,535 5,535 11,583 ------- ------- -------- -------- -------- Cash and cash equivalents at end of period................ $ 1,217 $ 5,535 $ 11,583 $ 2,881 $ 11,715 ======= ======= ======== ======== ======== Supplemental schedule of noncash investing and financing activities Issuance of stock to stockholders for receivables.................. $ -- $ 124 $ -- $ -- $ -- ======= ======= ======== ======== ======== Supplemental disclosure of cash flow information Cash payments for interest.... $ 18 $ 30 $ 272 $ 18 $ 264 ======= ======= ======== ======== ========
See accompanying notes. F-6 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) 1. Organization and Summary of Significant Accounting Policies The Company ORATEC Interventions, Inc. (the "Company") was incorporated in the State of California on May 26, 1993 to develop medical devices which use controlled thermal energy to treat spine and joint disorders. The Company's products use heat to shrink and repair damaged or stretched soft tissue. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. Interim Financial Information The financial information at March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited but, in the opinion of management, has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for such periods. Results for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for any subsequent period. Unaudited Pro Forma Redeemable Convertible Preferred Stock and Stockholders' Equity If the Company's initial public offering as described in Note 14 is consummated, all of the redeemable convertible preferred stock outstanding will automatically be converted into common stock. The unaudited pro forma redeemable convertible preferred stock and stockholders' equity at March 31, 1999 has been adjusted for the assumed conversion of redeemable convertible preferred stock based on the shares of redeemable convertible preferred stock outstanding at March 31, 1999. Cash Equivalents and Short Term Investments The Company considers all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents. In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company classifies its debt securities as "available-for-sale" securities for use in its current operations. Such debt securities are carried at amortized cost which approximates fair value. The cost of the securities sold is based on specific identification. Fair Value of Financial Instruments The fair values of marketable securities, as described in Note 5, are based on quoted market prices and are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying value of those securities approximates their fair value. F-7 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) The fair value of notes payable, as described in Note 10, are estimated by discounting the future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying values of these obligations approximate their respective fair values. The fair value of short term and long term equipment financing obligations and bank borrowings, as described in Notes 8 and 9, are estimated based on current interest rates available to the Company for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations approximate their respective fair values. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight line method over the estimated useful lives of the respective assets, generally two to seven years. The cost of generators in service is depreciated into cost of sales over an estimated useful life of two years. Impairment of Long-Lived Assets In accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews long- lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 121, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. Through March 31, 1999 there have been no such losses. Revenue Recognition The Company recognizes revenue upon shipment of products to customers, and, in some cases, when inventory provided to customers has been used at their facility as evidenced by receipt of a purchase order. If title to the products does not pass until receipt by the customer, revenue is deferred until proof of receipt is obtained. The Company's return policy allows customers to return new products up to 90 days after a sale. To date, returns have been insignificant. The Company has retained title to the majority of arthroscopy generators, which they have placed with customers for their use with the Company's disposable arthroscopy probes. The Company is placing spine generators with customers for a demonstration period. The Company recognizes revenue upon customer acceptance evidenced by the issuance of a customer purchase order. Advertising Costs Advertising costs are expensed as incurred. Advertising costs were not material in 1996, 1997, 1998, and the three months ended March 31, 1999. Dependence on Single Supplier The Company purchases all of its electrothermal generators from a sole source third party supplier. There are no other third party contractors who could readily assume this manufacturing function. Any delay in production of generators could result in the failure to meet customer demand. At March 31, 1999, the Company had a commitment of $2.4 million to purchase electrothermal generators. F-8 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) Stock-Based Compensation The Company accounts for grants of stock options and common stock purchase rights in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees and Related Interpretations." Information regarding pro forma adjustments to net loss, as required by Financial Accounting Standards Board Statement No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"), is included in Note 11. Comprehensive Income (Loss) As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires unrealized gains or losses on the Company's available-for-sale investments to be included in other comprehensive income. At December 31, 1997 and 1998, and at March 31, 1999, comprehensive loss approximated net loss as other comprehensive income was not material. Net Loss Per Share Basic earnings per share is calculated based on the weighted-average number of common shares outstanding during the period. Diluted earnings per share gives effect to the dilutive effect of common stock equivalents consisting of stock options and warrants (calculated using the treasury stock method). The computation of pro forma net loss per share includes shares issuable upon the conversion of outstanding shares of convertible preferred stock (using the as-if converted method) from the original date of issuance. A reconciliation of shares used in the calculations is as follows (in thousands):
Three months Years ended ended March December 31, 31, ----------------- ----------- 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- (unaudited) Basic and diluted: Weighted-average shares of common stock outstanding................................... 2,304 2,347 2,403 2,381 2,438 ===== ===== ===== ===== ===== Pro forma basic and diluted: Shares used above.............................. 2,403 2,438 Pro forma adjustment to reflect weighted- average effect of assumed conversion of redeemable convertible preferred stock........ 5,122 7,235 ----- ----- 7,525 9,673 ===== =====
The following outstanding options, warrants, and redeemable convertible preferred stock (on an as converted basis and including a warrant to purchase 73,412 shares of Series E preferred stock due to be issued at December 31, 1998) were excluded from the computation of diluted net loss per share as they had an antidilutive effect (in thousands):
December 31, March 31, ----------------- ----------- 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- (unaudited) Options and warrants.............................. 790 1,421 1,791 1,522 1,967 Redeemable convertible preferred stock............ 2,170 4,973 7,227 4,973 7,248
F-9 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities" ("SFAS 133") which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. SFAS 133 is effective for fiscal years beginning after June 15, 1999 and is not anticipated to have an impact on the Company's results of operations or financial condition when adopted as the Company holds no derivative financial instruments and does not currently engage in hedging activities. 2. Accounts Receivable Accounts receivable is stated net of allowance for doubtful accounts. A summary of movement in the allowance is as follows (in thousands):
December 31, --------------- March 31, 1996 1997 1998 1999 ---- ---- ---- --------- Balance at beginning of period.................... $ 20 $-- $106 $216 Additions charged to costs and expenses........... -- 106 151 141 Write-off of uncollectible accounts............... (20) -- (41) -- ---- ---- ---- ---- Balance at end of period.......................... $-- $106 $216 $357 ==== ==== ==== ====
3. Inventories Inventories are stated at the lower of standard cost or market. Standard costs approximate average actual costs. Inventories are summarized below (in thousands):
December 31, ------------- March 31, 1997 1998 1999 ------------- --------- Raw materials........................................ $ 122 $ 432 $ 456 Work in-process...................................... 58 41 89 Finished goods....................................... 87 370 398 Electrothermal generators held for sale.............. 235 578 765 ----- ------- ------ $ 502 $ 1,421 $1,708 ===== ======= ======
4. Property and Equipment Property and equipment consists of the following (in thousands):
December 31, --------------- March 31, 1997 1998 1999 ------ ------- --------- Electrothermal generators........................ $1,807 $ 4,692 $ 5,405 Computers, machinery, and equipment.............. 760 1,148 1,283 Furniture and fixtures........................... 224 459 308 Leasehold improvements........................... 95 218 226 ------ ------- ------- 2,886 6,517 7,222 Less accumulated depreciation and amortization... (645) (2,742) (3,654) ------ ------- ------- Property and equipment, net...................... $2,241 $ 3,775 $ 3,568 ====== ======= =======
F-10 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) 5. Marketable Securities Marketable securities consist of the following (in thousands):
Amortized Cost and Fair Value at ------------------------------------ December 31, --------------------- March 31, 1997 1998 1999 ---------- ---------- -------------- Certificates of deposit.................. $ 150 $ 1,000 $ 1,000 Corporate commercial paper............... 3,500 2,998 5,664 Asset-backed auction rate securities..... 900 4,500 8,100 ---------- ---------- ----------- $ 4,550 $ 8,498 $ 14,764 ========== ========== =========== Reported as: Cash equivalents....................... $ 900 $ 4,500 $ 10,638 Short term investments................. 3,650 3,998 4,126 ---------- ---------- ----------- $ 4,550 $ 8,498 $ 14,764 ========== ========== ===========
At December 31, 1998 and March 31, 1999, the average maturity of the investments was approximately two months. There were no material gross realized gains or losses from sales of securities in the periods presented. Unrealized gains and losses on investments were not material at December 31, 1997 and 1998, or March 31, 1999. 6. Other Accrued Liabilities Other accrued liabilities consisted of the following (in thousands):
December 31, ------------- March 31, 1997 1998 1999 ------------- --------- Professional fees.................................... $ 50 $ 529 $ 598 Dealer commissions................................... 156 138 177 Clinical and development costs....................... 200 452 632 Other................................................ 26 518 824 ----- ------- ------ $ 432 $ 1,637 $2,231 ===== ======= ======
7. Operating Lease Commitments The Company leases its facilities under various agreements expiring through July 2003. Rent expense was approximately $90,000, $230,000, and $320,000 for the years ended December 31, 1996, 1997, and 1998. The F-11 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) Company has the option to extend the term of its operating leases for three additional years. At December 31, 1998, minimum future rental payments under operating leases are as follows (in thousands): Year ended December 31, 1999................................................................. $ 476 2000................................................................. 425 2001................................................................. 246 2002................................................................. 255 2003................................................................. 130 ------ $1,532 ======
8. Equipment Financing Obligations In March 1996, a financial institution made available to the Company equipment loans of up to $500,000 on which interest accrues at a rate of 8% per annum. Final drawdown under this line was made in September 1997. In October 1997, two financial institutions made available to the Company equipment loans of up to an aggregate $1,000,000 on which interest is fixed at the time of each drawdown. At December 31, 1998, approximately $924,000 had been drawn down under three promissory notes with interest ranging between 7% and 8%. Principal and interest under the notes must be repaid according to the terms of each promissory note issued. In accordance with the loan agreements, the Company granted the lenders perfected security interests in specific equipment. In August 1998, a financial institution made available to the Company an equipment loan of up to $2,500,000 on which the interest is fixed at the time of each drawdown. The loan is secured by a security interest in the equipment financed and a junior interest in the other assets of the Company. At December 31, 1998, the Company had drawn down $2,175,800 of the loan with interest rates of 12% to 13%. Future minimum payments under equipment financing obligations are as follows at December 31, 1998 (in thousands): Fiscal year ended December 31, 1999............................................................... $ 965 2000............................................................... 1,359 2001............................................................... 1,936 ------ Total minimum payments............................................... 4,260 Less amount representing interest.................................... (949) ------ Present value of minimum payments.................................... 3,311 Less current portion................................................. (609) ------ Long term portion.................................................... $2,702 ======
F-12 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) 9. Bank Borrowings In June 1998, the Company entered into a loan and security agreement for a revolving line of credit of up to $2,500,000. The line of credit bears interest at 1% above the prime rate and has a first priority security interest over the assets of the Company. The Company is subject to certain covenants under the terms of the agreement including a maximum debt to tangible net worth ratio of 2:1, and was not in compliance for the month of September 30, 1998 and the quarter then ended, for which the Company received a waiver. At December 31, 1998 and March 31, 1999, the balance outstanding under this agreement was $1,177,579 and the unused line of credit was $1,322,421. The principal and all accrued interest is due in June 1999. The weighted-average interest rate for 1998 was 9.2%. In association with the loan and security agreement above, the Company received a letter of credit for $75,000 which expires in August 2000 to secure a building lease obligation. At December 31, 1998, no amount has been drawn against the letter of credit. 10. Notes Payable In December 1998, a financial institution made available to the Company a loan facility of up to $4,000,000 which bears interest at 13.5% per annum, subject to changes in the three year treasury rates. The loan is covered by a subordinated security interest in the assets of the Company. In connection with set up of the loan arrangement, the Company agreed to issue to the financial institution a warrant to purchase 73,412 shares of the Company's Series E preferred stock at $7.08 per share. For accounting purposes, the warrant was valued at $145,821 and has been fully expensed in 1998. At December 31, 1998, no amounts had been drawn down against this loan. At March 31, 1999, the total loan of $4,000,000 was outstanding in the form of two notes payable of $2,000,000 each bearing interest at 13.1% per annum. The notes are repayable over three years after an initial twelve months of interest-only payments. The annual maturities of the notes at March 31, 1999 were as follows: zero through December 31, 1999, $1,705,000, $2,107,000 and $188,000 for the years ended December 31, 2000, 2001 and 2002, respectively. 11. Redeemable Convertible Preferred Stock and Common Stock Redeemable Convertible Preferred Stock A summary of redeemable convertible preferred stock ("preferred stock") is as follows:
December 31, 1997 December 31, 1998 March 31, 1999 ---------------------------------- ---------------------------------- ---------------------------------- Redemption/ Redemption/ Redemption/ Issued and Liquidation Issued and Liquidation Issued and Liquidation Authorized Outstanding Value Authorized Outstanding Value Authorized Outstanding Value ---------- ----------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- Series A........ 180,000 156,245 $ 250,000 156,245 156,245 $ 250,000 156,245 156,245 $ 250,000 Series B........ 2,222,222 2,013,886 4,531,268 2,077,234 2,013,886 4,531,268 2,077,234 2,034,356 4,577,326 Series C........ 900,000 865,511 4,327,638 886,531 865,511 4,327,638 886,531 865,511 4,327,638 Series D........ 1,971,428 1,937,133 11,299,998 1,937,133 1,937,133 11,299,998 1,937,133 1,937,133 11,299,998 Series E........ -- -- -- 2,382,457 2,254,678 15,970,680 2,382,857 2,254,678 15,970,680 Undesignated preferred stock.......... 126,350 -- -- -- -- -- -- -- -- --------- --------- ----------- --------- --------- ----------- --------- --------- ----------- 5,400,000 4,972,775 $20,408,904 7,440,000 7,227,453 $36,379,584 7,440,000 7,247,923 $36,425,642 ========= ========= =========== ========= ========= =========== ========= ========= ===========
Each share of Series A, B, C, D, and E preferred stock is convertible, at the option of the holder, into one share of common stock, subject to certain adjustments for antidilution. Upon the approval of the holders of a F-13 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) majority of the outstanding shares of the Series A, B, C, D, or E preferred stock, voting as a single class, and a majority of the Series D and E preferred stock, together voting as a single class, the Series A, B, C, D, or E preferred stock are convertible to one share of common stock, subject to adjustments for antidilution. Additionally, the preferred stock will automatically convert into common stock concurrent with the closing of an underwritten public offering of common stock under the Securities Act of 1933 in which the Company receives at least $20,000,000 in gross proceeds and the price per share is at least $11.67 (subject to adjustment for a recapitalization, stock splits, or stock dividends). Series A, B, C, D, and E preferred stockholders are entitled to annual noncumulative dividends at a rate of $0.13, $0.18, $0.40, $0.48, and $0.57 per share, before and in preference to any dividends paid on common stock, when and as declared by the board of directors. No dividends have been declared as of December 31, 1998. The Series A, B, C, D, and E preferred stockholders are entitled to receive, upon liquidation or certain merger transactions, a distribution of $1.60, $2.25, $5.00, $5.83, and $7.08 per share, (subject to adjustment for a recapitalization) plus all declared but unpaid dividends. Thereafter, the remaining assets and funds, if any, shall be distributed among the holders of the Series D and E preferred stock and the common stock pro rata based on the number of shares held by each until the Series D and E preferred stockholders have received an aggregate of $17.50 per share. Thereafter, the remaining assets and funds, if any, shall be distributed ratably on a per share basis among the common stockholders. If, upon liquidation, dissolution, or winding up of the Company, the assets and funds distributed among the preferred stockholders are insufficient to permit the payment to which they are entitled as set forth above, the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of Series A, B, C, D, and E preferred stock in proportion to the aggregate preferential amounts owed to each such holder. The Series A, B, C, D, and E preferred stockholders have voting rights substantially equal to the common shares they would own upon conversion, with certain additional protective provisions requiring a separate class vote of the preferred stock. As long as at least 600,000 shares of Series D preferred stock remains outstanding, the Series D preferred stockholders shall have the right to elect one member of the board of directors of the corporation. As long as at least 600,000 shares of Series E preferred stock remains outstanding, the Series E preferred stockholders shall have the right to elect one member of the board of directors of the corporation. All other members of the board of directors shall be elected by the Series A, B, C, D, and E and common stockholders, voting as a single class on an as-converted basis. In accordance with the amended and restated Investor Rights Agreement that the Company entered into in December 1998, holders of at least 40% of the common stock issued or issuable upon conversion of the Series A, B, C, D, and E preferred stock may request the Company to file a registration statement covering the registration of those securities outstanding, if the aggregate offering price to the public exceeds $5,000,000 after the earlier of December 31, 2000 or six months after the effective date of the first registration statement for a public offering of the Company's securities. The Investor Rights Agreement also contains certain additional registration and information rights for the benefit of the holders of the Series A, B, C, D, and E preferred stock. F-14 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) 1995 Stock Plan In July 1995, the Company adopted the 1995 Stock Plan (the "Plan") which provides for the issuance of common stock options and common stock purchase rights to employees and consultants of the Company. The Plan permits the Company to (i) grant incentive stock options to employees at no less than 100% of fair value at date of grant as determined by the board of directors; (ii) grant nonstatutory stock options at no less than 85% of fair value; and (iii) sell common stock at no less than 85% of fair value subject to stock purchase agreements. At December 31, 1998, the Company had issued 8,647 shares of common stock under the Plan. Incentive stock options become exercisable ratably generally over four years from the date of grant. Nonstatutory stock options become exercisable ratably generally over two years from the date of grant. The term of the Plan is 10 years. At December 31, 1998, the Company had 454,054 options available for future grant (208,831 at March 31, 1999). A summary of option activity under the Plan is as follows:
Years ended December 31, ------------------------------------------------------------ Three months ended 1996 1997 1998 March 31, 1999 ------------------ -------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Weighted- Average Average Average Average Exercise Exercise Exercise Exercise Options Price Options Price Options Price Options Price ------- --------- --------- --------- --------- --------- --------- --------- Outstanding at beginning of period....... 132,000 $0.002 727,050 $0.58 1,337,052 $1.12 1,633,098 $2.43 Granted................... 613,500 $ 0.70 734,760 $1.65 494,213 $5.77 285,000 $7.08 Canceled.................. -- -- (72,782) $0.47 (114,392) $3.13 (39,777) $3.88 Exercised................. (18,450) $ 0.03 (51,976) $0.38 (83,775) $1.27 (39,381) $2.20 ------- --------- --------- --------- Outstanding at end of period............. 727,050 $ 0.58 1,337,052 $1.12 1,633,098 $2.43 1,838,940 $3.13 ======= ========= ========= ========= Weighted-average fair value of options granted during the period.. $ 0.13 $0.25 $0.97 $1.28 ====== ===== ===== =====
December 31, 1998 ------------------------------------------------- Options Options Outstanding Exercisable ------------------------------- ----------------- Weighted- Average Weighted- Weighted- Remaining Average Number Average Number of Contractual Exercise of Exercise Range of Exercise Prices Options Life Price Options Price - ------------------------ --------- ----------- --------- ------- --------- $0.002 - $0.17 321,044 8.08 $0.13 277,184 $0.15 $1.25 - $4.17 1,026,571 9.72 $1.78 441,512 $1.53 $5.83 - $8.33 285,483 9.72 $7.37 13,364 $6.87 --------- ------- 1,633,098 9.39 $2.43 732,060 $1.10 ========= =======
F-15 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited)
March 31, 1999 ------------------------------------------------- Options Options Outstanding Exercisable ------------------------------- ----------------- Weighted- Average Weighted- Weighted- Remaining Average Number Average Number of Contractual Exercise of Exercise Range of Exercise Prices Options Life Price Options Price - ------------------------ --------- ----------- --------- ------- --------- $0.002 - $0.17 317,562 7.84 $0.14 282,928 $0.14 $1.25 - $4.17 960,045 9.45 $1.73 481,415 $1.54 $5.83 - $8.33 561,333 9.70 $7.22 19,516 $7.02 --------- ------- 1,838,940 9.25 $3.13 783,859 $1.17 ========= =======
Options exercisable at December 31, 1996 and 1997 were 153,857 and 457,098. Pro forma information regarding net loss is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options issued under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the minimum value method and assumptions for 1996, 1997, and 1998 as follows: risk-free interest rates of 6%, 6%, and 4.5%; weighted-average expected life of the options was approximately 48 months and no dividends. The effect of applying SFAS 123 to the Company's stock option awards would have resulted in a net loss of $11,487,000 (or $4.78 per common share) for the year ended December 31, 1998. The pro forma effect for the years ended December 31, 1996 and 1997 were not materially different from the actual net losses reported. The pro forma net loss is not necessarily indicative of potential pro forma effects on results for future years. The Company has granted 52,382 options to nonemployees in 1998, which resulted in compensation expense of $102,000 for the year. The options vest primarily over a two-year period and, therefore, the Company will record additional expense related to these options in 1999 and 2000. Warrants In February 1996, the Company issued to an employee a warrant to purchase 30,000 shares of Series B preferred stock at a purchase price of $2.25 per share. In the three months ended March 31, 1999, these warrants were exercised or cancelled. In March 1996, the Company issued a warrant to purchase 33,333 shares of Series B preferred stock at a purchase price of $2.25 per share in conjunction with obtaining equipment financing from a lender. The warrant expires in five years from the issuance date, subject to acceleration upon the occurrence of certain events. In October 1997, the Company issued warrants to purchase 21,000 shares of Series C preferred stock at $5.00 per share in conjunction with obtaining an equipment financing facility. The warrants expire in ten years from the issuance date, subject to acceleration upon the occurrence of certain events. In December 1998, the Company entered into negotiations with a lender to obtain debt financing (see Note 10). As an inducement to conduct negotiations, the Company agreed to issue a warrant to purchase 73,412 shares of Series E preferred stock at a purchase price of $7.08 per share. The warrant expires January 2004, subject to acceleration upon the occurrence of certain events. F-16 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) As of December 31, 1998, warrants to purchase a total of 63,333 shares of Series B preferred stock and the warrants to purchase 21,000 shares of Series C preferred stock were outstanding. The warrant to purchase 73,412 shares of Series E preferred stock was due to be issued at December 31, 1998. Reserved Stock As of December 31, 1998, the Company has reserved shares of common stock for future issuance as follows: Stock plan......................................................... 2,087,152 Redeemable convertible preferred stock and warrants................ 7,385,198 --------- 9,472,350 =========
In addition, the Company has reserved the following shares of preferred stock for issuance upon exercise of stock warrants: Series B preferred stock.............................................. 63,333 Series C preferred stock.............................................. 21,000 Series E preferred stock.............................................. 73,412
12. Income Taxes As of December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $20,000,000 and $6,400,000. The Company also had federal research and development tax credit carryforwards of approximately $200,000. The net operating loss and credit carryforwards will expire at various dates beginning in 2009 through 2018, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses before utilization. As of December 31, 1997 and 1998, the Company had deferred tax assets of approximately $3,700,000 and $8,000,000. The net deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased by $950,000, $2,500,000, and $4,300,000 for the years ended December 31, 1996, 1997, and 1998. Deferred tax assets relate primarily to net operating loss carryforwards, research credits, and capitalized research and development costs. 13. Segment Reporting In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the reporting of selected financial information about a company's operating segments and disclosures about a company's products, geographical areas and major customers. Since inception, the Company has been primarily engaged in one reportable operating segment, providing medical devices which use controlled thermal energy to treat spine and joint disorders. At the present time, the F-17 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) Company is organized and managed along functional lines. The Company's President and Chief Executive Officer evaluates performance and allocates resources based on the operating results of the whole company. Revenues are tracked per product line (spine and arthroscopy) but the operating expenses of the Company are not allocated to individual product lines so that no measure of profit or loss for any product line of the Company is available. The Company attributes revenues from customers to individual countries based on the location of the customer. Substantially all of the Company's revenues to date have been derived from sales to customers in the U.S. Further, all of the Company's assets have been located in the U.S. for all periods presented. The Company's current products consist of two minimally invasive systems for the treatment of spine and joint disorders. The Company's spine and arthroscopy product sales are as follows (in thousands):
Three months Years ended ended December 31, March 31, ------------------- ------------- 1996 1997 1998 1998 1999 ---- ------ ------- ------ ------ Spine......................................... $-- $ -- $ 1,246 $ -- $1,525 Arthroscopy................................... -- 2,600 9,883 1,572 3,672 ---- ------ ------- ------ ------ $-- $2,600 $11,129 $1,572 $5,197 ==== ====== ======= ====== ======
14. Initial Public Offering, Reincorporation in Delaware and Stock Split (Unaudited) In May 1999, the Company's board of directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to sell shares of its common stock to the public. Upon completion of the Company's initial public offering, all of the Company's outstanding redeemable convertible preferred stock will be converted into 7,247,923 shares of common stock. On July 1, 1999, the Company's board of directors authorized the reincorporation of the Company in the State of Delaware. This reincorporation is to be effective prior to the Company's initial public offering. Upon reincorporation and the closing of the Company's initial public offering, the Company will be authorized to issue 75,000,000 shares of common stock and 5,000,000 shares of preferred stock. The change in authorized common stock has been reflected in the pro forma redeemable convertible preferred stock and stockholders' equity as of March 31, 1999. The accompanying financial statements have been adjusted retroactively to reflect all other effects of the reincorporation. On July 1, 1999, the Company's board of directors approved a reverse stock split of three shares for every five shares of common and preferred stock then outstanding. The reverse stock split will become effective prior to the time of the Company's initial public offering. Accordingly, the accompanying financial statements have been adjusted retroactively to reflect the reverse split. 15. Subsequent Events (Unaudited) On May 14, 1999, the Company granted options to purchase 96,300 shares of common stock at $7.08 per share. On May 24, 1999, the Company granted options to purchase 15,900 shares of common stock at $12.50 per share. On July 1, the Company granted options to purchase 113,850 shares of common stock at $12.50 to $13.33 per share. Deferred compensation of approximately $350,000 will be recorded in the quarter ended June 30, 1999 for these option grants based on the deemed fair value of the common stock. The deferred compensation will be amortized to expense over the four year average vesting period of the options. F-18 ORATEC INTERVENTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998 (Information for the three months ended March 31, 1998 and 1999 is unaudited) On July 1, 1999, the board of directors approved an amendment to the 1995 Plan, subject to stockholder approval, to increase the number of shares reserved for issuance by 750,000 shares. Further, the number of shares reserved for issuance are subject to an automatic annual increase on January 1, 2000, 2001 and 2002 equal to the lesser of (i) 750,000 shares, (ii) 4% of the shares of common stock outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as the board of directors determines. On July 1, 1999, the board of directors approved the adoption of the 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan"), subject to stockholder approval. A total of 250,000 shares of common stock has been reserved for issuance under the 1999 Purchase Plan. The number of shares reserved for issuance is subject to an automatic annual increase on January 1, 2001, 2002 and 2003 equal to the lesser of (i) 250,000 shares, (ii) 2% of the outstanding common stock on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as the board of directors determines. The 1999 Purchase Plan permits eligible employees to acquire shares of the Company's common stock through periodic payroll deductions of up to 15% of total compensation. An employee may purchase no more than 2,000 shares during any given offering period. Each offering period will have a maximum duration of approximately six months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company's common stock at the beginning or the end of each offering period. The initial offering period will commence on the effectiveness of the initial public offering and will end on April 30, 2000. On July 1, 1999 the board of directors, subject to stockholder approval, approved the 1999 Directors' Option Plan (the "Directors' Plan"), which provides for the grant of nonqualified stock options to nonemployee directors of the Company. A total of 200,000 shares of common stock have been reserved for issuance under the Directors' Plan. F-19 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares [LOGO OF ORATEC(R)] Common Stock ------------ PROSPECTUS ------------ Merrill Lynch & Co. J.P. Morgan & Co. U.S. Bancorp Piper Jaffray , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than the underwriting discount and commissions, payable by ORATEC in connection with the sale of common stock being registered. All amounts are estimates except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
Amount to be Paid --------- Securities and Exchange Commission registration fee................ $13,588 NASD filing fee.................................................... $ 5,388 Nasdaq National Market listing fee................................. $84,875 Printing and engraving expenses.................................... Legal fees and expenses............................................ Accounting fees and expenses....................................... Blue Sky qualification fees and expenses........................... Transfer Agent and Registrar fees.................................. Miscellaneous fees and expenses.................................... ------- Total.............................................................. =======
Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under some circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended. Article XII of ORATEC's certificate of incorporation (Exhibit 3.4) and Article VI of ORATEC's Bylaws (Exhibit 3.7) provide for indemnification of ORATEC's directors, officers, employees and other agents to the maximum extent permitted by Delaware Law. In addition, ORATEC has entered into Indemnification Agreements (Exhibit 10.11) with its officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides for cross-indemnification among ORATEC and the underwriters with respect to some matters, including matters arising under the Securities Act. Item 15. Recent Sales of Unregistered Securities Since June 30, 1996, ORATEC has sold and issued the following securities: (1) In March through December 1997, we issued and sold shares of Series C preferred stock convertible into an aggregate of 865,511 shares of common stock to a total of 120 investors for an aggregate purchase price of $4,327,638. (2) In October 1997, we issued warrants to purchase shares of Series C preferred stock convertible into an aggregate of 21,000 shares of common stock to two lenders. (3) In November and December 1997, we issued and sold shares of Series D preferred stock convertible into an aggregate of 1,937,133 shares of common stock to a total of 60 investors for an aggregate purchase price of $11,299,998. (4) In December 1998, we issued and sold shares of Series E preferred stock convertible into an aggregate of 2,254,678 shares of common stock to a total of 59 investors for an aggregate purchase price of $15,970,680. (5) In January 1999, we issued a warrant to purchase Series E preferred stock convertible into an aggregate of 73,412 shares of common stock to one lender. (6) In February 1999, we issued and sold 20,470 shares of Series B preferred stock to an executive officer upon his exercise of a warrant. II-1 (7) From July 1995 through June 30, 1999, under our 1995 Stock Plan, 233,019 shares of common stock had been issued upon exercise of options, 11,647 shares of common stock had been issued pursuant to restricted stock purchase agreements and 1,881,000 shares of common stock were issuable upon exercise of outstanding options. The issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. In addition, the issuances described in Item 7 were deemed exempt from registration under the Securities Act in reliance upon Rule 701 promulgated under the Securities Act. The recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution and appropriate legends were affixed to the share certificates and warrants issued in the transactions. All recipients had adequate access, through their relationships with us, to information about us. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Number Description ------ ----------- 1.1* Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation (current). 3.2 Certificate of Incorporation for reincorporation in Delaware (as proposed). 3.3 Amended and Restated Certificate of Incorporation for reverse stock split (as proposed). 3.4 Amended and Restated Certificate of Incorporation, post-IPO (as proposed). 3.5 Bylaws, as amended (current). 3.6 Bylaws for reincorporation in Delaware (as proposed). 3.7 Amended and Restated Bylaws, post-IPO (as proposed). 4.1* Specimen Stock Certificate. 5.1* Opinion of Venture Law Group regarding the legality of the common stock being registered. 10.1 Amended and Restated Investors' Rights Agreement dated December 7, 1998 among ORATEC and certain investors. 10.2 Employment Letter Agreement dated October 29, 1997 between ORATEC and Nancy V. Westcott. 10.3 Employment Agreement dated July 14, 1997 between ORATEC and Kenneth W. Anstey. 10.4 Employment Agreement dated August 21, 1996 and First Amendment to Employment Agreement dated July 14, 1997 between ORATEC and Hugh Sharkey. 10.5 Change of Control Letter Agreement dated 1996 between ORATEC and Roger Lipton. 10.6 1995 Stock Plan, as amended, and form of option agreement. 10.7 1999 Directors' Stock Option Plan and form of option agreement. 10.8 1999 Employee Stock Purchase Plan and form of subscription agreement. 10.9 Lease dated May 7, 1998 between ORATEC and White Properties Joint Venture (as amended). 10.10 Lease dated August 2, 1996 between ORATEC and Huettig & Schromm/Heaton & Keyser. 10.11 Form of Indemnification Agreement between ORATEC and officers and directors. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2* Consent of Venture Law Group, A Professional Corporation (See Exhibit 5.1). 23.3 Consent of Wilson Sonsini Goodrich & Rosati, a Professional Corporation. 23.4 Power of Attorney (See page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. II-2 (b) Financial Statement Schedules Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. Item 17. Undertakings The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in the denominations and registered in the names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Menlo Park, State of California, on July 9, 1999. ORATEC INTERVENTIONS, INC. /s/ Kenneth W. Anstey By: _________________________________ Kenneth W. Anstey President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Kenneth W. Anstey and Nancy V. Westcott and each of them, as his or her attorney-in-fact, with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and any and all Registration Statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this Registration Statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date /s/ Kenneth W. Anstey President, Chief Executive July 9, 1999 ______________________________________ Officer and Director Kenneth W. Anstey (Principal Executive Officer) /s/ Nancy V. Westcott Chief Financial Officer July 9, 1999 ______________________________________ (Principal Financial and Nancy V. Westcott Accounting Officer) /s/ Stephen Brackett Director July 9, 1999 ______________________________________ Stephen Brackett /s/ Gary S. Fanton, M.D. Director July 9, 1999 ______________________________________ Gary S. Fanton, M.D. /s/ Richard M. Ferrari Director July 9, 1999 ______________________________________ Richard M. Ferrari
II-4
Signature Title Date /s/ Patrick F. Latterell Director July 9, 1999 ______________________________________ Patrick F. Latterell /s/ Jeffrey A. Saal, M.D. Director July 9, 1999 ______________________________________ Jeffrey A. Saal, M.D. /s/ Hugh R. Sharkey Director July 9, 1999 ______________________________________ Hugh R. Sharkey
II-5 EXHIBIT INDEX
Number Description ------ ----------- 1.1* Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation (current). 3.2 Certificate of Incorporation for reincorporation in Delaware (as proposed). 3.3 Amended and Restated Certificate of Incorporation for reverse stock split (as proposed). 3.4 Amended and Restated Certificate of Incorporation, post-IPO (as proposed). 3.5 Bylaws, as amended (current). 3.6 Bylaws for reincorporation in Delaware (as proposed). 3.7 Amended and Restated Bylaws, post-IPO (as proposed). 4.1* Specimen Stock Certificate. 5.1* Opinion of Venture Law Group regarding the legality of the common stock being registered. 10.1 Amended and Restated Investors' Rights Agreement dated December 7, 1998 among ORATEC and certain investors. 10.2 Employment Letter Agreement dated October 29, 1997 between ORATEC and Nancy V. Westcott. 10.3 Employment Agreement dated July 14, 1997 between ORATEC and Kenneth W. Anstey. 10.4 Employment Agreement dated August 21, 1996 and First Amendment to Employment Agreement dated July 14, 1997 between ORATEC and Hugh Sharkey. 10.5 Change of Control Letter Agreement dated 1996 between ORATEC and Roger Lipton. 10.6 1995 Stock Plan, as amended, and form of option agreement. 10.7 1999 Directors' Stock Option Plan and form of option agreement. 10.8 1999 Employee Stock Purchase Plan and form of subscription agreement. 10.9 Lease dated May 7, 1998 between ORATEC and White Properties Joint Venture (as amended). 10.10 Lease dated August 2, 1996 between ORATEC and Huettig & Schromm/Heaton & Keyser. 10.11 Form of Indemnification Agreement between ORATEC and officers and directors. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2* Consent of Venture Law Group, A Professional Corporation (See Exhibit 5.1). 23.3 Consent of Wilson Sonsini Goodrich & Rosati, a Professional Corporation. 23.4 Power of Attorney (See page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. EX-3.1 2 CURRENT AMENDED AND RESTATED ARTICLES OF INCORP. EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ORATEC INTERVENTIONS, INC. The undersigned, Kenneth Anstey and Mark B. Weeks certify that: 1. They are the duly elected President and Secretary, respectively, of Oratec Interventions, Inc., a California corporation. 2. The Amended and Restated Articles of Incorporation of this corporation are amended and restated to read in full as follows: "I The name of this corporation is Oratec Interventions, Inc. II The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III (A) Classes of Stock. This corporation is authorized to issue two classes ---------------- of stock to be designated, respectively, "Common Stock" and "Preferred Stock." ------------ --------------- The total number of shares which the corporation is authorized to issue is 32,300,000 shares, of which 19,900,000 shares shall be Common Stock and 12,400,000 shares shall be Preferred Stock, each with a par value of $0.001 per share. (B) Rights, Preferences, Privileges and Restrictions of Preferred Stock. ------------------------------------------------------------------- There shall initially be five series of Preferred Stock designated as Series A Preferred Stock ("Series A Preferred"), Series B Preferred Stock ("Series B ------------------ -------- Preferred"), Series C Preferred Stock ("Series C Preferred"), Series D Preferred - --------- ------------------ Stock ("Series D Preferred") and Series E Preferred Stock ("Series E ------------------ -------- Preferred"). The Series A Preferred shall consist of Two Hundred Sixty Thousand Four Hundred Sixteen (260,416) shares, the Series B Preferred shall consist of Three Million Four Hundred Sixty-Two Thousand Fifty (3,462,050) shares, the Series C Preferred shall consist of One Million Four Hundred Seventy-Seven Thousand Five Hundred Forty-Two (1,477,542) shares, the Series D Preferred shall consist of Three Million Two Hundred Twenty-Eight Thousand Five Hundred Seventy- One (3,228,571) shares and the Series E Preferred shall consist of Three Million Nine Hundred Seventy-One Thousand Four Hundred Twenty-One (3,971,421) shares. Subject to compliance with applicable protective voting rights which have been or may be granted to Preferred Stock or any series thereof in the corporation's Articles of Incorporation and applicable law ("Protective ---------- Provisions"), the Board of Directors of the Company (the "Board of Directors") - ---------- ------------------ is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof. Subject to compliance with applicable Protective Provisions, the rights, privileges, preferences and restrictions of any such additional series may be subordinate to, pari passu with, or senior to any of those of any present ---- ----- or future class or series of Preferred Stock or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of that series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. The rights, preferences, privileges and restrictions of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred are as follows: (1) Dividends. --------- (a) The holders of outstanding Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends at the rate of (i) $0.08 per share of Series A Preferred per annum, (ii) $0.11 per share of Series B Preferred per annum, (iii) $0.24 per share of Series C Preferred per annum, (iv) $0.29 per share of Series D Preferred per annum and (v) $0.34 per share of Series E Preferred per annum (adjusted in each of the foregoing cases to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations), before any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) is paid on Common Stock. In the event that the amount of the dividends declared by the Board of Directors shall be insufficient to permit payment of the full aforesaid dividends, such dividends will be paid ratably to each holder of the Preferred Stock in proportion to the dividend amounts to which each such holder is entitled. After payment of the full amount of the aforesaid dividends, any additional dividends declared shall be distributed among all holders of Preferred Stock and Common Stock in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Preferred Stock were converted into Common Stock at the then effective Conversion Prices (as defined in Section 3). The right to such dividends on shares of Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. -2- (b) In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 3(d)(iii), then, in each such case for the purpose of this Section 1, the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (2) Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership thereof, (i) the amount of $0.96 per share for each share of Series A Preferred (the "Original Series A Issue Price") then ----------------------------- held by them and, in addition, an amount equal to all declared but unpaid dividends on the Series A Preferred, (ii) the amount of $1.35 per share for each share of Series B Preferred (the "Original Series B Issue Price") then held by ----------------------------- them and, in addition, an amount equal to all declared but unpaid dividends on the Series B Preferred, (iii) the amount of $3.00 per share for each share of Series C Preferred (the "Original Series C Issue Price") then held by them and, ----------------------------- in addition, an amount equal to all declared but unpaid dividends on the Series C Preferred, (iv) the amount of $3.50 per share of Series D Preferred (the "Original Series D Issue Price") then held by them and, in addition, an amount - ------------------------------ equal to all declared but unpaid dividends on the Series D Preferred and (v) the amount of $4.25 per share for each share of Series E Preferred (the "Original -------- Series E Issue Price") then held by them and, in addition, an amount equal to - -------------------- all declared but unpaid dividends on the Series E Preferred (adjusted in each of the foregoing cases to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations). If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amounts for the Preferred Stock, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Preferred Stock in proportion to the preferential amount which each such holder is entitled to receive. (b) Upon the completion of the distribution required by Section 2(a), the remaining assets of the corporation available for distribution to shareholders shall be distributed among the holders of the Series D Preferred, the Series E Preferred and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series D Preferred and such Series E Preferred at the then effective applicable Conversion Price (as defined in Section 3 below)) until (i) with respect to the holders of Series D Preferred, such holders shall have received an aggregate of $10.50 per share of Series D Preferred held, including amounts paid pursuant to Section 2(a) above, and (ii) with respect to the holders of Series E Preferred, such holders shall have received an aggregate of $10.50 per share of Series E Preferred held, including amounts paid pursuant to Section 2(a) above (in each case as adjusted to reflect subsequent stock dividends, stock splits, consolidations -3- or recapitalizations); thereafter, if assets remain in this corporation, the holders of the Common Stock shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each. (c) A merger or consolidation of the corporation with or into any other corporation or corporations in which the corporation is not the surviving entity or the sale, transfer or lease (other than a pledge or grant of a security interest to a bona fide lender) of all or substantially all of the assets of the corporation or any other transaction or series of related transactions in which the corporation's shareholders immediately prior thereto own less than a majority of the voting stock of the corporation (or its successor or parent) immediately thereafter, shall be treated as a liquidation, dissolution or winding up for purposes of this Section 2 and the shareholders of the corporation will be entitled to receive in cash and securities the amount they would have upon liquidation, unless the shareholders of the corporation immediately preceding such merger, consolidation, sale, transfer or lease own more than fifty percent (50%) of the surviving entity. (d) In any of such events, if the consideration received by this corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (A) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or market over the thirty (30)-day period ending three (3) days prior to the closing; (B) If actively traded over-the-counter other than through the Nasdaq National Market, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30)-day period ending three (3) days prior to the closing; and (C) If there is no active public market, the value shall be the fair market value thereof, as determined by the Board of Directors in good faith. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in subsection 2(d)(i)(A), (B) or (C) to reflect the approximate fair market value thereof, as determined by the Board of Directors in good faith. (3) Conversion. The holders of the Preferred Stock shall have ---------- conversion rights as follows (the "Conversion Rights"): ----------------- -4- (a) Right to Convert. Each share of Preferred Stock shall be ---------------- convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price for such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for Series A Preferred shall be the Original Series A Issue Price, the initial Conversion Price per share for Series B Preferred shall be the Original Series B Issue Price, the initial Conversion Price per share for Series C Preferred shall be the Original Series C Issue Price, the initial Conversion Price per share for the Series D Preferred shall be the Original Series D Issue Price and the initial Conversion Price per share for the Series E Preferred shall be the Original Series E Issue Price; provided, however, that such Conversion Prices shall be subject to adjustment as set forth in subsection 3(d). (b) Automatic Conversion. Each share of Preferred Stock shall -------------------- automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such share of Preferred Stock immediately upon the earlier of (i) this corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (the "Act"), at a public offering price of at --- least $7.00 per share (adjusted to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations) with gross proceeds to the Company of at least $20,000,000, or (ii) the date specified by written consent or agreement of the holders of (A) a majority of the outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis, and (B) a majority of the outstanding shares of Series D Preferred and Series E Preferred, voting together as a single class on an as-converted basis. (c) Mechanics of Conversion. Before any holder of Preferred Stock ----------------------- shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Act, the conversion shall be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such offering. -5- (d) Conversion Price Adjustments for Certain Dilutive Issuances, ------------------------------------------------------------ Splits and Combinations. The Conversion Price of the Preferred Stock shall be - ----------------------- subject to adjustment from time to time as follows: (i) (A) If this corporation shall issue, after the date upon which any shares of Series E Preferred were first issued (the "Purchase Date"), ------------- any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for any series of Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series of Preferred Stock in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this subsection 3(d)(i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by this corporation for such issuance would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of such Additional Stock; provided that, for the purposes of this subsection 3(d)(i), all shares of Common Stock issuable upon conversion of any outstanding Preferred Stock, options, warrants or convertible securities shall be deemed to be outstanding, and provided further that the fraction used in the above calculation will in no event be greater than one (1). (B) No adjustment of the Conversion Price for any series of Preferred Stock shall be made in an amount less than one cent (.01) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 3(d)(i)(E)(3), 3(d)(i)(E)(4) and 3(d)(iv), no adjustment of the Conversion Price for any series of Preferred Stock pursuant to this subsection 3(d)(i) shall have the effect of increasing the Conversion Price for such series of Preferred Stock above the Conversion Price for such series of Preferred Stock in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors in good faith irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the Purchase Date) of options to purchase or rights to subscribe for Common Stock, -6- securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(i) and subsection 3(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(i)(C) and (D)), if any, received by this corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by this corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by this corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 3(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights, upon conversion of or in exchange for such convertible or exchangeable securities or upon exercise of options or rights related to such securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of a series of Preferred Stock, to the extent in any way affected by or computed using such options, rights, securities or related options or rights, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights, the conversion or exchange of such securities or the exercise of options or rights related to such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of a series of Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. -7- (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock, or ---------------- securities convertible into or exercisable for Common Stock, either directly or indirectly (including securities deemed to have been issued pursuant to subsection 3(d)(i)(E)) issued by this corporation after the Purchase Date other than: (A) Shares of Common Stock issued or deemed to have been issued pursuant to a transaction described in subsection 3(d)(iii), (B) Shares of Common Stock issued or deemed to have been issued to employees, consultants, or directors of this corporation directly or pursuant to a stock option plan or stock purchase plan or other incentive stock arrangement approved by the Board of Directors of this corporation, (C) Shares of Common Stock issued or deemed to have been issued in connection with bona fide equipment leases, loans or bank financings, or similar financing transactions, the terms of which are approved by the Board of Directors of this corporation, (D) Shares of Common Stock issued or deemed to have been issued in connection with strategic relationships or similar arrangements, the terms of which are approved by a majority of the non-employee disinterested members of the Board of Directors of this corporation, and (E) Shares of Common Stock issued or issuable upon conversion or exercise of convertible or exercisable securities in existence as of the date of filing these Amended and Restated Articles of Incorporation. (iii) In the event this corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder - ------------------------- for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such split, subdivision, dividend or distribution if no record date is fixed), the Conversion Price of each series of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable -8- with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 3(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for each series of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Recapitalizations. If at any time or from time to time there ----------------- shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3 or Section 2) provision shall be made so that the holders of Preferred Stock shall thereafter be entitled to receive upon conversion of such Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (f) No Impairment. This corporation will not, by amendment of its ------------- Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. (g) No Fractional Shares and Certificate as to Adjustments. ------------------------------------------------------ (i) No fractional shares shall be issued upon the conversion of any share or shares of Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share (with one-half being rounded upward). Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, this corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). -9- (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Preferred Stock pursuant to this Section 3, this corporation, at its expense, shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of such Preferred Stock. (h) Reservation of Stock Issuable Upon Conversion. This corporation --------------------------------------------- shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these Amended and Restated Articles of Incorporation. (i) Notices. Any notice required by the provisions of this Section 3 ------- to be given to the holders of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of this corporation. (4) Voting Rights. ------------- (a) Each holder of shares of the Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the vote or consent of shareholders and, except as otherwise required by law, shall have voting rights and powers equal to the voting rights and powers of the Common Stock. The holder of each share of the Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation and shall vote with holders of the Common Stock upon the election of directors and upon any other matter submitted to a vote of shareholders, except in those matters required by law to be submitted to a class vote. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number. (b) (i) So long as at least One Million (1,000,000) shares of Series D Preferred shall remain outstanding (adjusted to reflect stock splits, stock dividends and recapitalizations), (A) the holders of Series D Preferred, voting separately as a series, shall have the right to elect one (1) member of the Board of Directors of this corporation (the -10- "Series D Director") and (B) the Series D Director may be removed from the Board ----------------- of Directors only by the affirmative vote of the holders of a majority of the Series D Preferred, voting separately as a series. The right of the holders of Series D Preferred to vote for the election of the Series D Director may be exercised at any annual meeting or at any special meeting called for such purpose or at any adjournment thereof. Any election to fill a vacancy in the board seat held by the Series D Director (other than to fill a vacancy created by the removal of the Series D Director) may be by written consent, delivered to the secretary of the corporation, of the holders of a majority of the shares of Series D Preferred outstanding as of the record date of such written consent. (ii) So long as at least One Million (1,000,000) shares of Series E Preferred shall remain outstanding (adjusted to reflect stock splits, stock dividends and recapitalizations), (A) the holders of Series E Preferred, voting separately as a series, shall have the right to elect one (1) member of the Board of Directors of this corporation (the "Series E Director") and (B) the ----------------- Series E Director may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Series E Preferred, voting separately as a Series. The right of the holders of Series E Preferred to vote for the election of the Series E Director may be exercised at any annual meeting or at any special meeting called for such purpose or at any adjournment thereof. Any election to fill a vacancy in the board seat held by the Series E Director (other than to fill a vacancy created by the removal of the Series E Director) may be by written consent, delivered to the secretary of the corporation, of the holders of a majority of the shares of Series E Preferred outstanding as of the record date of such written consent. (iii) In any election of other members of the Board of Directors of this corporation (collectively, the "Other Directors"), the candidates who --------------- receive the highest number of affirmative votes of the shares of Preferred Stock and Common Stock outstanding, voting together as a single class on an as- converted basis, shall be elected, up to the number of directors to be elected by such shares. The Other Directors may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Preferred Stock and Common Stock, voting together as a single class on an as-converted basis. (iv) Each director, and any subsequent director elected pursuant to this paragraph, shall serve as a director until his or her successor is elected and qualified. In the event of a vacancy in respect of any directorship elected by the holders of shares of Series D Preferred pursuant to this subsection 4(b)(i), the holders of a majority of the outstanding shares of Series D Preferred shall have the right to call a special meeting of shareholders, in order that the holders of the Series D Preferred may elect a successor director, at which meeting the holders of Series D Preferred shall be entitled to the same voting rights as provided in the subsection 4(b)(i), or the holders of Series D Preferred may fill such vacancy by written consent, delivered to the secretary of the corporation, of the holders of a majority of all outstanding shares of Series D Preferred outstanding as of the record date of such written consent. In the event of a vacancy in respect of any directorship elected by the holders of shares of Series E Preferred pursuant to subsection 4(b)(ii), the holders of a majority of the outstanding shares of Series E Preferred shall have the right to call a special meeting of shareholders, in order -11- that the holders of the Series E Preferred may elect a successor director, at which meeting the holders of Series E Preferred shall be entitled to the same voting rights as provided in the subsection 4(b)(ii), or the holders of Series E Preferred may fill such vacancy by written consent, delivered to the secretary of the corporation, of the holders of a majority of all outstanding shares of Series E Preferred outstanding as of the record date of such written consent. (5) Protective Provisions. --------------------- (a) So long as any shares of a particular series of Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of such series of Preferred Stock outstanding, voting together as a separate series, (i) adversely alter or change any of the powers, preferences, privileges or rights of such series; (ii) designate or issue any new class or series of shares having preferences superior to such series as to dividends, conversion rights, redemption or liquidation; (iii) increase the designated number of shares of such series; or (iv) amend the provisions of this subsection 5(a). (b) The corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of (i) so long as any shares of Preferred Stock are outstanding, the holders of at least a majority of the total number of outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis and (ii) so long as any shares of Series D Preferred are outstanding, the holders of a majority of the total number of outstanding shares of Series D Preferred Stock, voting together as a single series on an as-converted basis: (x) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of, if the consideration to be received by the shareholders of this corporation in such transaction (determined as provided in subsection 2(d) assuming conversion of all outstanding convertible securities and exercise of all options and warrants by their terms exercisable at the time of such transaction) is less than $5.50 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations); or (y) amend the provisions of this subsection 5(b). Any registered holder of Series D Preferred may proceed to protect and enforce its rights and the rights of any other holders of Series D Preferred Stock with any and all remedies available at law or in equity. (c) So long as any shares of Series E Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of outstanding shares of Series E Preferred, voting together as a single series on an as-converted basis, (i) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of, if the consideration to be received by the shareholders of this corporation in such transaction (determined as provided in subsection 2(d) assuming conversion of all outstanding convertible securities and exercise of all options and -12- warrants by their terms exercisable at the time of such transaction) is less than $7.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations); or (ii) amend the provisions of this subsection 5(c). Any registered holder of Series E Preferred may proceed to protect and enforce its rights and the rights of any other holders of Series E Preferred Stock with any and all remedies available at law or in equity. (6) Redemption of Series D and Series E Preferred Stock. --------------------------------------------------- (a) At the individual option of each holder of shares of Series D Preferred or, in the case of the redemption of any shares of Series E Preferred, upon the vote of at least a majority of the outstanding shares of Series E Preferred (adjusted for stock splits, dividends and the like), the corporation shall redeem, on the fifth (5th) anniversary of the Purchase Date (the "Redemption Date"), the number of shares of Series D and Series E Preferred held - ---------------- by such holder or holders that is specified in a request for redemption delivered to the corporation by the holder or holders on or prior to the thirtieth (30th) day immediately preceding the Redemption Date, by paying in cash therefor the Original Series D Issue Price per share of Series D Preferred to be redeemed by such holder and the Original Series E Issue Price per share of Series E Preferred to be redeemed by such holder (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared but unpaid dividends on such shares (the "Redemption Price"). ---------------- (b) At least fifteen (15) but no more than thirty (30) days prior to the Redemption Date, written notice (the "Redemption Notice") shall be mailed, ----------------- first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series D Preferred and Series E Preferred to be redeemed, at the address last shown on the records of the corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to the corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed. Except as provided in subsection (6)(c) on or after the Redemption Date, each holder of Series D Preferred and Series E Preferred to be redeemed shall surrender to the corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series D Preferred designated for redemption in the Redemption Notice as holders of Series D Preferred and all rights of the holders of shares of Series E Preferred designated for redemption in the Redemption Notice as holders of Series E Preferred (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to -13- such shares, and such shares shall not thereafter be transferred on the books of the corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the corporation legally available for redemption of shares of Series D Preferred and Series E Preferred on the Redemption Date are insufficient to redeem the total number of shares of Series D Preferred and Series E Preferred to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon such holder's percentage holding of the total number of shares of Series D Preferred and Series E Preferred outstanding immediately prior to the Redemption Date. The shares of Series D Preferred and Series E Preferred not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the corporation are legally available for the redemption of shares of Series D Preferred Stock and Series E Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the corporation has become obliged to redeem on the Redemption Date but which it has not redeemed. (7) Repurchase of Shares. In connection with repurchases by this -------------------- corporation of its Common Stock pursuant to its agreements with certain of the holders thereof, Sections 502 and 503 of the California General Corporation Law shall not apply in whole or in part with respect to such repurchases. (8) No Reissuance of Preferred Stock. No share or shares of Preferred -------------------------------- Stock acquired by the corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the corporation shall be authorized to issue. (C) Common Stock. ------------- (1) Dividend Rights. Subject to the prior rights of holders of all --------------- classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. (2) Liquidation Rights. Upon the liquidation, dissolution or winding ------------------ up of the corporation, the assets of the corporation shall be distributed as provided in Section 2 of Division B of Article III. (3) Voting Rights. The holder of each share of Common Stock shall ------------- have the right to one vote, and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. IV (A) Limitation on Directors' Liability. The liability of the directors of ---------------------------------- the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. -14- (B) Indemnification of Corporate Agents. The corporation is authorized to ----------------------------------- provide indemnification of agents (as defined in Section 317 of the California General Corporation Law) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California General Corporation Law, subject only to the applicable limits set forth in Section 204 of the California General Corporation Law with respect to actions for breach of duty to the corporation and its shareholders. (C) Repeal or Modification. Any repeal or modification of the foregoing ---------------------- provisions of this Article IV by the shareholders of the corporation shall not adversely affect any right or protection of a director or agent of the corporation existing at the time of such repeal or modification. 3. The foregoing amendment of the Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 and 903 of the California General Corporation Law. The total number of outstanding shares of Common Stock of this corporation is 4,004,649, the total number of outstanding shares of Series A Preferred Stock of this corporation is 260,416, the total number of outstanding shares of Series B Preferred Stock of this corporation is 3,356,495, the total number of outstanding shares of Series C Preferred Stock of this corporation is 1,442,542, and the total number of Series D Preferred Stock of this corporation is 3,220,571, and there is no other class of shares outstanding. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required under law and the Articles of Incorporation in effect at the time of this amendment was more than fifty percent (50%) of the outstanding Common Stock and Preferred Stock, voting together as a single class on an as-converted basis, more than fifty percent (50%) of the outstanding Preferred Stock, voting separately as a class on an as-converted basis, more than fifty percent (50%) of the outstanding Common Stock, voting separately as a class, and more than fifty percent (50%) of the outstanding shares of each of the Series A Preferred, the Series B Preferred, the Series C Preferred and the Series D Preferred, each voting as a separate series. -15- We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: November 24, 1998 /s/ Kenneth Anstey ----------------------------------- Kenneth Anstey, President /s/ Mark B. Weeks ----------------------------------- Mark B. Weeks, Secretary -16- EX-3.2 3 CERT. OF INCORP. FOR DELAWARE REINCORP. (PROPOSED) EXHIBIT 3.2 CERTIFICATE OF INCORPORATION OF ORATEC INTERVENTIONS, INC. ARTICLE I "The name of the corporation is ORATEC Interventions, Inc. (the "Corporation"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (A) Classes of Stock. This corporation is authorized to issue two classes ---------------- of stock to be designated, respectively, "Common Stock" and "Preferred Stock." ------------ --------------- The total number of shares which the corporation is authorized to issue is 32,300,000 shares, of which 19,900,000 shares shall be Common Stock and 12,400,000 shares shall be Preferred Stock, each with a par value of $0.001 per share. (B) Rights, Preferences, Privileges and Restrictions of Preferred Stock. ------------------------------------------------------------------- There shall initially be five series of Preferred Stock designated as Series A Preferred Stock ("Series A Preferred"), Series B Preferred Stock ("Series B ------------------ -------- Preferred"), Series C Preferred Stock ("Series C Preferred"), Series D Preferred - --------- ------------------ Stock ("Series D Preferred") and Series E Preferred Stock ("Series E ------------------ -------- Preferred"). The Series A Preferred shall consist of Two Hundred Sixty Thousand Four Hundred Sixteen (260,416) shares, the Series B Preferred shall consist of Three Million Four Hundred Sixty-Two Thousand Fifty (3,462,050) shares, the Series C Preferred shall consist of One Million Four Hundred Seventy-Seven Thousand Five Hundred Forty-Two (1,477,542) shares, the Series D Preferred shall consist of Three Million Two Hundred Twenty-Eight Thousand Five Hundred Seventy- One (3,228,571) shares and the Series E Preferred shall consist of Three Million Nine Hundred Seventy-One Thousand Four Hundred Twenty-One (3,971,421) shares. -1- Subject to compliance with applicable protective voting rights which have been or may be granted to Preferred Stock or any series thereof in the corporation's Articles of Incorporation and applicable law ("Protective ---------- Provisions"), the Board of Directors of the Company (the "Board of Directors") - ---------- ------------------ is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof. Subject to compliance with applicable Protective Provisions, the rights, privileges, preferences and restrictions of any such additional series may be subordinate to, pari passu with, or senior to any of those of any present ---- ----- or future class or series of Preferred Stock or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of that series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. The rights, preferences, privileges and restrictions of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred are as follows: (1) Dividends. --------- (a) The holders of outstanding Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends at the rate of (i) $0.08 per share of Series A Preferred per annum, (ii) $0.11 per share of Series B Preferred per annum, (iii) $0.24 per share of Series C Preferred per annum, (iv) $0.29 per share of Series D Preferred per annum and (v) $0.34 per share of Series E Preferred per annum (adjusted in each of the foregoing cases to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations), before any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) is paid on Common Stock. In the event that the amount of the dividends declared by the Board of Directors shall be insufficient to permit payment of the full aforesaid dividends, such dividends will be paid ratably to each holder of the Preferred Stock in proportion to the dividend amounts to which each such holder is entitled. After payment of the full amount of the aforesaid dividends, any additional dividends declared shall be distributed among all holders of Preferred Stock and Common Stock in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Preferred Stock were converted into Common Stock at the then effective Conversion Prices (as defined in Section 3). The right to such dividends on shares of Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. (b) In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 3(d)(iii), then, -2- in each such case for the purpose of this Section 1, the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (2) Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership thereof, (i) the amount of $0.96 per share for each share of Series A Preferred (the "Original Series A Issue Price") ----------------------------- then held by them and, in addition, an amount equal to all declared but unpaid dividends on the Series A Preferred, (ii) the amount of $1.35 per share for each share of Series B Preferred (the "Original Series B Issue Price") then held by ----------------------------- them and, in addition, an amount equal to all declared but unpaid dividends on the Series B Preferred, (iii) the amount of $3.00 per share for each share of Series C Preferred (the "Original Series C Issue Price") then held by them and, ----------------------------- in addition, an amount equal to all declared but unpaid dividends on the Series C Preferred, (iv) the amount of $3.50 per share of Series D Preferred (the "Original Series D Issue Price") then held by them and, in addition, an amount - ------------------------------ equal to all declared but unpaid dividends on the Series D Preferred and (v) the amount of $4.25 per share for each share of Series E Preferred (the "Original -------- Series E Issue Price") then held by them and, in addition, an amount equal to - -------------------- all declared but unpaid dividends on the Series E Preferred (adjusted in each of the foregoing cases to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations). If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amounts for the Preferred Stock, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Preferred Stock in proportion to the preferential amount which each such holder is entitled to receive. (b) Upon the completion of the distribution required by Section 2(a), the remaining assets of the corporation available for distribution to shareholders shall be distributed among the holders of the Series D Preferred, the Series E Preferred and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series D Preferred and such Series E Preferred at the then effective applicable Conversion Price (as defined in Section 3 below)) until (i) with respect to the holders of Series D Preferred, such holders shall have received an aggregate of $10.50 per share of Series D Preferred held, including amounts paid pursuant to Section 2(a) above, and (ii) with respect to the holders of Series E Preferred, such holders shall have received an aggregate of $10.50 per share of Series E Preferred held, including amounts paid pursuant to Section 2(a) above (in each case as adjusted to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations); thereafter, if assets remain in this corporation, the holders of the Common -3- Stock shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each. (c) A merger or consolidation of the corporation with or into any other corporation or corporations in which the corporation is not the surviving entity or the sale, transfer or lease (other than a pledge or grant of a security interest to a bona fide lender) of all or substantially all of the assets of the corporation or any other transaction or series of related transactions in which the corporation's shareholders immediately prior thereto own less than a majority of the voting stock of the corporation (or its successor or parent) immediately thereafter, shall be treated as a liquidation, dissolution or winding up for purposes of this Section 2 and the shareholders of the corporation will be entitled to receive in cash and securities the amount they would have upon liquidation, unless the shareholders of the corporation immediately preceding such merger, consolidation, sale, transfer or lease own more than fifty percent (50%) of the surviving entity. (d) In any of such events, if the consideration received by this corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (A) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or market over the thirty (30)-day period ending three (3) days prior to the closing; (B) If actively traded over-the-counter other than through the Nasdaq National Market, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30)-day period ending three (3) days prior to the closing; and (C) If there is no active public market, the value shall be the fair market value thereof, as determined by the Board of Directors in good faith. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in subsection 2(d)(i)(A), (B) or (C) to reflect the approximate fair market value thereof, as determined by the Board of Directors in good faith. (3) Conversion. The holders of the Preferred Stock shall have ---------- conversion rights as follows (the "Conversion Rights"): ----------------- -4- (a) Right to Convert. Each share of Preferred Stock shall ---------------- be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price for such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for Series A Preferred shall be the Original Series A Issue Price, the initial Conversion Price per share for Series B Preferred shall be the Original Series B Issue Price, the initial Conversion Price per share for Series C Preferred shall be the Original Series C Issue Price, the initial Conversion Price per share for the Series D Preferred shall be the Original Series D Issue Price and the initial Conversion Price per share for the Series E Preferred shall be the Original Series E Issue Price; provided, however, that such Conversion Prices shall be subject to adjustment as set forth in subsection 3(d). (b) Automatic Conversion. Each share of Preferred Stock -------------------- shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such share of Preferred Stock immediately upon the earlier of (i) this corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (the "Act"), at a public offering --- price of at least $7.00 per share (adjusted to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations) with gross proceeds to the Company of at least $20,000,000, or (ii) the date specified by written consent or agreement of the holders of (A) a majority of the outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis, and (B) a majority of the outstanding shares of Series D Preferred and Series E Preferred, voting together as a single class on an as-converted basis. (c) Mechanics of Conversion. Before any holder of Preferred ----------------------- Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Act, the conversion shall be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the -5- Common Stock upon conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such offering. (d) Conversion Price Adjustments for Certain Dilutive -------------------------------------------------- Issuances, Splits and Combinations. The Conversion Price of the Preferred Stock - ---------------------------------- shall be subject to adjustment from time to time as follows: (i) (A) If this corporation shall issue, after the date upon which any shares of Series E Preferred were first issued (the "Purchase Date"), any Additional Stock (as defined below) without consideration ------------- or for a consideration per share less than the Conversion Price for any series of Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series of Preferred Stock in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this subsection 3(d)(i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by this corporation for such issuance would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of such Additional Stock; provided that, for the purposes of this subsection 3(d)(i), all shares of Common Stock issuable upon conversion of any outstanding Preferred Stock, options, warrants or convertible securities shall be deemed to be outstanding, and provided further that the fraction used in the above calculation will in no event be greater than one (1). (B) No adjustment of the Conversion Price for any series of Preferred Stock shall be made in an amount less than one cent (.01) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 3(d)(i)(E)(3), 3(d)(i)(E)(4) and 3(d)(iv), no adjustment of the Conversion Price for any series of Preferred Stock pursuant to this subsection 3(d)(i) shall have the effect of increasing the Conversion Price for such series of Preferred Stock above the Conversion Price for such series of Preferred Stock in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be -6- deemed to be the fair value thereof as determined by the Board of Directors in good faith irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(i) and subsection 3(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(i)(C) and (D)), if any, received by this corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by this corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by this corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 3(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights, upon conversion of or in exchange for such convertible or exchangeable securities or upon exercise of options or rights related to such securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of a series of Preferred Stock, to the extent in any way affected by or computed using such options, rights, securities or related options or rights, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights, the conversion or exchange of such securities or the exercise of options or rights related to such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of a series of Preferred Stock, to the extent in any way affected by or computed using such options, rights or -7- securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of ---------------- Common Stock, or securities convertible into or exercisable for Common Stock, either directly or indirectly (including securities deemed to have been issued pursuant to subsection 3(d)(i)(E)) issued by this corporation after the Purchase Date other than: (A) Shares of Common Stock issued or deemed to have been issued pursuant to a transaction described in subsection 3(d)(iii), (B) Shares of Common Stock issued or deemed to have been issued to employees, consultants, or directors of this corporation directly or pursuant to a stock option plan or stock purchase plan or other incentive stock arrangement approved by the Board of Directors of this corporation, (C) Shares of Common Stock issued or deemed to have been issued in connection with bona fide equipment leases, loans or bank financings, or similar financing transactions, the terms of which are approved by the Board of Directors of this corporation, (D) Shares of Common Stock issued or deemed to have been issued in connection with strategic relationships or similar arrangements, the terms of which are approved by a majority of the non-employee disinterested members of the Board of Directors of this corporation, and (E) Shares of Common Stock issued or issuable upon conversion or exercise of convertible or exercisable securities in existence as of the date of filing these Amended and Restated Articles of Incorporation. (iii) In the event this corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock ------------ -8- Equivalents") without payment of any consideration by such holder for the - ----------- additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such split, subdivision, dividend or distribution if no record date is fixed), the Conversion Price of each series of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 3(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for each series of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Recapitalizations. If at any time or from time to time ----------------- there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3 or Section 2) provision shall be made so that the holders of Preferred Stock shall thereafter be entitled to receive upon conversion of such Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (f) No Impairment. This corporation will not, by amendment ------------- of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. (g) No Fractional Shares and Certificate as to Adjustments. ------------------------------------------------------ (i) No fractional shares shall be issued upon the conversion of any share or shares of Preferred Stock, and the number of shares of Common Stock to be issued -9- shall be rounded to the nearest whole share (with one-half being rounded upward). Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, this corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Preferred Stock pursuant to this Section 3, this corporation, at its expense, shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of such Preferred Stock. (h) Reservation of Stock Issuable Upon Conversion. This --------------------------------------------- corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these Amended and Restated Articles of Incorporation. (i) Notices. Any notice required by the provisions of this ------- Section 3 to be given to the holders of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of this corporation. (4) Voting Rights. ------------- (a) Each holder of shares of the Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the vote or consent of shareholders and, except as otherwise required by law, shall have voting rights and powers equal to the voting rights and powers of the Common Stock. The holder of each share of the Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation and shall vote with holders of the Common Stock upon the election of directors -10- and upon any other matter submitted to a vote of shareholders, except in those matters required by law to be submitted to a class vote. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number. (b) (i) So long as at least One Million (1,000,000) shares of Series D Preferred shall remain outstanding (adjusted to reflect stock splits, stock dividends and recapitalizations), (A) the holders of Series D Preferred, voting separately as a series, shall have the right to elect one (1) member of the Board of Directors of this corporation (the "Series D Director") ----------------- and (B) the Series D Director may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Series D Preferred, voting separately as a series. The right of the holders of Series D Preferred to vote for the election of the Series D Director may be exercised at any annual meeting or at any special meeting called for such purpose or at any adjournment thereof. Any election to fill a vacancy in the board seat held by the Series D Director (other than to fill a vacancy created by the removal of the Series D Director) may be by written consent, delivered to the secretary of the corporation, of the holders of a majority of the shares of Series D Preferred outstanding as of the record date of such written consent. (ii) So long as at least One Million (1,000,000) shares of Series E Preferred shall remain outstanding (adjusted to reflect stock splits, stock dividends and recapitalizations), (A) the holders of Series E Preferred, voting separately as a series, shall have the right to elect one (1) member of the Board of Directors of this corporation (the "Series E Director") ----------------- and (B) the Series E Director may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Series E Preferred, voting separately as a Series. The right of the holders of Series E Preferred to vote for the election of the Series E Director may be exercised at any annual meeting or at any special meeting called for such purpose or at any adjournment thereof. Any election to fill a vacancy in the board seat held by the Series E Director (other than to fill a vacancy created by the removal of the Series E Director) may be by written consent, delivered to the secretary of the corporation, of the holders of a majority of the shares of Series E Preferred outstanding as of the record date of such written consent. (iii) In any election of other members of the Board of Directors of this corporation (collectively, the "Other Directors"), the --------------- candidates who receive the highest number of affirmative votes of the shares of Preferred Stock and Common Stock outstanding, voting together as a single class on an as-converted basis, shall be elected, up to the number of directors to be elected by such shares. The Other Directors may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Preferred Stock and Common Stock, voting together as a single class on an as- converted basis. (iv) Each director, and any subsequent director elected pursuant to this paragraph, shall serve as a director until his or her successor is elected and -11- qualified. In the event of a vacancy in respect of any directorship elected by the holders of shares of Series D Preferred pursuant to this subsection 4(b)(i), the holders of a majority of the outstanding shares of Series D Preferred shall have the right to call a special meeting of shareholders, in order that the holders of the Series D Preferred may elect a successor director, at which meeting the holders of Series D Preferred shall be entitled to the same voting rights as provided in the subsection 4(b)(i), or the holders of Series D Preferred may fill such vacancy by written consent, delivered to the secretary of the corporation, of the holders of a majority of all outstanding shares of Series D Preferred outstanding as of the record date of such written consent. In the event of a vacancy in respect of any directorship elected by the holders of shares of Series E Preferred pursuant to subsection 4(b)(ii), the holders of a majority of the outstanding shares of Series E Preferred shall have the right to call a special meeting of shareholders, in order that the holders of the Series E Preferred may elect a successor director, at which meeting the holders of Series E Preferred shall be entitled to the same voting rights as provided in the subsection 4(b)(ii), or the holders of Series E Preferred may fill such vacancy by written consent, delivered to the secretary of the corporation, of the holders of a majority of all outstanding shares of Series E Preferred outstanding as of the record date of such written consent. (5) Protective Provisions. --------------------- (a) So long as any shares of a particular series of Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of such series of Preferred Stock outstanding, voting together as a separate series, (i) adversely alter or change any of the powers, preferences, privileges or rights of such series; (ii) designate or issue any new class or series of shares having preferences superior to such series as to dividends, conversion rights, redemption or liquidation; (iii) increase the designated number of shares of such series; or (iv) amend the provisions of this subsection 5(a). (b) The corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of (i) so long as any shares of Preferred Stock are outstanding, the holders of at least a majority of the total number of outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis and (ii) so long as any shares of Series D Preferred are outstanding, the holders of a majority of the total number of outstanding shares of Series D Preferred Stock, voting together as a single series on an as-converted basis: (x) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of, if the consideration to be received by the shareholders of this corporation in such transaction (determined as provided in subsection 2(d) assuming conversion of all outstanding convertible securities and exercise of all options and warrants by their terms exercisable at the time of such transaction) is less than $5.50 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations); or (y) amend the provisions of this subsection 5(b). Any registered -12- holder of Series D Preferred may proceed to protect and enforce its rights and the rights of any other holders of Series D Preferred Stock with any and all remedies available at law or in equity. (c) So long as any shares of Series E Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of outstanding shares of Series E Preferred, voting together as a single series on an as-converted basis, (i) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of, if the consideration to be received by the shareholders of this corporation in such transaction (determined as provided in subsection 2(d) assuming conversion of all outstanding convertible securities and exercise of all options and warrants by their terms exercisable at the time of such transaction) is less than $7.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations); or (ii) amend the provisions of this subsection 5(c). Any registered holder of Series E Preferred may proceed to protect and enforce its rights and the rights of any other holders of Series E Preferred Stock with any and all remedies available at law or in equity. (6) Redemption of Series D and Series E Preferred Stock. --------------------------------------------------- (a) At the individual option of each holder of shares of Series D Preferred or, in the case of the redemption of any shares of Series E Preferred, upon the vote of at least a majority of the outstanding shares of Series E Preferred (adjusted for stock splits, dividends and the like), the corporation shall redeem, on the fifth (5th) anniversary of the Purchase Date (the "Redemption Date"), the number of shares of Series D and Series E Preferred held - ---------------- by such holder or holders that is specified in a request for redemption delivered to the corporation by the holder or holders on or prior to the thirtieth (30th) day immediately preceding the Redemption Date, by paying in cash therefor the Original Series D Issue Price per share of Series D Preferred to be redeemed by such holder and the Original Series E Issue Price per share of Series E Preferred to be redeemed by such holder (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared but unpaid dividends on such shares (the "Redemption Price"). ---------------- (b) At least fifteen (15) but no more than thirty (30) days prior to the Redemption Date, written notice (the "Redemption Notice") shall be ----------------- mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series D Preferred and Series E Preferred to be redeemed, at the address last shown on the records of the corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to the corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed. Except as provided in subsection (6)(c) on or after the Redemption Date, each holder of Series D -13- Preferred and Series E Preferred to be redeemed shall surrender to the corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series D Preferred designated for redemption in the Redemption Notice as holders of Series D Preferred and all rights of the holders of shares of Series E Preferred designated for redemption in the Redemption Notice as holders of Series E Preferred (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the corporation legally available for redemption of shares of Series D Preferred and Series E Preferred on the Redemption Date are insufficient to redeem the total number of shares of Series D Preferred and Series E Preferred to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon such holder's percentage holding of the total number of shares of Series D Preferred and Series E Preferred outstanding immediately prior to the Redemption Date. The shares of Series D Preferred and Series E Preferred not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the corporation are legally available for the redemption of shares of Series D Preferred Stock and Series E Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the corporation has become obliged to redeem on the Redemption Date but which it has not redeemed. (7) Repurchase of Shares. In connection with repurchases by this -------------------- corporation of its Common Stock pursuant to its agreements with certain of the holders thereof, Sections 502 and 503 of the California General Corporation Law shall not apply in whole or in part with respect to such repurchases. (8) No Reissuance of Preferred Stock. No share or shares of -------------------------------- Preferred Stock acquired by the corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the corporation shall be authorized to issue. (C) Common Stock. ------------- (1) Dividend Rights. Subject to the prior rights of holders of all --------------- classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any -14- assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. (2) Liquidation Rights. Upon the liquidation, dissolution or winding ------------------ up of the corporation, the assets of the corporation shall be distributed as provided in Section 2 of Division B of Article III. (3) Voting Rights. The holder of each share of Common Stock shall ------------- have the right to one vote, and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE V The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE VI Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the Corporation. ARTICLE VII (A) To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation or any predecessor to the Corporation. (C) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision." ARTICLE IX -15- The name and mailing address of the incorporator are as follows: Laurel Finch c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 -16- Executed this ___ day of ______, 1999. _______________________________ Laurel Finch, Incorporator -17- EX-3.3 4 AMENDED AND RESTATED CERT. OF INCORP. FOR REVERSE STOCK SPLIT EXHIBIT 3.3 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ORATEC INTERVENTIONS, INC. Kenneth Anstey and Mark B. Weeks hereby certify that: 1. The date of filing the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware is ________, 1999. 2. They are the duly elected and acting President and Secretary, respectively, of ORATEC Interventions, Inc., a Delaware corporation. 3. The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: ARTICLE I "The name of the corporation is ORATEC Interventions, Inc. (the "Corporation"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (A) Classes of Stock. This corporation is authorized to issue two classes ---------------- of stock to be designated, respectively, "Common Stock" and "Preferred Stock." ------------ --------------- The total number of shares which the corporation is authorized to issue is 19,380,000 shares, of which 11,940,000 shares shall be Common Stock and 7,440,000 shares shall be Preferred Stock, each with a par value of $0.001 per share. (B) Rights, Preferences, Privileges and Restrictions of Preferred Stock. ------------------------------------------------------------------- There shall initially be five series of Preferred Stock designated as Series A Preferred Stock ("Series A Preferred"), Series B Preferred Stock ("Series B ------------------ -------- Preferred"), Series C Preferred Stock ("Series C Preferred"), Series D Preferred - --------- ------------------ Stock ("Series D Preferred") and Series E Preferred Stock ("Series E ------------------ -------- Preferred"). The Series A Preferred shall consist of One Hundred Fifty-Six Thousand Two Hundred Fifty (156,250) shares, the Series B Preferred shall consist of Two Million Seventy-Seven Thousand Two Hundred Thirty (2,077,230) shares, the Series C Preferred shall consist of Eight Hundred Eighty-Six Thousand Five Hundred Twenty-Five (886,525) shares, the Series D Preferred shall consist of One Million Nine Hundred Thirty-Seven Thousand One Hundred Forty- Three (1,937,143) shares and the Series E Preferred shall consist of Two Million Three Hundred Eighty-Two Thousand Eight Hundred Fifty-Three (2,382,853) shares. -1- Subject to compliance with applicable protective voting rights which have been or may be granted to Preferred Stock or any series thereof in the corporation's Articles of Incorporation and applicable law ("Protective ---------- Provisions"), the Board of Directors of the Company (the "Board of Directors") - ---------- ------------------ is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof. Subject to compliance with applicable Protective Provisions, the rights, privileges, preferences and restrictions of any such additional series may be subordinate to, pari passu with, or senior to any of those of any present ---- ----- or future class or series of Preferred Stock or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of that series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. The rights, preferences, privileges and restrictions of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred are as follows: (1) Dividends. --------- (a) The holders of outstanding Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends at the rate of (i) $0.13 per share of Series A Preferred per annum, (ii) $0.18 per share of Series B Preferred per annum, (iii) $0.40 per share of Series C Preferred per annum, (iv) $0.48 per share of Series D Preferred per annum and (v) $0.57 per share of Series E Preferred per annum (adjusted in each of the foregoing cases to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations), before any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) is paid on Common Stock. In the event that the amount of the dividends declared by the Board of Directors shall be insufficient to permit payment of the full aforesaid dividends, such dividends will be paid ratably to each holder of the Preferred Stock in proportion to the dividend amounts to which each such holder is entitled. After payment of the full amount of the aforesaid dividends, any additional dividends declared shall be distributed among all holders of Preferred Stock and Common Stock in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Preferred Stock were converted into Common Stock at the then effective Conversion Prices (as defined in Section 3). The right to such dividends on shares of Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. (b) In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 3(d)(iii), then, -2- in each such case for the purpose of this Section 1, the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (2) Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership thereof, (i) the amount of $1.60 per share for each share of Series A Preferred (the "Original Series A Issue Price") ----------------------------- then held by them and, in addition, an amount equal to all declared but unpaid dividends on the Series A Preferred, (ii) the amount of $2.25 per share for each share of Series B Preferred (the "Original Series B Issue Price") then held by ----------------------------- them and, in addition, an amount equal to all declared but unpaid dividends on the Series B Preferred, (iii) the amount of $5.00 per share for each share of Series C Preferred (the "Original Series C Issue Price") then held by them and, ----------------------------- in addition, an amount equal to all declared but unpaid dividends on the Series C Preferred, (iv) the amount of $5.83 per share of Series D Preferred (the "Original Series D Issue Price") then held by them and, in addition, an amount - ------------------------------ equal to all declared but unpaid dividends on the Series D Preferred and (v) the amount of $7.08 per share for each share of Series E Preferred (the "Original -------- Series E Issue Price") then held by them and, in addition, an amount equal to - -------------------- all declared but unpaid dividends on the Series E Preferred (adjusted in each of the foregoing cases to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations). If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amounts for the Preferred Stock, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Preferred Stock in proportion to the preferential amount which each such holder is entitled to receive. (b) Upon the completion of the distribution required by Section 2(a), the remaining assets of the corporation available for distribution to shareholders shall be distributed among the holders of the Series D Preferred, the Series E Preferred and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series D Preferred and such Series E Preferred at the then effective applicable Conversion Price (as defined in Section 3 below)) until (i) with respect to the holders of Series D Preferred, such holders shall have received an aggregate of $17.50 per share of Series D Preferred held, including amounts paid pursuant to Section 2(a) above, and (ii) with respect to the holders of Series E Preferred, such holders shall have received an aggregate of $17.50 per share of Series E Preferred held, including amounts paid pursuant to Section 2(a) above (in each case as adjusted to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations); thereafter, if assets remain in this corporation, the holders of the Common -3- Stock shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each. (c) A merger or consolidation of the corporation with or into any other corporation or corporations in which the corporation is not the surviving entity or the sale, transfer or lease (other than a pledge or grant of a security interest to a bona fide lender) of all or substantially all of the assets of the corporation or any other transaction or series of related transactions in which the corporation's shareholders immediately prior thereto own less than a majority of the voting stock of the corporation (or its successor or parent) immediately thereafter, shall be treated as a liquidation, dissolution or winding up for purposes of this Section 2 and the shareholders of the corporation will be entitled to receive in cash and securities the amount they would have upon liquidation, unless the shareholders of the corporation immediately preceding such merger, consolidation, sale, transfer or lease own more than fifty percent (50%) of the surviving entity. (d) In any of such events, if the consideration received by this corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (A) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or market over the thirty (30)-day period ending three (3) days prior to the closing; (B) If actively traded over-the-counter other than through the Nasdaq National Market, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30)-day period ending three (3) days prior to the closing; and (C) If there is no active public market, the value shall be the fair market value thereof, as determined by the Board of Directors in good faith. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in subsection 2(d)(i)(A), (B) or (C) to reflect the approximate fair market value thereof, as determined by the Board of Directors in good faith. (3) Conversion. The holders of the Preferred Stock shall have ---------- conversion rights as follows (the "Conversion Rights"): ----------------- -4- (a) Right to Convert. Each share of Preferred Stock shall ---------------- be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price for such share by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for Series A Preferred shall be the Original Series A Issue Price, the initial Conversion Price per share for Series B Preferred shall be the Original Series B Issue Price, the initial Conversion Price per share for Series C Preferred shall be the Original Series C Issue Price, the initial Conversion Price per share for the Series D Preferred shall be the Original Series D Issue Price and the initial Conversion Price per share for the Series E Preferred shall be the Original Series E Issue Price; provided, however, that such Conversion Prices shall be subject to adjustment as set forth in subsection 3(d). (b) Automatic Conversion. Each share of Preferred Stock -------------------- shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such share of Preferred Stock immediately upon the earlier of (i) this corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (the "Act"), at a public offering --- price of at least $11.67 per share (adjusted to reflect subsequent stock dividends, stock splits, consolidations or recapitalizations) with gross proceeds to the Company of at least $20,000,000, or (ii) the date specified by written consent or agreement of the holders of (A) a majority of the outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis, and (B) a majority of the outstanding shares of Series D Preferred and Series E Preferred, voting together as a single class on an as-converted basis. (c) Mechanics of Conversion. Before any holder of Preferred ----------------------- Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Act, the conversion shall be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the -5- Common Stock upon conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such offering. (d) Conversion Price Adjustments for Certain Dilutive -------------------------------------------------- Issuances, Splits and Combinations. The Conversion Price of the Preferred Stock - ---------------------------------- shall be subject to adjustment from time to time as follows: (i) (A) If this corporation shall issue, after the date upon which any shares of Series E Preferred were first issued (the "Purchase Date"), any Additional Stock (as defined below) without consideration ------------- or for a consideration per share less than the Conversion Price for any series of Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series of Preferred Stock in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this subsection 3(d)(i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by this corporation for such issuance would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of such Additional Stock; provided that, for the purposes of this subsection 3(d)(i), all shares of Common Stock issuable upon conversion of any outstanding Preferred Stock, options, warrants or convertible securities shall be deemed to be outstanding, and provided further that the fraction used in the above calculation will in no event be greater than one (1). (B) No adjustment of the Conversion Price for any series of Preferred Stock shall be made in an amount less than one cent (.01) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 3(d)(i)(E)(3), 3(d)(i)(E)(4) and 3(d)(iv), no adjustment of the Conversion Price for any series of Preferred Stock pursuant to this subsection 3(d)(i) shall have the effect of increasing the Conversion Price for such series of Preferred Stock above the Conversion Price for such series of Preferred Stock in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be -6- deemed to be the fair value thereof as determined by the Board of Directors in good faith irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(i) and subsection 3(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(i)(C) and (D)), if any, received by this corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by this corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by this corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 3(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights, upon conversion of or in exchange for such convertible or exchangeable securities or upon exercise of options or rights related to such securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of a series of Preferred Stock, to the extent in any way affected by or computed using such options, rights, securities or related options or rights, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights, the conversion or exchange of such securities or the exercise of options or rights related to such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of a series of Preferred Stock, to the extent in any way affected by or computed using such options, rights or -7- securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of ---------------- Common Stock, or securities convertible into or exercisable for Common Stock, either directly or indirectly (including securities deemed to have been issued pursuant to subsection 3(d)(i)(E)) issued by this corporation after the Purchase Date other than: (A) Shares of Common Stock issued or deemed to have been issued pursuant to a transaction described in subsection 3(d)(iii), (B) Shares of Common Stock issued or deemed to have been issued to employees, consultants, or directors of this corporation directly or pursuant to a stock option plan or stock purchase plan or other incentive stock arrangement approved by the Board of Directors of this corporation, (C) Shares of Common Stock issued or deemed to have been issued in connection with bona fide equipment leases, loans or bank financings, or similar financing transactions, the terms of which are approved by the Board of Directors of this corporation, (D) Shares of Common Stock issued or deemed to have been issued in connection with strategic relationships or similar arrangements, the terms of which are approved by a majority of the non-employee disinterested members of the Board of Directors of this corporation, and (E) Shares of Common Stock issued or issuable upon conversion or exercise of convertible or exercisable securities in existence as of the date of filing these Amended and Restated Articles of Incorporation. (iii) In the event this corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock ------------ -8- Equivalents") without payment of any consideration by such holder for the - ----------- additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such split, subdivision, dividend or distribution if no record date is fixed), the Conversion Price of each series of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 3(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for each series of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Recapitalizations. If at any time or from time to time ----------------- there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3 or Section 2) provision shall be made so that the holders of Preferred Stock shall thereafter be entitled to receive upon conversion of such Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (f) No Impairment. This corporation will not, by amendment ------------- of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. (g) No Fractional Shares and Certificate as to Adjustments. ------------------------------------------------------ (i) No fractional shares shall be issued upon the conversion of any share or shares of Preferred Stock, and the number of shares of Common Stock to be issued -9- shall be rounded to the nearest whole share (with one-half being rounded upward). Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, this corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Preferred Stock pursuant to this Section 3, this corporation, at its expense, shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of such Preferred Stock. (h) Reservation of Stock Issuable Upon Conversion. This --------------------------------------------- corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these Amended and Restated Articles of Incorporation. (i) Notices. Any notice required by the provisions of this ------- Section 3 to be given to the holders of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of this corporation. (4) Voting Rights. ------------- (a) Each holder of shares of the Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the vote or consent of shareholders and, except as otherwise required by law, shall have voting rights and powers equal to the voting rights and powers of the Common Stock. The holder of each share of the Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation and shall vote with holders of the Common Stock upon the election of directors -10- and upon any other matter submitted to a vote of shareholders, except in those matters required by law to be submitted to a class vote. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number. (b) (i) So long as at least Six Hundred Thousand (600,000) shares of Series D Preferred shall remain outstanding (adjusted to reflect stock splits, stock dividends and recapitalizations), (A) the holders of Series D Preferred, voting separately as a series, shall have the right to elect one (1) member of the Board of Directors of this corporation (the "Series D -------- Director") and (B) the Series D Director may be removed from the Board of - -------- Directors only by the affirmative vote of the holders of a majority of the Series D Preferred, voting separately as a series. The right of the holders of Series D Preferred to vote for the election of the Series D Director may be exercised at any annual meeting or at any special meeting called for such purpose or at any adjournment thereof. Any election to fill a vacancy in the board seat held by the Series D Director (other than to fill a vacancy created by the removal of the Series D Director) may be by written consent, delivered to the secretary of the corporation, of the holders of a majority of the shares of Series D Preferred outstanding as of the record date of such written consent. (ii) So long as at least Six Hundred Thousand (600,000) shares of Series E Preferred shall remain outstanding (adjusted to reflect stock splits, stock dividends and recapitalizations), (A) the holders of Series E Preferred, voting separately as a series, shall have the right to elect one (1) member of the Board of Directors of this corporation (the "Series E -------- Director") and (B) the Series E Director may be removed from the Board of - -------- Directors only by the affirmative vote of the holders of a majority of the Series E Preferred, voting separately as a Series. The right of the holders of Series E Preferred to vote for the election of the Series E Director may be exercised at any annual meeting or at any special meeting called for such purpose or at any adjournment thereof. Any election to fill a vacancy in the board seat held by the Series E Director (other than to fill a vacancy created by the removal of the Series E Director) may be by written consent, delivered to the secretary of the corporation, of the holders of a majority of the shares of Series E Preferred outstanding as of the record date of such written consent. (iii) In any election of other members of the Board of Directors of this corporation (collectively, the "Other Directors"), the --------------- candidates who receive the highest number of affirmative votes of the shares of Preferred Stock and Common Stock outstanding, voting together as a single class on an as-converted basis, shall be elected, up to the number of directors to be elected by such shares. The Other Directors may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Preferred Stock and Common Stock, voting together as a single class on an as- converted basis. (iv) Each director, and any subsequent director elected pursuant to this paragraph, shall serve as a director until his or her successor is elected and -11- qualified. In the event of a vacancy in respect of any directorship elected by the holders of shares of Series D Preferred pursuant to this subsection 4(b)(i), the holders of a majority of the outstanding shares of Series D Preferred shall have the right to call a special meeting of shareholders, in order that the holders of the Series D Preferred may elect a successor director, at which meeting the holders of Series D Preferred shall be entitled to the same voting rights as provided in the subsection 4(b)(i), or the holders of Series D Preferred may fill such vacancy by written consent, delivered to the secretary of the corporation, of the holders of a majority of all outstanding shares of Series D Preferred outstanding as of the record date of such written consent. In the event of a vacancy in respect of any directorship elected by the holders of shares of Series E Preferred pursuant to subsection 4(b)(ii), the holders of a majority of the outstanding shares of Series E Preferred shall have the right to call a special meeting of shareholders, in order that the holders of the Series E Preferred may elect a successor director, at which meeting the holders of Series E Preferred shall be entitled to the same voting rights as provided in the subsection 4(b)(ii), or the holders of Series E Preferred may fill such vacancy by written consent, delivered to the secretary of the corporation, of the holders of a majority of all outstanding shares of Series E Preferred outstanding as of the record date of such written consent. (5) Protective Provisions. --------------------- (a) So long as any shares of a particular series of Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of such series of Preferred Stock outstanding, voting together as a separate series, (i) adversely alter or change any of the powers, preferences, privileges or rights of such series; (ii) designate or issue any new class or series of shares having preferences superior to such series as to dividends, conversion rights, redemption or liquidation; (iii) increase the designated number of shares of such series; or (iv) amend the provisions of this subsection 5(a). (b) The corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of (i) so long as any shares of Preferred Stock are outstanding, the holders of at least a majority of the total number of outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis and (ii) so long as any shares of Series D Preferred are outstanding, the holders of a majority of the total number of outstanding shares of Series D Preferred Stock, voting together as a single series on an as-converted basis: (x) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of, if the consideration to be received by the shareholders of this corporation in such transaction (determined as provided in subsection 2(d) assuming conversion of all outstanding convertible securities and exercise of all options and warrants by their terms exercisable at the time of such transaction) is less than $9.17 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations); or (y) amend the provisions of this subsection 5(b). Any registered -12- holder of Series D Preferred may proceed to protect and enforce its rights and the rights of any other holders of Series D Preferred Stock with any and all remedies available at law or in equity. (c) So long as any shares of Series E Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of outstanding shares of Series E Preferred, voting together as a single series on an as-converted basis, (i) sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of this corporation is disposed of, if the consideration to be received by the shareholders of this corporation in such transaction (determined as provided in subsection 2(d) assuming conversion of all outstanding convertible securities and exercise of all options and warrants by their terms exercisable at the time of such transaction) is less than $11.67 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations); or (ii) amend the provisions of this subsection 5(c). Any registered holder of Series E Preferred may proceed to protect and enforce its rights and the rights of any other holders of Series E Preferred Stock with any and all remedies available at law or in equity. (6) Redemption of Series D and Series E Preferred Stock. --------------------------------------------------- (a) At the individual option of each holder of shares of Series D Preferred or, in the case of the redemption of any shares of Series E Preferred, upon the vote of at least a majority of the outstanding shares of Series E Preferred (adjusted for stock splits, dividends and the like), the corporation shall redeem, on the fifth (5th) anniversary of the Purchase Date (the "Redemption Date"), the number of shares of Series D and Series E Preferred held - ---------------- by such holder or holders that is specified in a request for redemption delivered to the corporation by the holder or holders on or prior to the thirtieth (30th) day immediately preceding the Redemption Date, by paying in cash therefor the Original Series D Issue Price per share of Series D Preferred to be redeemed by such holder and the Original Series E Issue Price per share of Series E Preferred to be redeemed by such holder (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared but unpaid dividends on such shares (the "Redemption Price"). ---------------- (b) At least fifteen (15) but no more than thirty (30) days prior to the Redemption Date, written notice (the "Redemption Notice") shall be ----------------- mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series D Preferred and Series E Preferred to be redeemed, at the address last shown on the records of the corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to the corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed. Except as provided in subsection (6)(c) on or after the Redemption Date, each holder of Series D -13- Preferred and Series E Preferred to be redeemed shall surrender to the corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series D Preferred designated for redemption in the Redemption Notice as holders of Series D Preferred and all rights of the holders of shares of Series E Preferred designated for redemption in the Redemption Notice as holders of Series E Preferred (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the corporation legally available for redemption of shares of Series D Preferred and Series E Preferred on the Redemption Date are insufficient to redeem the total number of shares of Series D Preferred and Series E Preferred to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon such holder's percentage holding of the total number of shares of Series D Preferred and Series E Preferred outstanding immediately prior to the Redemption Date. The shares of Series D Preferred and Series E Preferred not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the corporation are legally available for the redemption of shares of Series D Preferred Stock and Series E Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the corporation has become obliged to redeem on the Redemption Date but which it has not redeemed. (7) Repurchase of Shares. In connection with repurchases by this -------------------- corporation of its Common Stock pursuant to its agreements with certain of the holders thereof, Sections 502 and 503 of the California General Corporation Law shall not apply in whole or in part with respect to such repurchases. (8) No Reissuance of Preferred Stock. No share or shares of -------------------------------- Preferred Stock acquired by the corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the corporation shall be authorized to issue. (C) Common Stock. ------------- (1) Dividend Rights. Subject to the prior rights of holders of all --------------- classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any -14- assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. (2) Liquidation Rights. Upon the liquidation, dissolution or winding ------------------ up of the corporation, the assets of the corporation shall be distributed as provided in Section 2 of Division B of Article III. (3) Voting Rights. The holder of each share of Common Stock shall ------------- have the right to one vote, and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE V The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE VI Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the Corporation. ARTICLE VII (A) To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation or any predecessor to the Corporation. (C) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision." -15- The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by this Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at __________, California, on ____________________, 1999. _________________________________ Kenneth Anstey President _________________________________ Mark B. Weeks Secretary -16- EX-3.4 5 AMENDED AND RESTATED CERTIF. OF INCORP. (POST-IPO) EXHIBIT 3.4 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ORATEC INTERVENTIONS, INC. Kenneth Anstey and Mark B. Weeks hereby certify that: 1. The date of filing the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware is ________, 1999. 2. They are the duly elected and acting President and Secretary, respectively, of ORATEC Interventions, Inc., a Delaware corporation. 3. The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: ARTICLE I "The name of this corporation is ORATEC Interventions, Inc. (the "Corporation"). ----------- ARTICLE II The address of the registered office of the Corporation in the State of Delaware is: Corporation Trust Company 1209 Orange Street Wilmington, County of New Castle Delaware, 19801 The name of the Corporation's registered agent at said address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (A) Classes of Stock. The Corporation is authorized to issue two classes ---------------- of stock to be designated, respectively, "Common Stock" and "Preferred Stock." ------------ --------------- The total number of shares which the Corporation is authorized to issue is 80,000,000 shares, each with a par value of $0.001 per share. 75,000,000 of such shares shall be Common Stock, and 5,000,000 of such shares shall be Preferred Stock. (B) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Certificate of Incorporation, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors. ARTICLE VI "Listing Event" as used in this Amended and Restated Certificate of ------------- Incorporation shall mean the first annual meeting of stockholders following such time as the Corporation meets the criteria set forth in subdivisions (1), (2) or (3) of Section 2115(c) the California Corporations Code as of the record date of such meeting. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, its directors and its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the occurrence of the Listing Event: (i) The number of directors which shall constitute the entire Board of Directors, and the number of directors in each class, shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. Until changed by a resolution of the Board of Directors, Class I shall consist of three directors, each of whom shall be designated by the Board of Directors; Class II shall consist of three directors, each of whom shall be designated by the Board of Directors; and Class III shall consist of three directors, each of whom shall be designated by the Board of Directors Upon the occurrence of the Listing Event, the terms of office of the Class I directors shall expire, and Class I directors shall be elected for a full term of three years. At the first annual meeting of stockholders following the Listing Event, the term of office of the Class II directors shall expire, and Class II directors shall be elected for a full term of three years. At the second annual meeting of the stockholders following the Listing Event, the term of office of the Class III directors shall expire, and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, -2- directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together ------------ as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. In addition to the requirements of law and any other provisions hereof (and notwithstanding the fact that approval by a lesser vote may be permitted by law or any other provision hereof), the affirmative vote of the holders of at least 66 2/3 percent of the voting power of the then outstanding shares of stock of all classes and all series of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter, repeal, or adopt any provision inconsistent with this Section (i) of this Article VI. (ii) There shall be no right with respect to shares of stock of the Corporation to cumulate votes in the election of directors. (iii) Any director, or the entire Board of Directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of the then-outstanding shares of the Voting Stock, voting together as a single class; or (ii) without cause by the affirmative vote of the holders of at least 66-2/3% of the voting power of the then-outstanding shares of the Voting Stock. ARTICLE VII No action shall be taken by the stockholders of the Corporation other than at an annual or special meeting of the stockholders, upon due notice and in accordance with the provisions of the Corporation's bylaws. ARTICLE VIII The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or -3- hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE IX The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XI The Corporation shall have perpetual existence. ARTICLE XII (A) To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation's stockholders, further reductions in the liability of the Corporation's directors for breach of fiduciary duty, then a director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware, as so amended. (B) Any repeal or modification of the foregoing provisions of this Article XII shall not adversely affect any right or protection of a director of the Corporation with respect to any acts or omissions of such director occurring prior to such repeal or modification. ARTICLE XIII (A) To the fullest extent permitted by applicable law, the Corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) though bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to a corporation, its stockholders, and others. -4- (B) Any repeal or modification of any of the foregoing provisions of this Article XIII shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification." * * * -5- The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by this Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at __________, California, on ____________________, 1999. _________________________________ Kenneth Anstey President _________________________________ Mark B. Weeks Secretary EX-3.5 6 BYLAWS AS AMENDED (CURRENT) EXHIBIT 3.5 BYLAWS OF DORSAMED INCORPORATED TABLE OF CONTENTS Page ---- ARTICLE I - CORPORATE OFFICES................................................ 1 1.1 PRINCIPAL OFFICE.................................................... 1 1.2 OTHER OFFICES....................................................... 1 ARTICLE II - MEETINGS OF SHAREHOLDERS........................................ 1 2.1 PLACE OF MEETINGS................................................... 1 2.2 ANNUAL MEETING...................................................... 1 2.3 SPECIAL MEETING..................................................... 1 2.4 NOTICE OF SHAREHOLDERS' MEETINGS.................................... 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................ 2 2.6 QUORUM.............................................................. 3 2.7 ADJOURNED MEETING; NOTICE........................................... 3 2.8 VOTING.............................................................. 4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT................... 4 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING............ 5 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS........ 6 2.12 PROXIES............................................................ 6 2.13 INSPECTORS OF ELECTION............................................. 7 ARTICLE III - DIRECTORS...................................................... 7 3.1 POWERS.............................................................. 7 3.2 NUMBER OF DIRECTORS................................................. 8 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS............................ 8 3.4 RESIGNATION AND VACANCIES........................................... 8 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................ 9 3.6 REGULAR MEETINGS.................................................... 9 3.7 SPECIAL MEETINGS; NOTICE............................................ 9 3.8 QUORUM.............................................................. 10 3.9 WAIVER OF NOTICE.................................................... 10 3.10 ADJOURNMENT........................................................ 10 3.11 NOTICE OF ADJOURNMENT.............................................. 10 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................. 10 3.13 FEES AND COMPENSATION OF DIRECTORS................................. 11 3.14 APPROVAL OF LOANS TO OFFICERS...................................... 11 ARTICLE IV - COMMITTEES...................................................... 11 4.1 COMMITTEES OF DIRECTORS............................................. 11 4.2 MEETINGS AND ACTION OF COMMITTEES................................... 12 ARTICLE V - OFFICERS......................................................... 12 5.1 OFFICERS............................................................ 12 5.2 ELECTION OF OFFICERS................................................ 12 5.3 SUBORDINATE OFFICERS................................................ 13 5.4 REMOVAL AND RESIGNATION OF OFFICERS................................. 13 5.5 VACANCIES IN OFFICES................................................ 13 5.6 CHAIRMAN OF THE BOARD............................................... 13 5.7 PRESIDENT........................................................... 13 5.8 VICE PRESIDENTS..................................................... 14 5.9 SECRETARY........................................................... 14 5.10 CHIEF FINANCIAL OFFICER............................................ 14 ARTICLE VI - INDEMNIFICATION OF DIRECTORS OFFICERS EMPLOYEES AND OTHER AGENTS.................................... 15 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................... 15 6.2 INDEMNIFICATION OF OTHERS........................................... 15 6.3 PAYMENT OF EXPENSES IN ADVANCE...................................... 15 6.4 INDEMNITY NOT EXCLUSIVE............................................. 16 6.5 INSURANCE INDEMNIFICATION........................................... 16 6.6 CONFLICTS........................................................... 16 ARTICLE VII - RECORDS AND REPORTS............................................ 16 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER........................ 16 7.2 MAINTENANCE AND INSPECTION OF BYLAWS................................ 17 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS............... 17 7.4 INSPECTION BY DIRECTORS............................................. 17 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER............................... 18 7.6 FINANCIAL STATEMENTS................................................ 18 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...................... 19 ARTICLE VIII - GENERAL MATTERS............................................... 19 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING............... 19 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS........................... 19 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.................. 19 8.4 CERTIFICATES FOR SHARES............................................. 20 8.5 LOST CERTIFICATES................................................... 20 8.6 CONSTRUCTION; DEFINITIONS........................................... 20 ARTICLE IX - AMENDMENTS...................................................... 21 9.1 AMENDMENT BY SHAREHOLDERS........................................... 21 9.2 AMENDMENT BY DIRECTORS.............................................. 21 BYLAWS ------ OF -- DORSAMED INCORPORATED --------------------- ARTICLE I CORPORATE OFFICES ----------------- 1.1 PRINCIPAL OFFICE ---------------- The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES ------------- The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS ------------------------ 2.1 PLACE OF MEETINGS ----------------- Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING -------------- The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the second Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING --------------- A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS -------------------------------- All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE -------------------------------------------- Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders' meeting, or (iv) by telegraphic or other -2- written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM ------ The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE ------------------------- Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At -3- any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING ------ The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT ------------------------------------------------- The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, -4- either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------------- Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," -5- pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS ----------------------------------------------------------- For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES ------- Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy -6- shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION ---------------------- Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS --------- 3.1 POWERS ------ Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the -7- outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS ------------------- The number of directors of the corporation shall be not less than four (4) nor more than seven (7). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1)./1/ No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS ---------------------------------------- Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES ------------------------- Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. ________________ /1/ This section 3.2 reflects the Bylaws as most recently amended by the Certificate of Amendment of Bylaws dated October 6, 1997. -8- A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ---------------------------------------- Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS ---------------- Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS; NOTICE ------------------------ Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate -9- it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM ------ A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE ---------------- Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT ----------- A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT --------------------- Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------- Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a -10- unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS ---------------------------------- Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS* ----------------------------- The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS ----------------------- The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; ________________________ * This section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code. -11- (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS -------- 5.1 OFFICERS -------- The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS -------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. -12- 5.3 SUBORDINATE OFFICERS -------------------- The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES -------------------- A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD --------------------- The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT --------- Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence or non- existence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. -13- 5.8 VICE PRESIDENTS --------------- In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and -14- shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS ------------------------------------------------------------------ 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS ------------------------- The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE ------------------------------ Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. -15- 6.4 INDEMNITY NOT EXCLUSIVE ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 6.5 INSURANCE INDEMNIFICATION ------------------------- The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.6 CONFLICTS --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER -------------------------------------------- The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the -16- corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS ------------------------------------ The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS ----------------------------------------------------- The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS ----------------------- Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and -17- each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER ------------------------------------- The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS -------------------- If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. -18- 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS ---------------------------------------------- The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS --------------- 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING ----------------------------------------------------- For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS ----------------------------------------- From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED -------------------------------------------------- The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the -19- corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES ----------------------- A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. -20- ARTICLE IX AMENDMENTS ---------- 9.1 AMENDMENT BY SHAREHOLDERS ------------------------- New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS ---------------------- Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors. -21- CERTIFICATE OF ADOPTION OF BYLAWS OF DORSAMED INCORPORATED Adoption by Incorporator ------------------------ The undersigned person appointed in the Articles of Incorporation to act as the Incorporator of DorsaMed Incorporated hereby adopts the foregoing bylaws, comprising twenty-five (25) pages, as the Bylaws of the corporation. Executed this 27th day of May 1993. /s/ J. Casey McGlynn __________________________________ J. Casey McGlynn, Incorporator Certificate by Secretary of Adoption by Incorporator ---------------------------------------------------- The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of DorsaMed Incorporated and that the foregoing Bylaws, comprising twenty-five (25) pages, were adopted as the Bylaws of the corporation on May 27, 1993, by the person appointed in the Articles of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 27th day of May 1993. /s/ J. Casey McGlynn __________________________________ J. Casey McGlynn, Secretary -22- EX-3.6 7 BYLAWS FOR REINCORPORATION IN DELAWARE (PROPOSED) EXHIBIT 3.6 BYLAWS OF ORATEC INTERVENTIONS, INC. (a Delaware Company) TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES..................................................... 1 1.1 Registered Office........................................................ 1 1.2 Other Offices............................................................ 1 ARTICLE II - MEETINGS OF STOCKHOLDERS............................................. 1 2.1 Place Of Meetings........................................................ 1 2.2 Annual Meeting........................................................... 1 2.3 Special Meeting.......................................................... 1 2.4 Notice Of Stockholders' Meetings......................................... 2 2.5 Manner Of Giving Notice; Affidavit Of Notice............................. 2 2.6 Quorum................................................................... 2 2.7 Adjourned Meeting; Notice................................................ 2 2.8 Conduct Of Business...................................................... 3 2.9 Voting................................................................... 3 2.10 Waiver Of Notice........................................................ 3 2.11 Stockholder Action By Written Consent Without A Meeting................. 3 2.12 Record Date For Stockholder Notice; Voting; Giving Consents............. 4 2.13 Proxies................................................................. 4 ARTICLE III - DIRECTORS........................................................... 5 3.1 Powers................................................................... 5 3.2 Number Of Directors...................................................... 5 3.3 Election, Qualification And Term Of Office Of Directors.................. 5 3.4 Resignation And Vacancies................................................ 5 3.5 Place Of Meetings; Meetings By Telephone................................. 6 3.6 Regular Meetings......................................................... 6 3.7 Special Meetings; Notice................................................. 7 3.8 Quorum................................................................... 7 3.9 Waiver Of Notice......................................................... 7 3.10 Board Action By Written Consent Without A Meeting....................... 8 3.11 Fees And Compensation Of Directors...................................... 8 3.12 Approval Of Loans To Officers........................................... 8 3.13 Removal Of Directors.................................................... 8 3.14 Chairman Of The Board Of Directors...................................... 8 ARTICLE IV - COMMITTEES........................................................... 9 4.1 Committees Of Directors.................................................. 9 4.2 Committee Minutes........................................................ 9 4.3 Meetings And Action Of Committees........................................ 9
TABLE OF CONTENTS (continued)
Page ---- ARTICLE V - OFFICERS.............................................................. 10 5.1 Officers................................................................. 10 5.2 Appointment Of Officers.................................................. 10 5.3 Subordinate Officers..................................................... 10 5.4 Removal And Resignation Of Officers...................................... 10 5.5 Vacancies In Offices..................................................... 10 5.6 Chief Executive Officer.................................................. 11 5.7 President................................................................ 11 5.8 Vice Presidents.......................................................... 11 5.9 Secretary................................................................ 11 5.10 Chief Financial Officer................................................. 12 5.11 Representation Of Shares Of Other Corporations.......................... 12 5.12 Authority And Duties Of Officers........................................ 12 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.. 13 6.1 Indemnification Of Directors And Officers................................ 13 6.2 Indemnification Of Others................................................ 13 6.3 Payment Of Expenses In Advance........................................... 13 6.4 Indemnity Not Exclusive.................................................. 13 6.5 Insurance................................................................ 14 6.6 Conflicts................................................................ 14 ARTICLE VII - RECORDS AND REPORTS................................................. 14 7.1 Maintenance And Inspection Of Records.................................... 14 7.2 Inspection By Directors.................................................. 15 7.3 Annual Statement To Stockholders......................................... 15 ARTICLE VIII - GENERAL MATTERS.................................................... 15 8.1 Checks................................................................... 15 8.2 Execution Of Corporate Contracts And Instruments......................... 15 8.3 Stock Certificates; Partly Paid Shares................................... 15 8.4 Special Designation On Certificates...................................... 16 8.5 Lost Certificates........................................................ 16 8.6 Construction; Definitions................................................ 17 8.7 Dividends................................................................ 17 8.8 Fiscal Year.............................................................. 17 8.9 Seal..................................................................... 17 8.10 Transfer Of Stock....................................................... 17
-3- TABLE OF CONTENTS (continued)
Page ---- 8.11 Stock Transfer Agreements............................................... 18 8.12 Registered Stockholders................................................. 18 ARTICLE IX - AMENDMENTS........................................................... 18
-4- BYLAWS OF ORATEC INTERVENTIONS, INC. (a Delaware Company) ARTICLE I CORPORATE OFFICES ----------------- 1.1 Registered Office. ----------------- The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 Other Offices. ------------- The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ 2.1 Place Of Meetings. ----------------- Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 Annual Meeting. -------------- The annual meeting of stockholders shall be held on such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors each year. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 Special Meeting. --------------- A special meeting of the stockholders may be called at any time by the Board of Directors, the chairman of the board, the president or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting. If a special meeting is called by any person or persons other than the Board of Directors, the president or the chairman of the board, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty- five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. 2.4 Notice Of Stockholders' Meetings. -------------------------------- All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 Manner Of Giving Notice; Affidavit Of Notice. -------------------------------------------- Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 Quorum. ------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 Adjourned Meeting; Notice. ------------------------- When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof -2- are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 Conduct Of Business. ------------------- The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. 2.9 Voting. ------ The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 Waiver Of Notice. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.11 Stockholder Action By Written Consent Without A Meeting. ------------------------------------------------------- Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. -3- Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.12 Record Date For Stockholder Notice; Voting; Giving Consents. ----------------------------------------------------------- In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is delivered to the corporation. (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.13 Proxies. ------- Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed -4- signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS --------- 3.1 Powers. ------ Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 Number Of Directors. ------------------- Upon the adoption of these bylaws, the number of directors constituting the entire Board of Directors shall be seven (7). Thereafter, this number may be changed by a resolution of the Board of Directors or of the stockholders, subject to Section 3.4 of these Bylaws. No reduction of the authorized number of directors shall have the effect of removing any director before such director's term of office expires. 3.3 Election, Qualification And Term Of Office Of Directors. ------------------------------------------------------- Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 Resignation And Vacancies. ------------------------- Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these Bylaws: -5- (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 Place Of Meetings; Meetings By Telephone. ---------------------------------------- The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 Regular Meetings. ---------------- Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. -6- 3.7 Special Meetings; Notice. ------------------------ Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 Quorum. ------ At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 Waiver Of Notice. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. -7- 3.10 Board Action By Written Consent Without A Meeting. ------------------------------------------------- Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 Fees And Compensation Of Directors. ---------------------------------- Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.12 Approval Of Loans To Officers. ----------------------------- The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 Removal Of Directors. -------------------- Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 Chairman Of The Board Of Directors. ---------------------------------- The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. -8- ARTICLE IV COMMITTEES ---------- 4.1 Committees Of Directors. ----------------------- The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate 1 or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these Bylaws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by this chapter to be submitted to stockholders for approval or (ii) adopting, amending or repealing any Bylaw of the corporation. 4.2 Committee Minutes. ----------------- Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 Meetings And Action Of Committees. --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. -9- ARTICLE V OFFICERS -------- 5.1 Officers. -------- The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, a chief executive officer, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 Appointment Of Officers. ----------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 Subordinate Officers. -------------------- The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 Removal And Resignation Of Officers. ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the Secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 Vacancies In Offices. -------------------- Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. -10- 5.6 Chief Executive Officer. ----------------------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation (if such an officer is appointed) shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. 5.7 President. --------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 Vice Presidents. --------------- In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 Secretary. --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. -11- The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 Chief Financial Officer. ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the bylaws. 5.11 Representation Of Shares Of Other Corporations. ---------------------------------------------- The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 Authority And Duties Of Officers. -------------------------------- In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. -12- ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS ------------------------------------------------------------------- 6.1 Indemnification Of Directors And Officers. ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (a) who is or was a director or officer of the corporation, (b) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 Indemnification Of Others. ------------------------- The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the corporation, (b) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 Payment Of Expenses In Advance. ------------------------------ Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 Indemnity Not Exclusive. ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, -13- agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation 6.5 Insurance. --------- The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 Conflicts. --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 Maintenance And Inspection Of Records. ------------------------------------- The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, -14- the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 Inspection By Directors. ----------------------- Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 Annual Statement To Stockholders. -------------------------------- The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS --------------- 8.1 Checks. ------ From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 Execution Of Corporate Contracts And Instruments. ------------------------------------------------ The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 Stock Certificates; Partly Paid Shares. -------------------------------------- The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of -15- any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 Special Designation On Certificates. ----------------------------------- If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 Lost Certificates. ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or -16- destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 Construction; Definitions. ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 Dividends. --------- The directors of the corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 Fiscal Year. ----------- The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. 8.9 Seal. ---- The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 Transfer Of Stock. ----------------- Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. -17- 8.11 Stock Transfer Agreements. ------------------------- The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 Registered Stockholders. ----------------------- The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS ---------- The Bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -18- CERTIFICATE OF ADOPTION OF BYLAWS OF ORATEC INTERVENTIONS, INC. ADOPTION BY INCORPORATOR ------------------------ The undersigned person appointed in the certificate of incorporation to act as the Incorporator of ORATEC Interventions, Inc. hereby adopts the foregoing bylaws as the Bylaws of the corporation. Executed this _____ day of ____________________. _______________________________________ Laurel Finch, Incorporator CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR ---------------------------------------------------- The undersigned hereby certifies that the undersigned is the duly elected, qualified, and acting Secretary of ORATEC Interventions, Inc. and that the foregoing Bylaws were adopted as the Bylaws of the corporation on _____________, 1999 by the person appointed in the certificate of incorporation to act as the Incorporator of the corporation. Executed this _____ day of ______________________. _______________________________________ Mark B. Weeks, Secretary EX-3.7 8 AMENDED AND RESTATED BYLAWS (POST IPO) Exhibit 3.7 AMENDED AND RESTATED BYLAWS OF ORATEC INTERVENTIONS, INC. -1- TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES..................................................... 3 1.1 Registered Office........................................................ 3 1.2 Other Offices............................................................ 3 ARTICLE II - MEETINGS OF STOCKHOLDERS............................................. 3 2.1 Place Of Meetings........................................................ 3 2.2 Annual Meeting........................................................... 1 2.3 Special Meeting.......................................................... 3 2.4 Notice of Shareholder's Meeting; Affidavit Of Notice..................... 3 2.5 Advance Notice of Stockholder Nominees................................... 3 2.6 Quorum................................................................... 4 2.7 Adjourned Meeting; Notice................................................ 4 2.8 Conduct Of Business...................................................... 4 2.9 Voting................................................................... 5 2.10 Waiver Of Notice........................................................ 5 2.11 Record Date For Stockholder Notice; Voting.............................. 5 2.12 Proxies................................................................. 6 ARTICLE III - DIRECTOR............................................................ 6 3.1 Powers................................................................... 6 3.2 Number Of Directors...................................................... 6 3.3 Election, Qualification And Term Of Office Of Directors.................. 6 3.4 Resignation And Vacancies................................................ 6 3.5 Place Of Meetings; Meetings By Telephone................................. 7 3.6 Regular Meetings......................................................... 8 3.7 Special Meetings; Notice................................................. 8 3.8 Quorum................................................................... 8 3.9 Waiver Of Notice......................................................... 8 3.10 Board Action By Written Consent Without A Meeting....................... 9 3.11 Fees And Compensation Of Directors...................................... 9 3.12 Approval Of Loans To Officers........................................... 9 3.13 Removal Of Directors.................................................... 9 3.14 Chairman Of The Board Of Directors...................................... 10 ARTICLE IV - COMMITTEES........................................................... 10 4.1 Committees Of Directors.................................................. 10 4.2 Committee Minutes........................................................ 10 4.3 Meetings And Action Of Committees........................................ 11 ARTICLE V - OFFICERS.............................................................. 13 5.1 Officers................................................................. 13
-i- 5.2 Appointment Of Officers.................................................. 13 5.3 Subordinate Officers..................................................... 13 5.4 Removal And Resignation Of Officers...................................... 14 5.5 Vacancies In Offices..................................................... 12 5.6 Chief Executive Officer.................................................. 14 5.7 President................................................................ 14 5.8 Vice Presidents.......................................................... 13 5.9 Secretary................................................................ 13 5.10 Chief Financial Officer................................................. 15 5.11 Representation Of Shares Of Other Corporations.......................... 15 5.12 Authority And Duties Of Officers........................................ 16 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.. 16 6.1 Indemnification Of Directors And Officers................................ 16 6.2 Indemnification Of Others................................................ 16 6.3 Payment Of Expenses In Advance........................................... 17 6.4 Indemnity Not Exclusive.................................................. 17 6.5 Insurance................................................................ 17 6.6 Conflicts................................................................ 17 ARTICLE VII - RECORDS AND REPORTS................................................. 18 7.1 Maintenance And Inspection Of Records.................................... 18 7.2 Inspection By Directors.................................................. 18 7.3 Annual Statement To Stockholders......................................... 18 ARTICLE VIII - GENERAL MATTERS.................................................... 18 8.1 Checks................................................................... 18 8.2 Execution Of Corporate Contracts And Instruments......................... 19 8.3 Stock Certificates; Partly Paid Shares................................... 19 8.4 Special Designation On Certificates...................................... 19 8.5 Lost Certificates........................................................ 20 8.6 Construction; Definitions................................................ 20 8.7 Dividends................................................................ 20 8.8 Fiscal Year.............................................................. 20 8.9 Seal..................................................................... 21 8.10 Transfer Of Stock....................................................... 21 8.11 Stock Transfer Agreements............................................... 21 8.12 Registered Stockholders................................................. 21 ARTICLE IX - AMENDMENTS........................................................... 21
-ii- AMENDED AND RESTATED BYLAWS OF ORATEC INTERVENTIONS, INC. ARTICLE I CORPORATE OFFICES ----------------- 1.1 Registered Office. ----------------- The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware, County of New Castle, 19801. The name of its registered agent at such address is The Corporation Trust Company. 1.2 Other Offices. ------------- The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ 2.1 Place Of Meetings. ----------------- Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 Annual Meeting. -------------- (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. (b) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the corporation's notice with respect to such meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 2.2, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 2.2. (c) In addition to the requirements of Section 2.5, for nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of this Section 2.2, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such business must be a proper matter for stockholder action under the General Corporation Law of Delaware. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not less than twenty (20) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days prior to or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the twentieth (20th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (B) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (d) Only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.2. The chairman of the meeting shall determine whether a nomination or any business proposed to be transacted by the stockholders has been properly brought before the meeting and, if any proposed nomination or business has not been properly brought before the meeting, the chairman shall declare that such proposed business or nomination shall not be presented for stockholder action at the meeting. (e) For purposes of this Section 2.2, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service. (f) Nothing in this Section 2.2 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. -4- 2.3 Special Meeting. --------------- (a) A special meeting of the stockholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president. (b) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be selected pursuant to such notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in Section 2.5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 2.5. 2.4 Notice of Stockholder's Meetings; Affidavit Of Notice. ----------------------------------------------------- All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with this Section 2.4 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting (or such longer or shorter time as is required by Section 2.5 of these Bylaws, if applicable). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.5 Advance Notice of Stockholder Nominees. -------------------------------------- Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than sixty (60) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re- election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are -5- beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 Quorum. ------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 Adjourned Meeting; Notice. ------------------------- When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 Conduct Of Business. ------------------- The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. -6- 2.9 Voting. ------ (a) The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). (b) Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 Waiver Of Notice. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.11 Record Date For Stockholder Notice; Voting. ------------------------------------------ In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -7- 2.12 Proxies. ------- Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS --------- 3.1 Powers. ------ Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 Number Of Directors. ------------------- The number of directors constituting the entire Board of Directors shall be seven (7). 3.3 Election, Qualification And Term Of Office Of Directors. ------------------------------------------------------- Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 Resignation And Vacancies. ------------------------- Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold -8- office as provided in this section in the filling of other vacancies. A vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the quorum. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the certificate of incorporation or these Bylaws: (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 Place Of Meetings; Meetings By Telephone. ---------------------------------------- The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in -9- the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 Regular Meetings. ---------------- Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 Special Meetings; Notice. ------------------------ Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 Quorum. ------ At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 Waiver Of Notice. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall -10- constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 Board Action By Written Consent Without A Meeting. ------------------------------------------------- Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 Fees And Compensation Of Directors. ---------------------------------- Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.12 Approval Of Loans To Officers. ----------------------------- The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 Removal Of Directors. -------------------- Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. -11- No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 Chairman Of The Board Of Directors. ---------------------------------- The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES ---------- 4.1 Committees Of Directors. ----------------------- The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (d) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (e) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 Committee Minutes. ----------------- -12- Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 Meetings And Action Of Committees. --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS -------- 5.1 Officers. -------- The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 Appointment Of Officers. ----------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 Subordinate Officers. -------------------- The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. -13- 5.4 Removal And Resignation Of Officers. ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the Secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 Vacancies In Offices. -------------------- Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. 5.6 Chief Executive Officer. ----------------------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.7 President. --------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 Vice Presidents. --------------- In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the -14- president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 Secretary. --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 Chief Financial Officer. ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 5.11 Representation Of Shares Of Other Corporations. ---------------------------------------------- -15- The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 Authority And Duties Of Officers. -------------------------------- In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS ------------------------------------------------------------------- 6.1 Indemnification Of Directors And Officers. ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (a) who is or was a director or officer of the corporation, (b) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 Indemnification Of Others. ------------------------- The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the corporation, (b) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an -16- employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 Payment Of Expenses In Advance. ------------------------------ Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 Indemnity Not Exclusive. ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation 6.5 Insurance. --------- The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 Conflicts. --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -17- ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 Maintenance And Inspection Of Records. ------------------------------------- The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 Inspection By Directors. ----------------------- Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 Annual Statement To Stockholders. -------------------------------- The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS --------------- 8.1 Checks. ------ From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, -18- notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 Execution Of Corporate Contracts And Instruments. ------------------------------------------------ The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 Stock Certificates; Partly Paid Shares. -------------------------------------- The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice- president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 Special Designation On Certificates. ----------------------------------- If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full -19- or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 Lost Certificates. ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 Construction; Definitions. ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 Dividends. --------- The directors of the corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 Fiscal Year. ----------- The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. -20- 8.9 Seal. ---- The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 Transfer Of Stock. ----------------- Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 Stock Transfer Agreements. ------------------------- The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 Registered Stockholders. ----------------------- The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS ---------- The Bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -21- EX-10.1 9 AMENDED AND RESTATED INVESTORS' RIGHTS AGMT. EXHIBIT 10.1 ORATEC INTERVENTIONS, INC. ______________________________________________________________________________ AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ______________________________________________________________________________ December 7, 1998 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ---------------------------------------------- THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Agreement") is --------- entered into as of the 7th day of December, 1998, by and among Oratec Interventions, Inc., a California corporation (the "Company"), the holders of ------- the Company's securities listed on Exhibit A hereto (the "Existing Investors"), --------- ------------------ the holders of warrants to purchase shares of Preferred Stock listed on Exhibit ------- A hereto (the "Warrant Holders") and the holders of the Company's securities - - --------------- listed on Exhibit B hereto (the "New Investors," and collectively with the --------- ------------- Existing Investors and the Warrant Holders, the "Investors"). --------- RECITAL The Company and the Existing Investors entered into an Amended and Restated Investor Rights Agreement dated as of November 26, 1997 (the "Prior Rights ------------ Agreement"). - --------- The Company and certain of the Existing Investors and the New Investors are parties to a Series E Preferred Stock Purchase Agreement of even date herewith (the "Series E Purchaser Agreement"), pursuant to which the Company will sell ---------------------------- and issue to such Investors shares of the Company's Series E Preferred Stock (the "Series E Preferred Stock"). ------------------------ The Company has issued warrants to purchase shares of Preferred Stock (the "Warrants") to certain entities and wishes to grant certain registration rights -------- to the Warrant Holders. The Company and the undersigned Existing Investors, who hold a majority of the "Registrable Securities" (as such term is defined in the Prior Rights ---------------------- Agreement), wish to amend and restate the Prior Rights Agreement in its entirety in accordance with Section 3.7 of the Prior Rights Agreement on the terms and conditions set forth in this Agreement in order to include the New Investors and the shares of Series E Preferred Stock, and the Warrant Holders and the Warrant Shares hereunder. AGREEMENT SECTION 1 Restrictions on Transferability; -------------------------------- Registration Rights ------------------- 1.1 Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any ---------- other federal agency at the time administering the Securities Act. "Conversion Shares" means the Common Stock issued or issuable upon ----------------- conversion of the Securities. "Holder" shall mean any Investor holding Registrable Securities and ------ any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 1.14 hereof. The terms "register," "registered" and "registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the --------------------- Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any regular or special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "Registrable Securities" means (i) the Conversion Shares; and (ii) any ---------------------- Common Stock of the Company issued or issuable in respect of the Conversion Shares or other securities issued or issuable with respect to the Conversion Shares upon any stock split, stock dividend, recapitalization, or similar event, or any Common Stock otherwise issued or issuable with respect to the Conversion Shares; provided, however, that shares of Common Stock or other securities shall -------- ------- only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale. "Restricted Securities" shall mean the securities of the Company --------------------- required to bear the legend set forth in Section 1.3 of this Agreement. "Securities" shall mean (i) shares of the Company's Series A Preferred ---------- Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock held by the Investors as of the date hereof, (ii) shares of the Company's Series B Preferred Stock, Series C Preferred Stock and Series E Preferred Stock issuable upon exercise of warrants (the "Warrant ------- Shares") held by certain Investors as of the date hereof, provided that the - ------ -------- Warrant Shares shall only be considered "Securities" and the holders of Warrant Shares shall only be considered as "Holders" for the purposes of Sections 1.1, 1.2, 1.3, 1.4, 1.6, 1.7, 1.8, 1.9, 1.10, 1.11, 1.12, 1.13, 1.14, 1.15, 1.16 and Section 3 of this Agreement, and (iii) shares of Series E Preferred Stock issued or issuable to persons or entities that become parties to this Agreement pursuant to Section 3.7. "Securities Act" shall mean the Securities Act of 1933, as amended, or -------------- any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. -2- "Selling Expenses" shall mean all underwriting discounts, selling ---------------- commissions and stock transfer taxes applicable to the securities registered by the Holders and all fees and disbursements of counsel for the Holders (except as provided by Section 1.8). 1.2 Restrictions. The Securities and the Conversion Shares shall not be ------------ sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. The Investors will cause any proposed purchaser, assignee, transferee or pledgee of the Securities and the Conversion Shares to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. 1.3 Restrictive Legend. Each certificate representing (i) the Securities, ------------------ (ii) the Conversion Shares and (iii) any other securities issued in respect of the securities referenced in clauses (i) and (ii) upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 1.4 below) be stamped or otherwise imprinted with legends in the following form (in addition to any legend required under applicable state securities laws): "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT." "THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY." Each Investor and Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer established in this Section 1. 1.4 Notice of Proposed Transfers. The holder of each certificate ---------------------------- representing Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 1. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied at such holder's expense by either (i) an unqualified written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory -3- to the Company, addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. The Company will not require such a legal opinion or "no action" letter (a) in any transaction in compliance with Rule 144, (b) in any transaction in which an Investor which is a corporation distributes Restricted Securities solely to its majority-owned subsidiaries or affiliates for no consideration, or (c) in any transaction in which an Investor which is a partnership distributes Restricted Securities solely to partners or retired partners thereof for no consideration, provided that each transferee agrees in writing to be subject to the terms of this Section 1.4. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 1.3 above, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act. The Company shall be required to promptly reissue unlegended certificates at the request of any holder thereof if the Holder shall have obtained an opinion of counsel who shall be, and whose legal opinion shall be, reasonably acceptable to the Company, at such Holder's expense, to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. Notwithstanding the foregoing, a legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 1.5 Requested Registration. ---------------------- (a) Request for Registration. In case the Company shall receive from ------------------------ Holders of at least forty percent (40%) of the Registrable Securities a written request that the Company effect any registration, qualification or compliance of the Registrable Securities, the anticipated aggregate offering price to the public of which would exceed $5,000,000, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky law or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after receipt of such written -4- notice from the Company by any Holder; provided, however, that the Company shall -------- ------- not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 1.5: (1) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (2) Prior to the earlier of December __ , 2000 or six (6) months following the bona fide firm commitment underwritten (by an underwriter of nationally recognized standing) initial public offering of the Company's Common Stock pursuant to an effective registration statement under the Securities Act; (3) If at the time of the request to register Registrable Securities the Company gives notice within thirty (30) days of such request that it is engaged or has fixed plans to engage within ninety (90) days of the time of the request in a bona fide firm commitment underwritten public offering of its Common Stock pursuant to an effective registration statement under the Securities Act; (4) After the Company has effected two (2) such registrations pursuant to this subparagraph 1.5(a), such registrations have been declared or ordered effective and the securities offered pursuant to such registrations have been sold; or (5) If the Company shall furnish to such Holders a certificate, signed by the President of the Company, stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for registration statements to be filed in the near future, then the Company's obligation to use it best efforts to register, qualify or comply under this Section 1.5 shall be deferred for up to one (1) period, not to exceed one hundred twenty (120) days each from the date of receipt of written request from the Holders, in any twelve (12) month period. Subject to the foregoing clauses (1) through (5), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. (b) Underwriting. In the event that a registration pursuant to ------------ Section 1.5 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 1.5(a)(i). The right of any Holder to registration pursuant to Section 1.5 shall be conditioned upon such Holder's participation in the underwriting arrangements required by Section 1.5 and the inclusion of such Holder's Registrable Securities in the underwriting, to the extent requested and to the extent provided in this Agreement. The Company shall (together with all Holders) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by majority in interest of the Holders requesting such registration (which managing underwriter -5- shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 1.5, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration. The Company shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all such Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. If any Holder disapproves of the terms of any such underwriting, he or she may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 180 days after the effective date of the registration statement relating thereto. 1.6 Company Registration. -------------------- (a) Notice of Registration. If at any time or from time to time, the ---------------------- Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Commission Rule 145 transaction, the Company will: (i) give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved in such registration, all the Registrable Securities specified in a written request or requests made within twenty (20) days after receipt of such written notice from the Company by any Holder. (b) Underwriting. If the registration of which the Company gives ------------ notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the written notice given pursuant to Section 1.6(a)(i). In such event, the right of any Holder to registration pursuant to Section 1.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company (or the Holders who have demanded such registration). Notwithstanding any other provision of this Section 1.6, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration provided, however, that, except in the case of the initial public offering of the Company's Common Stock pursuant to a registration statement under the Securities Act (where securities (including Registrable Securities) to be included in such registration by the Company's shareholders (including the Holders) may be excluded entirely if the managing underwriter determines that marketing factors require a -6- limitation of the number of shares to be underwritten), the aggregate value of securities (including Registrable Securities) to be included in such registration by the Company's shareholders (including the Holders) may not be so reduced to less than thirty percent (30%) of the total value of all securities included in such registration. The Company shall so advise all Holders, and the number of shares Registrable Securities that may be included in the registration and underwriting shall be allocated among all such Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 180 days after the effective date of the registration statement relating thereto. (c) Right to Terminate Registration. The Company shall have the right ------------------------------- to terminate or withdraw any registration initiated by it under this Section 1.6 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. 1.7 Registration on Form S-3. ------------------------ (a) If Holders of at least thirty percent (30%) of the Registrable Securities then outstanding request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities, the reasonably anticipated aggregate price to the public of which would exceed $1,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form; provided, -------- however, that the Company shall not be required to effect more than two (2) - ------- registrations, and provided, further, that the Company shall not be required to -------- ------- pay Registration Expenses incurred in connection with more than one (1) registration pursuant to this Section 1.7 in any twelve (12) month period. The Company will (i) promptly give written notice of the proposed registration to all other Holders, and (ii) as soon as practicable, use its best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after receipt of such written notice from the Company. (b) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 1.7: (i) in any particular jurisdiction in which the Company -7- would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act, (ii) during the period starting with the date sixty (60) days prior to the filing of, and ending on a date six (6) months following the effective date of, a registration statement (other than with respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not appropriate for the registration of Registrable Securities), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective, or (iii) if the Company shall furnish to such Holder a certificate signed by the president of the Company stating that, in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company or its shareholders for registration statements to be filed in the near future, then the Company's obligation to register, qualify or comply under this Section 1.7 shall be deferred for up to one (1) period, not to exceed one hundred twenty (120) days each from the receipt of the request to file such registration by such Holder or Holders, in any twelve (12) month period. 1.8 Expenses of Registration. Subject to the limitation set forth in ------------------------ Section 1.7, all Registration Expenses incurred in connection with any registration pursuant to Sections 1.5, 1.6 and 1.7 and the reasonable cost of one (1) special legal counsel to represent all of the Holders together in any such registration shall be borne by the Company. Unless otherwise stated, all other Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of the registered securities included in such registration pro rata on the basis of the number of shares so registered. 1.9 Registration Procedures. In the case of each registration, ----------------------- qualification or compliance effected by the Company pursuant to this Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred eighty (180) days or until the distribution described in the registration statement has been completed; (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (c) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for such period as any seller of Registrable Securities pursuant to such registration statement shall request and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered -8- by such registration statement in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; (d) use commercially reasonable efforts to register or qualify the Registrable Securities covered by such registration statement under such other securities or "blue sky" laws of such jurisdictions as any sellers of Registrable Securities or any managing underwriter, if any, shall reasonably request, and do any and all other acts and things which may be reasonably necessary or advisable to enable such sellers or underwriter, if any, to consummate the disposition of the Registrable Securities in such jurisdictions, except that in no event shall the Company be required to qualify to do business as a foreign corporation in any jurisdiction where it would not, but for the requirements of this paragraph (d), be required to be so qualified, to subject itself to taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction; (e) promptly notify each Holder selling Registrable Securities covered by such registration statement and each managing underwriter, if any: (i) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement related thereto or post-effective amendment to the registration statement has been filed and, with respect to the registration statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC or state securities authority for amendments or supplements to the registration statement or the prospectus related thereto or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation of any proceeding for such purpose; and (v) of the existence of any fact of which the Company becomes aware which results in the registration statement, the prospectus related thereto or any document incorporated therein by reference containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not misleading; and, if the notification relates to an event described in clause (v), the Company shall promptly prepare and furnish to each such seller and each underwriter, if any, a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which they were made not misleading; (f) comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, as soon as reasonably practicable after the effective date of the registration statement (and in any event within sixteen (16) months thereafter), an earnings statement (which need not be audited) covering the period of at least twelve consecutive months beginning with the first day of the Company's first calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; -9- (g) (i) cause all such Registrable Securities covered by such registration statement to be listed on the principal securities exchange on which similar securities issued by the Company are then listed (if any), if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) if no similar securities are then so listed, to either cause all such Registrable Securities to be listed on a national securities exchange or to secure designation of all such Registrable Securities as a National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") ------ "national market system security" within the meaning of Rule 11Aa2-1 of the ------------------------------- Exchange Act or, failing that, secure NASDAQ authorization for such shares and, without limiting the generality of the foregoing, take all actions that may be required by the Company as the issuer of such Registrable Securities in order to facilitate the managing underwriter's arranging for the registration of at least two (2) market makers as such with respect to such shares with the National Association of Securities Dealers, Inc. (the "NASD"); ---- (h) provide and cause to be maintained a transfer agent and registrar for all such Registrable Securities covered by such registration statement not later than the effective date of such registration statement; (i) enter into such customary agreements (including, if applicable, an underwriting agreement) and take such other actions as the Holders of a majority of the Registrable Securities participating in such offering shall reasonably request in order to expedite or facilitate the disposition of such Registrable Securities. The Holders of the Registrable Securities which are to be distributed by such underwriters shall be parties to such underwriting agreement; (j) obtain an opinion from the Company's counsel in customary form and covering such matters as are customarily covered by such opinions delivered to underwriters in underwritten public offerings, which opinion shall be reasonably satisfactory to the underwriter, if any, and furnish to each Holder participating in the offering and to each underwriter, if any, a copy of such opinion addressed to such Holder or underwriter; (k) deliver promptly to each Holder participating in the offering and each underwriter, if any, copies of all correspondence between the SEC and the Company, its counsel or auditors and all memoranda relating to discussions with the SEC or its staff with respect to the registration statement, other than those portions of any such memoranda which contain information subject to attorney-client privilege with respect to the Company, and, upon receipt of such confidentiality agreements as the Company may reasonably request, make reasonably available for inspection by any seller of such Registrable Securities covered by such registration statement, by any underwriter, if any, participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause all of the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; -10- (l) use commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement; (m) provide a CUSIP number for all Registrable Securities, not later than the effective date of the registration statement; (n) make reasonably available its employees and personnel and otherwise provide reasonable assistance to the underwriters (taking into account the needs of the Company's businesses and the requirements of the marketing process) in the marketing of Registrable Securities in any underwritten offering; (o) promptly after the filing of any document which is to be incorporated by reference into the registration statement or the prospectus (after the initial filing of such registration statement) provide copies of such document to counsel for the selling holders of Registrable Securities and to each managing underwriter, if any, and make the Company's representatives reasonably available for discussion of such document and make such changes in such document; (p) furnish to each Holder participating in the offering and the managing underwriter, without charge, at least one signed copy of the registration statement and any post-effective amendments thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (q) cooperate with the selling Holders of Registrable Securities and the managing underwriter, if any, to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing the Registrable Securities to be sold, and cause such Registrable Securities to be issued in such denominations and registered in such names in accordance with the underwriting agreement prior to any sale of Registrable Securities to the underwriters or, if not an underwritten offering, in accordance with the instructions of the selling Holders of Registrable Securities at least three business days prior to any sale of Registrable Securities and instruct any transfer agent and registrar of Registrable Securities to release any stop transfer orders in respect thereto; and (r) take all such other commercially reasonable actions as are necessary or advisable in order to expedite or facilitate the disposition of such Registrable Securities. 1.10 Indemnification. --------------- (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities, joint or several (or actions or proceedings in respect thereof) ("Claims"), including any of the foregoing incurred in ------ settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue -11- statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any federal or state securities law, rule or regulation applicable to the Company, and relating to action required of or inaction by the Company, in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses as reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and, only out of the net proceeds received by such Holder from the offering of the securities covered by such a registration statement, will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses as reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. In no event shall any indemnity under this Section 1.10(b) exceed the net proceeds from the offering received by such Holder. (c) Each party entitled to indemnification under this Section 1.10 (the "Indemnified Party") shall give notice to the party required to provide ----------------- indemnification (the "Indemnifying Party") promptly after such Indemnified Party ------------------ has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved -12- by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that (i) if the Indemnifying Party fails to take reasonable steps necessary to defend diligently the action or proceeding within twenty (20) days after receiving notice from such Indemnified Party; or (ii) if such Indemnified Party who is a defendant in any action or proceeding which is also brought against the Indemnifying Party reasonably shall have concluded that there may be one or more legal defenses available to such Indemnified Party which are not available to the Indemnifying Party; or (iii) if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct, then, in any such case, the Indemnified Party shall have the right to assume or continue its own defense as set forth above (but with no more than one firm of counsel for all Indemnified Parties in each jurisdiction), and the Indemnifying Party shall be liable for any expenses therefor. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action. No settlement of any such claim, loss, damage, liability or action shall be made by the Indemnified Party without the prior written consent of the Indemnifying Party (such consent to not be unreasonably withheld). No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If for any reason the foregoing indemnity is unavailable or is insufficient to hold harmless an Indemnified Party under Sections 1.10(a) or (b), then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of any Claim in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party, on the one hand, and the Indemnified Party, on the other hand, with respect to such offering of securities. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. If, however, the allocation provided in the second preceding sentence is not permitted by applicable law, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party in such proportion as is appropriate to reflect not only such relative faults but also the relative benefits of the Indemnifying Party and the Indemnified Party as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 1.10(d) were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentences of this Section 1.10(d). The amount paid or payable in respect of any Claim shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such Claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding anything in this Section 1.10(d) to the contrary, no -13- Indemnifying Party (other than the Company) shall be required pursuant to this Section 1.10(d) to contribute any amount in excess of the net proceeds received by such indemnifying party from the sale of Registrable Securities in the offering to which the Claims of the Indemnified Parties relate, less the amount of any indemnification payment made by such Indemnifying Party pursuant to Section 1.10(b). (e) The indemnification and contribution agreements contained herein shall be in addition to any other rights to indemnification or contribution which any Indemnified Party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any Indemnified Party and shall survive the transfer of the Registrable Securities by any such party. (f) The indemnification and contribution required by this Section 1.10 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 1.11 Information by Holder. The Holder or Holders of Registrable --------------------- Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 1. 1.12. Limitations on Subsequent Registration Rights; No Inconsistent -------------------------------------------------------------- Agreements. Without the prior written consent of the Holders of a majority of - ---------- the Registrable Securities, the Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights, the terms of which are more favorable than the registration rights granted to the Holders thereunder. The Company further agrees that if any other registration rights agreement entered into after the date of this Agreement with respect to any of its securities contains terms which are more favorable to, or less restrictive on, the other party thereto than the terms and conditions in this Agreement are (insofar as they are applicable) to the Holders, then the terms and conditions of this Agreement shall immediately be deemed to have been amended without further action by the Company or any of the Holders of Registrable Securities so that the Holders shall be entitled to the benefit of any such more favorable or less restrictive terms or conditions. 1.13 Rule 144 Reporting. With a view to making available the benefits of ------------------ certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"); ------------ -14- (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) So long as an Investor owns any Restricted Securities, to furnish to the Investor forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information as an Investor may reasonably request in availing itself of any rule or regulation of the Commission allowing an Investor to sell any such securities without registration. 1.14 Transfer of Registration Rights. The rights to cause the Company to ------------------------------- register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities by an Investor (together with any affiliate); provided, that (a) such transfer may -------- otherwise be effected in accordance with applicable securities laws, (b) notice of such assignment is given to the Company, and (c) such transferee or assignee (i) is a wholly-owned subsidiary or constituent partners (including limited partners) of such Investor, or (ii) acquires from such Investor the lesser of (A) 100,000 or more shares of Restricted Securities (as appropriately adjusted for stock splits, stock dividends and the like) or (B) all of the Restricted Securities then owned by such Investor. 1.15 Standoff Agreement. Each Holder agrees in connection with any ------------------ registration of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days from the effective date of such registration in the case the initial public offering of the Company's Common Stock pursuant to a registration statement under the Securities Act and ninety (90) days in any subsequent offering) as may be requested by the Company or such managing underwriters; provided, that (a) the officers and directors of the Company who -------- own stock of the Company (and "affiliates" and "associates" thereof (as such terms are defined in Rule 12b 2 under the Exchange Act) agree to such restrictions, and (b) the Company has used commercially reasonable efforts to cause shareholders holding over 200,000 shares of Common Stock or Common Stock equivalents to agree to such restrictions. 1.16 Termination of Rights. The rights of any particular Holder to cause --------------------- the Company to register securities under Sections 1.5, 1.6 and 1.7 shall terminate with respect to such Holder (i) five (5) years following a bona fide firm underwritten public offering of shares of the Company's Common Stock registered under the Securities Act, (ii) with respect to any Holder, at such time as such Holder is able to dispose of all its Registrable Securities in one three (3)-month -15- period pursuant to the provisions of Rule 144; or (iii) with respect to any Holder, at such time as such Holder holds Registrable Securities constituting less than one percent (1%) of the outstanding voting stock of the Company. SECTION 2 Affirmative Covenants of the Company The Company hereby covenants and agrees as follows: 2.1 Financial Information. As long as a Holder holds at least 500,000 --------------------- shares of the Securities (as adjusted for stock splits, stock dividends and the like), the Company will mail the following reports to such Holder: (a) As soon as practicable after the end of each fiscal year, and in any event within ninety (90) days thereafter, audited consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and audited consolidated statements of income, audited consolidated statements of changes in financial position and audited consolidated statements of shareholders' equity of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of recognized national standing selected by the Company. (b) As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company and in any event within forty-five (45) days thereafter, an unaudited consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and unaudited consolidated statements of income, unaudited consolidated statements of cash flow and unaudited consolidated statements of shareholders' equity of the Company and its subsidiaries, if any, for such period and for the current fiscal year to date, and comparisons to budget and the corresponding prior year period, prepared in accordance with generally accepted accounting principles (other than for accompanying notes and subject to normal year-end audit adjustments), all in reasonable detail. (c) As soon as practicable after the end of each month (other than the last month of a fiscal quarter) and in any event within forty-five (45) days after the end of each such month through November 30, 1998 and within thirty (30) days after the end of each such month thereafter, an unaudited consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such month, and unaudited consolidated statements of income, unaudited consolidated statements of cash flow and unaudited consolidated statements of shareholders' equity of the Company and its subsidiaries, if any, for such month and for the current fiscal year to date, and comparisons to budget and the corresponding prior year period, prepared in accordance with generally accepted accounting principles (other than for accompanying notes and subject to normal year-end audit adjustments), all in reasonable detail. -16- (d) As soon as practicable, but in any event not less than thirty (30) days nor more than ninety (90) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets and sources and applications of funds statements for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company. (e) Contemporaneously with delivery to holders of Common Stock, a copy of each report of the Company delivered to holders of the Company's Common Stock. 2.2 Subsidiaries. If for any period the Company shall have any subsidiary ------------ or subsidiaries whose accounts are consolidated with those of the Company, then, in respect of such period, the financial statements and information delivered pursuant to the foregoing Section 2.1 shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries. 2.3 Access to Records. ----------------- (a) Each Holder shall have access to the Company's books, records and properties for purposes reasonably related to such Holder's interests as a shareholder. (b) The Company shall afford each Holder of at least 500,000 shares of Series D Preferred Stock and/or Series E Preferred Stock (a "Major Holder"), ------------ and their employees, counsel and other authorized representatives full access, during normal business hours, upon reasonable advance notice, with due regard to its ongoing operations, to the assets, properties, plants, offices, warehouses and other facilities, contracts and books and records of the Company, and to the outside auditors of the Company and their work papers relating thereto, in each case, as the Major Holders may from time to time reasonably request. The Major Holders and their representatives shall be entitled to consult with the representatives, officers, employees and accountants of the Company with respect to the Company, and the Company will instruct such persons to cooperate with the Major Holders. The Company shall permit representatives of the Major Holders to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the principal officers of the Company, all at such reasonable times, upon reasonable notice and as often as the Major Holders may reasonably request; provided, however, that neither the Board of Directors nor the officers of the Company shall be under any obligation pursuant to this Section 2.3 to take any action with respect to any proposals made or advice furnished by the Major Holders in their capacities as shareholders of the Company, other than to take such proposals or advice seriously and give due consideration thereto. (c) The Company agrees to furnish to each Major Holder, within ten (10) business days of any Major Holder's request, a capitalization table setting forth the class, series of each class, the name of the holder of each class or series thereof, and the number of shares held by each such holder. 2.4 System of Accounting. The books of account and other financial and -------------------- corporate records of the Company shall be maintained in accordance with good business and accounting -17- practices and the financial condition of the Company shall be accurately reflected in the financial statements required to be provided to the Major Holders under the terms of this Agreement. 2.5 Transfer of Information Rights. The information rights set forth in ------------------------------ Section 2.1 and 2.3 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment or assignment of Registrable Securities by an Investor (together with an affiliate) (which acceptance shall not be unreasonably withheld); provided, that (a) such -------- transfer may otherwise be effected in accordance with applicable securities laws, (b) notice of such assignment is given to the Company, and (c) such transferee or assignee (i) is a wholly-owned subsidiary or constituent partner (including limited partners) of such Investor, or (ii) acquires from such Investor the lesser of (A) 100,000 or more shares of Registered Securities (500,000 shares of Series D Preferred Stock and/or Series E Preferred Stock in the case of a transfer of rights pursuant to Section 2.3(b)) as appropriately adjusted for stock splits, stock dividends and the like or (B) all of the Restricted Securities then owned by such Investor. In the event that the Company reasonably determines that provision of information to a transferee pursuant to this Section 2.5 would materially adversely affect its proprietary position, such information may be edited in the manner necessary to avoid such effect. 2.6 Right to Maintain Interest. Subject to the terms and conditions -------------------------- specified in this Section 2.6, the Company hereby grants to each Major Holder a right to maintain the percentage ownership interest of such Major Holder in the Company with respect to future sales by the Company of any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Shares"), such that each time the Company proposes to offer ------ Shares, the Company shall first make an offering of such Shares to each Major Holder in accordance with the following provisions: (a) The Company shall deliver a notice by certified mail ("Notice") ------ to each Major Holder stating the aggregate number of such Shares to be offered and the price and terms upon which it proposes to offer such Shares. (b) Within twenty (20) days after delivery of the Notice, each Major Holder may elect to purchase at the price and on the terms specified in the Notice, up to such number of Shares equal to (x) the total number of Shares being offered, multiplied by (y) a fraction, the numerator of which equals the total number of shares of Common Stock issued and held, or issuable upon conversion or exercise of all convertible or exercisable securities (including shares of Common Stock issuable upon conversion of convertible securities issuable upon exercise of outstanding warrants) then held by such Major Holder, and the denominator of which equals the total number of shares of Common Stock of the Company then outstanding (assuming full conversion and exercise of all then outstanding convertible or exercisable securities and conversion of all convertible securities issuable upon exercise of outstanding warrants). (c) The Company may, during the ninety (90)-day period following the expiration of the period provided in Section 2.6(b), offer the remaining unsubscribed portion of -18- the Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. (d) The right to maintain interest set forth in this Section 2.6 shall not be applicable to: (i) Shares issued or deemed to have been issued pursuant to a split, subdivision or recapitalization of the outstanding shares of Common Stock, or a payment in respect of outstanding shares of Common Stock of a dividend of Common Stock or securities or rights convertible into Common Stock; (ii) Shares issued or deemed to have been issued to employees, consultants or directors of the Company directly or pursuant to a stock option plan or stock purchase plan or other stock incentive arrangement approved by the Company's Board of Directors; (iii) Shares issued or deemed to have been issued in connection with bona fide equipment lease financings or similar financing transactions, the terms of which are approved by the Company's Board of Directors, or warrants (and the shares issuable upon exercise of such warrants) to purchase up to 122,353 shares of Series E Preferred Stock in connection with the subordinated debt financing with Transamerica that has been approved by the Company's Board of Directors prior to the date of this Agreement; (iv) Shares issued or deemed to have been issued in connection with strategic relationships or similar transactions, the terms of which are approved by a majority of the non-employee disinterested members of the Company's Board of Directors; (v) Shares issued or deemed to have been issued upon conversion of Preferred Stock; or (vi) Shares issued in connection with a public offering of the Company's securities pursuant to a registration statement under the Securities Act. 2.7 Effectiveness and Termination of Covenants. The covenants set ------------------------------------------ forth in this Section 2 shall terminate on and be of no further force or effect upon the earlier of (i) the consummation of the Company's sale of shares of its Common Stock in an underwritten public offering pursuant to an effective registration statement filed under the Securities Act or (ii) the registration by the Company of a class of its equity securities under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, or (iii) upon the consummation of an acquisition of the Company in one or a series of related transactions in which the shareholders of the Company immediately prior thereto own less than 50% of the voting stock of the Company (or its successor or parent) thereafter, and pursuant to which a Public Market exists for the Company's capital stock (or other stock issued in exchange therefore). For the purpose of this Agreement, a "Public Market" shall be deemed to exist if: (i) such stock is listed on a ------------- national securities exchange (as that term is used in the 1934 Act or (ii) such stock is traded on the over-the-counter market and prices are published daily on business days in a recognized financial journal. -19- SECTION 3 Miscellaneous ------------- 3.1 Assignment. Except as otherwise provided in this Agreement, the terms ---------- and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties to this Agreement. 3.2 Third Parties. Nothing in this Agreement, express or implied, is ------------- intended to confer upon any party, other than the parties to this Agreement, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.3 Governing Law. This Agreement shall be governed by and construed ------------- under the laws of the State of California in the United States of America. 3.4 Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.5 Notices. Any notice required or permitted by this Agreement shall be ------- in writing and shall be sent by prepaid registered or certified mail, return receipt requested, or otherwise delivered by hand or by messenger addressed to the other party at the address shown on the signature page to the Series E Preferred Stock Purchase Agreement of even date herewith or at such other address for which such party gives notice under this Agreement. Such notice shall be deemed to have been given when delivered if delivered personally, by overnight courier, or by facsimile transmission (as evidenced by the sender's confirmation receipt), or, if sent by mail, at the earlier of its receipt or three (3) days after deposit in the mail. Any notice to the Company shall be given as follows: Oratec Interventions, Inc. 3700 Haven Court Menlo Park, CA 94025 Telephone: (650) 369-9904 Facsimile: (650) 369-9905 Attention: President with a copy to: Venture Law Group A Professional Corporation 2775 Sand Hill Road Menlo Park, CA 94025 Telephone: (650) 854-4488 Facsimile: (650) 233-8386 -20- Attn.: Mark B. Weeks 3.6 Severability. If one or more provisions of this Agreement are held to ------------ be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms. 3.7 Amendment and Waiver. Any provision of this Agreement may be amended -------------------- or waived with the written consent of the Company and the Holders of at least a majority of the outstanding shares of the Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of Registrable Securities and the Company. In addition, the Company may waive performance of any obligation owing to it, as to some or all of the Holders of Registrable Securities, or agree to accept alternatives to such performance, without obtaining the consent of any Holder of Registrable Securities. In the event that an underwriting agreement is entered into, and such underwriting agreement contains terms differing from this Agreement, as to any such Holder the terms of such underwriting agreement shall govern. In the event of the issuance of (a) additional shares of Series E Preferred Stock permitted to be sold pursuant to the Series E Preferred Stock Purchase Agreement of even date herewith, or (b) warrants to purchase additional shares of Series E Preferred Stock in connection with bona fide equipment lease or bank financings, subordinated debt financings or similar financing transactions, the terms of which are approved by the Board of Directors of the Company, the holders of such shares or warrants may become parties to this Agreement, without any further action by the Holders, by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed to be "Holders" for all ------- purposes of this Agreement as of the date of execution and delivery of such counterpart signature page. In the case of such an issuance, upon execution and delivery of an additional counterpart signature page by any such person or entity, the Company shall add such person or entity's name to Exhibit B hereto. --------- 3.8 Effect of Amendment or Waiver. The Investors and their successors and ----------------------------- assigns acknowledge that by the operation of Section 3.7 of this Agreement the holders of a majority of the outstanding Registrable Securities, acting in conjunction with the Company, will have the right and power to diminish or eliminate any or all rights or increase any or all obligations pursuant to this Agreement. 3.9 Rights of Holders. Each holder of Registrable Securities shall have ----------------- the absolute right to exercise or refrain from exercising any right or rights that such holder may have by reason of this Agreement, including, without limitation, the right to consent to the waiver or modification of any obligation under this Agreement, and such holder shall not incur any liability to any other holder of any securities of the Company as a result of exercising or refraining from exercising any such right or rights. 3.10 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default -21- be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 3.11 Termination of Prior Rights Agreement. Pursuant to Section 3.7 of ------------------------------------- the Prior Rights Agreement, the Company and the undersigned Existing Investors, being the holders of the requisite majority of the outstanding Registrable Securities (as defined in the Prior Rights Agreement), hereby amend and restate the Prior Rights Agreement to read in its entirety as set forth in this Agreement. 3.12 Waiver of Right to Maintain Interest; Termination of Certain ------------------------------------------------------------ Covenants in Series D Purchase Agreement. Pursuant to Section 14.8 of the - ---------------------------------------- Series D Preferred Stock Purchase Agreement dated November 26, 1997 between the Company and certain of the Existing Investors (the "Series D Purchase ----------------- Agreement"), the Company and the undersigned holders of a majority of the shares - --------- of Series D Preferred Stock, being the holders of the requisite majority of the shares of Stock (as defined in the Series D Purchase Agreement) needed to amend the Series D Purchase Agreement, do hereby (i) waive the Right to Maintain Interest contained in Section 7.18 of the Series D Purchase Agreement (including notice requirements) with respect to the issuance of the shares of Series E Preferred Stock pursuant to the Series E Purchase Agreement, and (ii) terminate Sections 7.1, 7.2, 7.3, 7.4 and 7.18 of the Series D Purchase Agreement. -22- IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Investor Rights Agreement as of the day and year first above written. COMPANY: ORATEC INTERVENTIONS, INC., a California corporation By: /s/ Kenneth Anstey --------------------------------- Title: President ------------------------------ WARRANTHOLDERS: ____________________________________ (Warrantholder Name - Please print) By:_________________________________ (Signature) Title:______________________________ (if any) EXISTING INVESTORS: ____________________________________ (Investor Name - Please print) By:_________________________________ (Signature) Title:______________________________ (if any) NEW INVESTORS: ____________________________________ (Investor Name - Please print) By:_________________________________ (Signature) Title:______________________________ (if any) EXHIBIT A EXISTING INVESTORS
- ------------------------------------------------------------------------------------------------------- First Name Last Name or Entity Name Type of Stock - ------------------------------------------------------------------------------------------------------- Michael Dillingham Series A - ------------------------------------------------------------------------------------------------------- Gary Fanton Series A - ------------------------------------------------------------------------------------------------------- Michael Franz Series A - ------------------------------------------------------------------------------------------------------- Hartzler, Geoffrey, Trustee of the Geoffrey Hartzler Revocable Trust dated 1/8/97, as amended Series A - ------------------------------------------------------------------------------------------------------- Alan Johnson Series A - ------------------------------------------------------------------------------------------------------- Stephen Marcus Series A - ------------------------------------------------------------------------------------------------------- Jeffrey Saal Series A - ------------------------------------------------------------------------------------------------------- Joel Saal Series A - ------------------------------------------------------------------------------------------------------- Greg Barrett Series B - ------------------------------------------------------------------------------------------------------- David Birnbach Series B - ------------------------------------------------------------------------------------------------------- Randy Birnbach Series B - ------------------------------------------------------------------------------------------------------- Scott Blumenthal Series B - ------------------------------------------------------------------------------------------------------- Smith Barney IRA Custodian FBO Jeffrey I. Bragman Series B - ------------------------------------------------------------------------------------------------------- Steve Caria Series B - ------------------------------------------------------------------------------------------------------- Chris Casscells Series B - ------------------------------------------------------------------------------------------------------- CN Investment Partners, L.P. Series B - ------------------------------------------------------------------------------------------------------- Mike Crocker Series B - ------------------------------------------------------------------------------------------------------- Norma Crocker Series B - ------------------------------------------------------------------------------------------------------- Delphi BioInvestments III, L.P. Series B - ------------------------------------------------------------------------------------------------------- Delphi Ventures III, L.P. Series B - ------------------------------------------------------------------------------------------------------- Michael Dillingham Series B - ------------------------------------------------------------------------------------------------------- David Jr., M.D. Drez Series B - ------------------------------------------------------------------------------------------------------- William Elting Series B - ------------------------------------------------------------------------------------------------------- Peter W. & Mary R. Fanton Series B - ------------------------------------------------------------------------------------------------------- Gary Fanton Series B - ------------------------------------------------------------------------------------------------------- Vincent and Marjorie Fanton Series B - ------------------------------------------------------------------------------------------------------- Michael Franz Series B - ------------------------------------------------------------------------------------------------------- Michael Franz Series B - ------------------------------------------------------------------------------------------------------- Lesley Gimbel Series B - ------------------------------------------------------------------------------------------------------- Lesley and Barry Gimbel, JTWROS Series B - ------------------------------------------------------------------------------------------------------- Richard Goode Series B - ------------------------------------------------------------------------------------------------------- Fred and Eleanor Goren Series B - ------------------------------------------------------------------------------------------------------- Ralph Grant Series B - ------------------------------------------------------------------------------------------------------- Jean Johnson Series B - ------------------------------------------------------------------------------------------------------- Jonathan Krass Series B - ------------------------------------------------------------------------------------------------------- Krass, Jonathan G. Krass and Stephanie M. Bryan, Tenants in Common Series B - ------------------------------------------------------------------------------------------------------- Krass, Jonathan G. Krass, custodian for Rebecca May Krass Series B - ------------------------------------------------------------------------------------------------------- Krass, Jonathan G. Krass, custodian for Daniel Gould Krass Series B - ------------------------------------------------------------------------------------------------------- Joseph Lagatutta Series B - ------------------------------------------------------------------------------------------------------- Richard Mastaloni Series B - ------------------------------------------------------------------------------------------------------- R. Hardwin Mead Series B - ------------------------------------------------------------------------------------------------------- Munkdale, Steve Munkdale (IRA Account) Account #568-63873-16 Smith Barney Series B - ------------------------------------------------------------------------------------------------------- Robert and Janet Paul Series B - ------------------------------------------------------------------------------------------------------- Peloza, John, H., P.A. Profit Sharing Plan & Trust, #101 Series B - ------------------------------------------------------------------------------------------------------- Richard Randall Series B - -------------------------------------------------------------------------------------------------------
EXHIBIT A EXISTING INVESTORS
- --------------------------------------------------------------------------------------------------------------- First Name Last Name or Entity Name Type of Stock - --------------------------------------------------------------------------------------------------------------- ???? and Carolyn Ross, JTWROS Series B - --------------------------------------------------------------------------------------------------------------- Bruce Saal Series B - --------------------------------------------------------------------------------------------------------------- Jeffrey Saal Series B - --------------------------------------------------------------------------------------------------------------- Jeffrey Saal Series B - --------------------------------------------------------------------------------------------------------------- Joel Saal Series B - --------------------------------------------------------------------------------------------------------------- Saal, Laura, TTEE, Laura P. Saal Living Trust Series B - --------------------------------------------------------------------------------------------------------------- Sable, Ltd. Series B - --------------------------------------------------------------------------------------------------------------- Sharkey, Hugh, Custondia for Zoe Alexandr Sharkey under the CA Uniform Transfers to Minors Act til 21 Series B - --------------------------------------------------------------------------------------------------------------- Sharkey, Hugh, Custondia for Zoe Alexandr Sharkey under the CA Uniform Transfers to Minors Act til 21 Series B - --------------------------------------------------------------------------------------------------------------- Sharkey, Hugh, R. and Kathleen A. Daly, Trustees of the Sharkey- Daly Family Trust U/D/T dated 9-23-96 Series B - --------------------------------------------------------------------------------------------------------------- Six C's Investment Corp. Series B - --------------------------------------------------------------------------------------------------------------- C. Thomas Vangness Series B - --------------------------------------------------------------------------------------------------------------- Venrock Associates Series B - --------------------------------------------------------------------------------------------------------------- Venrock Associates II, L.P. Series B - --------------------------------------------------------------------------------------------------------------- Micheline Yuan Series B - --------------------------------------------------------------------------------------------------------------- James Zimmerman Series B - --------------------------------------------------------------------------------------------------------------- Douglas Zipes Series B - --------------------------------------------------------------------------------------------------------------- Mary Jo Anstey Series C - --------------------------------------------------------------------------------------------------------------- David & Meleah Arnold Series C - --------------------------------------------------------------------------------------------------------------- John Ashley Series C - --------------------------------------------------------------------------------------------------------------- Atherton Venture Fund I, LLC Series C - --------------------------------------------------------------------------------------------------------------- Bruce Benedick Series C - --------------------------------------------------------------------------------------------------------------- Alan Beyer Series C - --------------------------------------------------------------------------------------------------------------- Thomas Biesheuvel Series C - --------------------------------------------------------------------------------------------------------------- Biesheuvel, Thomas R. Biesheuvel Trustee of Karl W. Bowen Rodkey Trust Series C - --------------------------------------------------------------------------------------------------------------- David Birnbach Series C - --------------------------------------------------------------------------------------------------------------- Bovee, The Bovee 1984 Trust DTD 11-24-84 FBO Alexander & Matthew Saal Series C - --------------------------------------------------------------------------------------------------------------- Ann Bowers Series C - --------------------------------------------------------------------------------------------------------------- David Bradley Series C - --------------------------------------------------------------------------------------------------------------- Burks, Robert Burks Trust Series C - --------------------------------------------------------------------------------------------------------------- Dudley Burwell Series C - --------------------------------------------------------------------------------------------------------------- Kenneth Caldwell Series C - --------------------------------------------------------------------------------------------------------------- Cardiovascular Medicine & Cardiac Arrhythmias Profit Sharing Plan FBO Roger Winkle Series C - --------------------------------------------------------------------------------------------------------------- Cardiovascular Medicine & Cardiac Arrhythmia FBO: Edward Anderson Series C - --------------------------------------------------------------------------------------------------------------- David Chao Series C - --------------------------------------------------------------------------------------------------------------- Mark Curtis Series C - --------------------------------------------------------------------------------------------------------------- Kathleen Daly Series C - --------------------------------------------------------------------------------------------------------------- DB Futures Series C - --------------------------------------------------------------------------------------------------------------- Christine DeCaria Series C - --------------------------------------------------------------------------------------------------------------- DeLee Ltd. Series C - --------------------------------------------------------------------------------------------------------------- Eric and Kyung-Hee Doelling Series C - ---------------------------------------------------------------------------------------------------------------
EXHIBIT A EXISTING INVESTORS
- --------------------------------------------------------------------------------------------------------------- First Name Last Name or Entity Name Type of Stock - --------------------------------------------------------------------------------------------------------------- David Drez, Jr., M.D. Series C - --------------------------------------------------------------------------------------------------------------- John Dunning Series C - --------------------------------------------------------------------------------------------------------------- William Elting Series C - --------------------------------------------------------------------------------------------------------------- Dieter Enzman Series C - --------------------------------------------------------------------------------------------------------------- Robert Eppley Series C - --------------------------------------------------------------------------------------------------------------- Wade Faerber Series C - --------------------------------------------------------------------------------------------------------------- Peter W. and Mary R. Fanton, JTWROS Series C - --------------------------------------------------------------------------------------------------------------- Vincent and Marjorie Fanton Series C - --------------------------------------------------------------------------------------------------------------- Gary Fanton Series C - --------------------------------------------------------------------------------------------------------------- Fitzwilson, Robert C. Fitzwilson Trust U/A DTD 6/24/87 Series C - --------------------------------------------------------------------------------------------------------------- Michael Franz Series C - --------------------------------------------------------------------------------------------------------------- Fred and Eleanor Goren, JTWROS Series C - --------------------------------------------------------------------------------------------------------------- GBP Partners Series c - --------------------------------------------------------------------------------------------------------------- James Goode Series C - --------------------------------------------------------------------------------------------------------------- Richard Goode Series C - --------------------------------------------------------------------------------------------------------------- Alan M. and Kathleen E. Smith Goodman JTWROS Series C - --------------------------------------------------------------------------------------------------------------- William Gow Series C - --------------------------------------------------------------------------------------------------------------- Robert Gray, Jr. Series c - --------------------------------------------------------------------------------------------------------------- Dean Greenberg Series C - --------------------------------------------------------------------------------------------------------------- Jerry M. and Susan G. Harris Series C - --------------------------------------------------------------------------------------------------------------- Hess, Gabriela Hess Trust UAD 11/30/94, Mark Milani Ttee Series C - --------------------------------------------------------------------------------------------------------------- Hess, Verena Hess Trust UAD 11/30/94, Mark Milani Tttee Series C - --------------------------------------------------------------------------------------------------------------- Stephen Hochschuler Series C - --------------------------------------------------------------------------------------------------------------- Harold Hohbach Series C - --------------------------------------------------------------------------------------------------------------- Douglas Huntington Series C - --------------------------------------------------------------------------------------------------------------- Jackson, Susan Jackson Trust U/A DTD 9/15/89 Series C - --------------------------------------------------------------------------------------------------------------- Jean Johnson Series C - --------------------------------------------------------------------------------------------------------------- Linda Kan Series C - --------------------------------------------------------------------------------------------------------------- Raj Kapany Series C - --------------------------------------------------------------------------------------------------------------- Patricia Kelleher Series C - --------------------------------------------------------------------------------------------------------------- Michael Kimball Series C - --------------------------------------------------------------------------------------------------------------- Byron King Series C - --------------------------------------------------------------------------------------------------------------- Michele Klein Series C - --------------------------------------------------------------------------------------------------------------- Howard and Susan Jeffries Klevens, JTWROS Series C - --------------------------------------------------------------------------------------------------------------- Theodore Klint Series C - --------------------------------------------------------------------------------------------------------------- Klint Family Trust U/A DTD 2/1/93 Series C - --------------------------------------------------------------------------------------------------------------- Kevin Knight Series C - --------------------------------------------------------------------------------------------------------------- Franklin Koenig Series C - --------------------------------------------------------------------------------------------------------------- Patrick Kraft Series C - --------------------------------------------------------------------------------------------------------------- Jonathan Krass Series C - --------------------------------------------------------------------------------------------------------------- Jonathan Krass Series C - --------------------------------------------------------------------------------------------------------------- Jonathan Krass Series C - --------------------------------------------------------------------------------------------------------------- Jonathan Krass Series C - --------------------------------------------------------------------------------------------------------------- Krass, Jonathan G. Krass and Stephanie M. Bryan, Tenants in Common Series C - --------------------------------------------------------------------------------------------------------------- Krass, Jonathan G. Krass, custodian for Rebecca May Krass Series C - ---------------------------------------------------------------------------------------------------------------
EXHIBIT A EXISTING INVESTORS
- ---------------------------------------------------------------------------------------------------------------- First Name Last Name or Entity Name Type of Stock - ---------------------------------------------------------------------------------------------------------------- Krass, Jonathan G. Krass, custodian for Daniel Gould Krass Series C - ---------------------------------------------------------------------------------------------------------------- Krass, Jonathan G. Krass, Smith Barney Inc. Rollover Custodian, Acct #565-68067-1-7-017 Series C - ---------------------------------------------------------------------------------------------------------------- Mordecai Kurz Series C - ---------------------------------------------------------------------------------------------------------------- Kurz, Mordecai Kurz and Linda C. Kurz, Trustees of the Kurz Trust of 8/17/1987 Series C - ---------------------------------------------------------------------------------------------------------------- Mordecai Kurz, Guardian for David M. Kurz Series C - ---------------------------------------------------------------------------------------------------------------- Mordecai Kurz, Guardian for Nathaniel Series C - ---------------------------------------------------------------------------------------------------------------- Jerry Latta Series C - ---------------------------------------------------------------------------------------------------------------- Latterman Family Limited Trust Series C - ---------------------------------------------------------------------------------------------------------------- Le Le Series C - ---------------------------------------------------------------------------------------------------------------- Calvin Lee Series C - ---------------------------------------------------------------------------------------------------------------- Betsy Levy Leight Series C - ---------------------------------------------------------------------------------------------------------------- Carol Light Series C - ---------------------------------------------------------------------------------------------------------------- John Lopez Series C - ---------------------------------------------------------------------------------------------------------------- Robert Mack Series C - ---------------------------------------------------------------------------------------------------------------- Jayne Maggipinto Series C - ---------------------------------------------------------------------------------------------------------------- Gregory Maletis Series C - ---------------------------------------------------------------------------------------------------------------- David Marshall Series C - ---------------------------------------------------------------------------------------------------------------- Marshall, Stuart C. Marshall Trust Series C - ---------------------------------------------------------------------------------------------------------------- J. Lindsey McLean Series C - ---------------------------------------------------------------------------------------------------------------- R. Hardwin Mead Series C - ---------------------------------------------------------------------------------------------------------------- Robert Millard Series C - ---------------------------------------------------------------------------------------------------------------- Jeffrey Miller Series C - ---------------------------------------------------------------------------------------------------------------- Munkdale, Steve Munkdale (IRA Account) Series C - ---------------------------------------------------------------------------------------------------------------- Paul Murphy Series C - ---------------------------------------------------------------------------------------------------------------- David Musket Series C - ---------------------------------------------------------------------------------------------------------------- David Nee Series C - ---------------------------------------------------------------------------------------------------------------- Robert Pelosi Series C - ---------------------------------------------------------------------------------------------------------------- Jackie Peraza Series C - ---------------------------------------------------------------------------------------------------------------- Joshua Pickus Series C - ---------------------------------------------------------------------------------------------------------------- Carlos Prietto Series C - ---------------------------------------------------------------------------------------------------------------- ProMed Partners, L.P. Series C - ---------------------------------------------------------------------------------------------------------------- River Edge Partners, Inc. Series C - ---------------------------------------------------------------------------------------------------------------- Rivers, Christi Rivers and Kevin Van Bladel Series C - ---------------------------------------------------------------------------------------------------------------- Daniel Robertson Series C - ---------------------------------------------------------------------------------------------------------------- Rodkey, First Trust Corp TTEE FOB William G. Rodkey Series C - ---------------------------------------------------------------------------------------------------------------- Rollins, John S. and Elizabeth M., Trustees of the Rollins Living Trust UDT dtd 9-19-90 Series C - ---------------------------------------------------------------------------------------------------------------- Douglas Rousse Series C - ---------------------------------------------------------------------------------------------------------------- Ruder Revocable Intervivos Trust DTD 9/15/93 Series C - ---------------------------------------------------------------------------------------------------------------- Joel Saal Series C - ---------------------------------------------------------------------------------------------------------------- Saal, Joel, Custodian for Rachel until age 21 under the UTMA Series C - ---------------------------------------------------------------------------------------------------------------- Saal, Joel, S. custodian for Nicole Saal until age 21 under the CA UTMA Series C - ---------------------------------------------------------------------------------------------------------------- Saratoga Ventures Series C - ---------------------------------------------------------------------------------------------------------------- David Schurman Series C - ---------------------------------------------------------------------------------------------------------------- Hugh Sharkey Series C - ----------------------------------------------------------------------------------------------------------------
EXHIBIT A EXISTING INVESTORS
- ------------------------------------------------------------------------------------------------------------------------------ First Name Last Name or Entity Name Type of Stock - ------------------------------------------------------------------------------------------------------------------------------ Charles Silverman Series C - ------------------------------------------------------------------------------------------------------------------------------ Allen Smoot Series C - ------------------------------------------------------------------------------------------------------------------------------ Daren Stewart Series C - ------------------------------------------------------------------------------------------------------------------------------ Robert Stoll Series C - ------------------------------------------------------------------------------------------------------------------------------ George Thabbit Series C - ------------------------------------------------------------------------------------------------------------------------------ Jim Tibone, M.D. Series C - ------------------------------------------------------------------------------------------------------------------------------ Francisco Valencia Series C - ------------------------------------------------------------------------------------------------------------------------------ Van dick, Steven M. and Deborah A. Van Dick, Trustees of the Van Dick Family Trust - 1998 U/I/T dtd. 5-2-98 Series C - ------------------------------------------------------------------------------------------------------------------------------ Vaupel, Geoffrey L. Vaupel, M.D. Pension and Profit Sharing Plan Series C - ------------------------------------------------------------------------------------------------------------------------------ Eric Verploeg Series C - ------------------------------------------------------------------------------------------------------------------------------ VLG Investments 1997 Series C - ------------------------------------------------------------------------------------------------------------------------------ Michael Wall Series C - ------------------------------------------------------------------------------------------------------------------------------ Warden, Carl and Vickie Warden Family Foundation Series C - ------------------------------------------------------------------------------------------------------------------------------ Russell Warren Series C - ------------------------------------------------------------------------------------------------------------------------------ Lee Weissman Series C - ------------------------------------------------------------------------------------------------------------------------------ Alan Wood Series C - ------------------------------------------------------------------------------------------------------------------------------ Micheline Yuan Series C - ------------------------------------------------------------------------------------------------------------------------------ Atherton Venture Fund 1, LLC Series D - ------------------------------------------------------------------------------------------------------------------------------ Scott Blumenthal Series D - ------------------------------------------------------------------------------------------------------------------------------ Robert Bonahoom Series D - ------------------------------------------------------------------------------------------------------------------------------ Bowers, Ann S. Bowers, TTEE Separate Property Trust Series D - ------------------------------------------------------------------------------------------------------------------------------ Ray Caputo Series D - ------------------------------------------------------------------------------------------------------------------------------ Cowen and Company, Custodian FBO David B. Musket SEP IRA Series D - ------------------------------------------------------------------------------------------------------------------------------ Mark Curtis Series D - ------------------------------------------------------------------------------------------------------------------------------ DB Futures Series D - ------------------------------------------------------------------------------------------------------------------------------ Delphi BioInvestments III, L.P. Series D - ------------------------------------------------------------------------------------------------------------------------------ Delphi Ventures III. L.P. Series D - ------------------------------------------------------------------------------------------------------------------------------ William Elting Series D - ------------------------------------------------------------------------------------------------------------------------------ Emerald Capital Corporation for John Lopez Series D - ------------------------------------------------------------------------------------------------------------------------------ Robert Gamburd Series D - ------------------------------------------------------------------------------------------------------------------------------ Lisa Giannone Series D - ------------------------------------------------------------------------------------------------------------------------------ Goode, James, IRA Rollover with Smith Barney as Cust. Series D - ------------------------------------------------------------------------------------------------------------------------------ Gray, MLPF&S Custodian FPO Robert L. Gray, Sr. IRRA FBO Robert L. Gray, Sr. Series D - ------------------------------------------------------------------------------------------------------------------------------ Cory Helm Series D - ------------------------------------------------------------------------------------------------------------------------------ Hochschuler Family Partnership, Stephen J. Hochschuler Series D - ------------------------------------------------------------------------------------------------------------------------------ Jay Jansen Series D - ------------------------------------------------------------------------------------------------------------------------------ Tony Jelincik Series D - ------------------------------------------------------------------------------------------------------------------------------ Raj Kapany Series D - ------------------------------------------------------------------------------------------------------------------------------ Kevin Knight Series D - ------------------------------------------------------------------------------------------------------------------------------ Jonathan Krass Series D - ------------------------------------------------------------------------------------------------------------------------------ Krass, Jonathan G. Krass and Stephanie M. Bryan, Tenants in Common Series D - ------------------------------------------------------------------------------------------------------------------------------ Krass, Jonathan G. Krass, custodian for Rebecca May Krass Series D - ------------------------------------------------------------------------------------------------------------------------------ Krass, Jonathan G. Krass, custodian for Daniel Gould Krass Series D - ------------------------------------------------------------------------------------------------------------------------------
EXHIBIT A EXISTING INVESTORS
- ------------------------------------------------------------------------------------------------------------------------------------ First Name Last Name or Entity Name Type of Stock - ------------------------------------------------------------------------------------------------------------------------------------ Krass, Jonathan G. Krass, Smith Barney Inc. Rollover Custodian, Acct #565-68067-1-7-017 Series D ----------------------------------------------------------------------------------------------------------------------------------- Kurz, Mordecai Kurz and Linda C. Kurz, Trustees of the Kurz Trust of 8/17/1987 Series D - ------------------------------------------------------------------------------------------------------------------------------------ Mordecai Kurz, Guardian for David M. Kurz Series D - ------------------------------------------------------------------------------------------------------------------------------------ Mordecai Kurz, Guardian for Nathaniel A. Kurz Series D - ------------------------------------------------------------------------------------------------------------------------------------ Smith Barney Custodian for the IRA of Jerry D. Latta Series D - ------------------------------------------------------------------------------------------------------------------------------------ Latterman Family Limited Partnership Series D - ------------------------------------------------------------------------------------------------------------------------------------ Edward Lauing Series D - ------------------------------------------------------------------------------------------------------------------------------------ Connie Lee Series D - ------------------------------------------------------------------------------------------------------------------------------------ Betsy Levy Leight Series D - ------------------------------------------------------------------------------------------------------------------------------------ Lawrence Lemak Series D - ------------------------------------------------------------------------------------------------------------------------------------ Irwin Lieber Series D - ----------------------------------------------------------------------------------------------------------------------------------- John Lopez Series D - ----------------------------------------------------------------------------------------------------------------------------------- Lopez, Smith Barney Custodian for the IRA of John Lopez Series D - ------------------------------------------------------------------------------------------------------------------------------------ Terence Matthews Series D - ------------------------------------------------------------------------------------------------------------------------------------ Peter McGann Series D - ------------------------------------------------------------------------------------------------------------------------------------ McGann, Peter D. McGann, Profit Sharing Series D - ------------------------------------------------------------------------------------------------------------------------------------ R. Meisterling Series D - ------------------------------------------------------------------------------------------------------------------------------------ David Nee Series D - ------------------------------------------------------------------------------------------------------------------------------------ Pacific Medical Series D - ------------------------------------------------------------------------------------------------------------------------------------ Pequot Offshore Private Equity Fund, L.P. Series D - ------------------------------------------------------------------------------------------------------------------------------------ Pequot Private Equity Fund, L.P. Series D - ------------------------------------------------------------------------------------------------------------------------------------ Prima Associates, L.P. Series D - ------------------------------------------------------------------------------------------------------------------------------------ R.R.G. #1 Family Ltd. Partnership Series D - ------------------------------------------------------------------------------------------------------------------------------------ River Edge Partners, Inc. Series D - ------------------------------------------------------------------------------------------------------------------------------------ Robert Reid, Inc. Series D - ------------------------------------------------------------------------------------------------------------------------------------ Saratoga Ventures Series D - ------------------------------------------------------------------------------------------------------------------------------------ David Siegel Series D - ------------------------------------------------------------------------------------------------------------------------------------ Joshua Siegel Series D - ------------------------------------------------------------------------------------------------------------------------------------ Smith Barney Custodian for the IRA of Linda C. Kurz Series D - ------------------------------------------------------------------------------------------------------------------------------------ Thomas Storm Series D - ------------------------------------------------------------------------------------------------------------------------------------ Joel Swartz Series D - ------------------------------------------------------------------------------------------------------------------------------------ Team Surgical, Inc. Series D - ------------------------------------------------------------------------------------------------------------------------------------ William and Judy Thorpe Series D - ------------------------------------------------------------------------------------------------------------------------------------ Venrock Associates Series D - ------------------------------------------------------------------------------------------------------------------------------------ Venrock Associates II, L.P. Series D - ------------------------------------------------------------------------------------------------------------------------------------ Mark Vreede Series D - ------------------------------------------------------------------------------------------------------------------------------------ Russell Warren Series D - ------------------------------------------------------------------------------------------------------------------------------------ Micheline Yuan Series D - ------------------------------------------------------------------------------------------------------------------------------------ Roger Lipton B Warrant - ------------------------------------------------------------------------------------------------------------------------------------ Venture Lending and Leasing B Warrant - ------------------------------------------------------------------------------------------------------------------------------------ MMC/GATX Partnership No. 1 C Warrant - ------------------------------------------------------------------------------------------------------------------------------------ Silicon Valley Bank C Warrant - ------------------------------------------------------------------------------------------------------------------------------------
EXHIBIT B --------- NEW INVESTORS Name (in Alphabetical Order) - ---------------------------- Allen, Glen, Curtis An, Howard S. and Sue K. Anderson, Gunnar Arnold, David M. and Meleah T. Birnbach, David J. BP-1, LLC Capen, Daniel, A. Casper, G. David and/or Mary Lou Curtis, Mark T. Delaney, Terence and Caroline, JTWROS Delaney, Terence J. SSB Sep IRA Custodian Richard and Deborah Derby Richard Derby, Jr. IRA Rollover Franz, Michael Gimbel, Lesley and Barry K. Hacker, Robert J. Harris, Jerry M. and Susan G., JTWROS Jelincik, Tony Jarolem, Kenneth, M.D. Kapany, Raj Karasek, Dennis and Sheryl L. The Trust Co. of Oklahoma Custodian for Dennis E. Karasek IRA Karasek, Michael and Jean Diamond Kim, Daniel K Knight, Kevin T. Kraft, Mark MD Krass, Jonathan, Smith Barney Inc. Rollover Custodian, Acct. #565-68067-1-7-017 Krass, Jonathan G. Custodian for Rebecca May Krass Krass, Jonathan G. Custodian for Daniel Gould Krass Krass, Jonathan G. Krass, Jonathan G. and Stephanie M. Bryan, Tenants in Common Krull, David G. Kurz, Mordecai and Linda C., Trustees of the Kurz Trust of 8-17-87 Kurzweil, Peter R., M.D. Larsen, John M. Lee, Calvin, K. Lee, Connie, C., M.D. Leight, Betsy Levy, Trustee of the Betty Levy Leight Trust dtd 9-19-93 Lopez, John Marshall, David J. Mitchell, Scott A. and/or Laura E. Gerlach & Co., nominee for The Manufacturers Life Insurance Company (USA) Nee, David M. and Karen, Trustees of the Nee Family Trust UAD 8-27-92 Nelson, Russell, W. PM Investments (Oratec), LLC Pequot Offshore Private Equity Fund, L.P. Pequot Private Equity Fund, L.P. Rhodes, Arthur and Bonnie G. RiverEdge Partners, Inc. Roschuk, John Robert Stonecipher, Thomas K. and Brenda D. Team Surgical The Travelers Insurance Company Venrock Associates Venrock Associates L.P., II Warden, Carl Eric Wheatley Partners, L.P. Wheatley Foreign Partners, L.P. White, Howard and Carolee White 1986 Trust EX-10.2 10 EMPLOYMENT LETTER BETWEEN ORATEC AND N. WESTCOTT EXHIBIT 10.2 October 29, 1997 Ms. Nancy V. Westcott 510 Brierhill Road Deerfield, Illinois 60015 Dear Nancy: On behalf of Oratec Interventions, Inc. (the "Company"), I am pleased to ------- offer you the position of Chief Financial Officer and Vice President Administration of the Company. Speaking for myself, as well as the other members of the Company's management team, we are all very impressed with your credentials and we look forward to your future success in this position. The terms of your new position with the Company are as set forth below: 1. Position. -------- a. You will become the Chief Financial Officer and Vice President Administration of the Company, working out of the Company's headquarters office in Menlo Park, CA. You will report to the Company's President and Chief Executive Officer. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the terms hereof. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's President and Chief Executive Officer, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. 2. Start Date. Subject to fulfillment of any conditions imposed by this ---------- letter agreement, you will commence this new position with the Company on November 3, 1997 (the "Start Date"). June 28, 1999 Page 2 3. Proof of Right to Work. For purposes of federal immigration law, you ---------------------- will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your Start Date, or our employment relationship with you may be terminated. 4. Compensation. ------------ a. Base Salary. You will be paid a monthly salary of $12,500, which ----------- is equivalent to $150,000 on an annualized basis (the "Base Salary"). Your salary will be payable in two equal payments per month pursuant to the Company's regular payroll policy (or in the same manner as other officers of the Company). b. Signing Bonus. In connection with the commencement of your ------------- employment, you will be paid a cash bonus of $37,500 (as reduced applicable tax withholdings) on your Start Date. In the event that you voluntarily terminate your employment with the Company before the end of the first year of employment, you agree to repay the Company 100% of such bonus by personal check or other negotiable instrument. c. Incentive Bonus. You will be eligible to receive an annual --------------- incentive bonus of up to 25% of your Base Salary for the calendar year ending December 31, 1998. Payment of the bonus will be based on achievement of specified corporate and individual performance targets mutually agreed upon by you and the Company's President and Chief Executive Officer within 60 days of your Start Date. You will also be eligible to earn incentive bonuses in future years, again based on achievement of objectives. With respect to the remainder of the 1997 calendar year, you will be eligible to receive a prorated portion of the annual incentive bonus specified above based on achievement of specified corporate and individual performance targets mutually agreed upon by you and the Company's President and Chief Executive Officer within 30 days of your Start Date. d. Annual Review. Your Base Salary will be reviewed at the end of ------------- each calendar year as part of the Company's normal salary review process. 5. Stock Options. ------------- a. Initial Grant. In connection with the commencement of your ------------- employment, the Company will recommend that the Board of Directors grant you an option to purchase 150,000 shares of the Company's Common Stock ("Shares") with ------ an exercise price equal to the fair market value on the date of the grant. These option shares will become exercisable at the rate of twelve forty-eighths (12/48) of the Shares twelve months after the Vesting Commencement Date and one forty-eighth (1/48) of the Shares at the end of each calendar month thereafter. The Vesting Commencement Date will be your Start Date. Vesting will, of course, depend on your continued employment with the Company. Notwithstanding the above, in the event that (i) your employment is terminated by the Company or a successor other than for Cause (as defined below), or (ii) your job duties, responsibilities and requirements or compensation are materially reduced or changed such that they are inconsistent with your prior duties, responsibilities and requirements or June 28, 1999 Page 3 compensation, in either case in connection with, or as a result of, a Change of Control (as defined below), one hundred percent (100%) of the option that has not yet become exercisable shall become exercisable on the effective date of such termination, reduction or change. For purposes of this letter, a termination or material reduction or change will be deemed to have occurred in connection with, or as a result of, a Change in Control if it occurs within 12 months of such Change in Control. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1995 Stock Plan and the Stock Option Agreement between you and the Company. b. Subsequent Option Grants. Subject to the discretion of the ------------------------ Company's Board of Directors, you may be eligible to receive additional grants of stock options from time to time in the future, on such terms and subject to such conditions as the Board of Directors shall determine as of the date of any such grant. 6. Benefits. -------- a. Employee Benefits. You will be entitled to participate, to the ----------------- extent you are eligible under the terms and conditions thereof, in any medical insurance plans, 401(k) plans, deferred compensation plans, life insurance plans, vacation, retirement or other employee benefit plans which are generally available to executives of the Company or are available to senior executives or a select group of executives of the Company and which may be in effect from time to time during your employment with the Company. The Company shall be under no obligation to institute or continue the existence of any employee benefit plan described herein and may from time to time amend, modify or terminate any such employee benefit plan. b. Relocation Expenses. In connection with your relocation from the ------------------- Chicago area to the San Francisco Bay Area, the Company will reimburse you for the relocation expenses estimated on Schedule 1 hereto. Any amounts received by you for relocation expense reimbursement will be reported as taxable income to you in the year received as required by applicable tax law; provided that you will be fully "grossed up" for the taxes you pay as a result of this relocation expense reimbursement. In the event that you voluntarily terminate your employment with the Company before the end of your first year of employment, you agree to repay the Company 100% of the relocation expenses estimated in Schedule 1 hereto by personal check or other negotiable instrument. 7. Severance Agreement. If your employment is terminated by the Company ------------------- or its successor for any reason other than Cause, as defined below, you will be entitled to receive continuation of your Base Salary and medical insurance benefits for the number of months following the date of termination of your employment as set forth below: a. Twelve (12) months if the termination occurs within two (2) years of your Start Date. June 28, 1999 Page 4 b. Six (6) months if the termination occurs more than two (2) years after your Start Date. c. Twelve (12) months if the termination or the material reduction or change (as described in Section 5(a)(ii)) occurs at any time during your employment with the Company in connection with, or as a result of, a Change of Control of the Company. In addition, if your employment is terminated by the Company or its successor for any reason other than Cause, the Company will provide executive- level outplacement services to you. 8. Definitions. ----------- a. Cause. For purposes of this letter agreement, "Cause" shall mean ----- ----- (a) willful misconduct or gross negligence in performance of your duties hereunder; (b) refusal to comply in any material respect with the legal directives of the Company's Board of Directors so long as such directives are not inconsistent with your position and duties, which is not remedied (if remediable) within twenty (20) working days after written notice from the Company's Board of Directors, which written notice shall state that failure to remedy such conduct may result in termination for Cause; (c) a deliberate attempt to do an injury to the Company; (d) conduct, dishonest, fraudulent or otherwise, that materially discredits the Company or is materially detrimental to the reputation of the Company; (e) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company; or (f) material breach of any element of the Company's Proprietary Information Agreement, including without limitation, the theft or other misappropriation of the Company's proprietary information, in each case as determined in good faith by the Company's Board of Directors. b. Change of Control. For purposes of this letter agreement, a ----------------- "Change of Control" shall mean the occurrence of any of the following events: ----------------- (i) an acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of the Company), or (ii) a sale of all or substantially all of the assets of the Company (collectively, a "Merger"), so long as in either case (x) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than fifty percent (50%) of the voting power of the surviving or acquiring entity, or (y) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than sixty percent (60%) of the voting power of the surviving or acquiring entity and a majority of the members of the Board of Directors of the surviving or acquiring entity immediately after such Merger were not members of the Board of Directors of the Company immediately prior to such Merger. 9. Limitation on Change of Control Benefits. In the event that the ---------------------------------------- severance and stock option acceleration benefits provided in this letter agreement in connection with, or as a result of, a Change of Control of the Company (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code, June 28, 1999 Page 5 then such benefits shall be payable either: (a) in full, or (b) as to such lesser amount which would result in no portion of such benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in your receipt on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless you and the Company otherwise agree in writing, any determination required under this Section 9 shall be made in writing by independent public accountants appointed by you and reasonably acceptable to the Company (the "Accountants"), whose determination shall be conclusive and binding upon you and the Company for all purposes. For purposes of making the calculations required by this Section 9, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and you shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 9. 10. Proprietary Information Agreement. Your acceptance of this offer and --------------------------------- commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Proprietary Information Agreement, a copy of which is enclosed for your review and execution (the "Proprietary Information Agreement"), prior to or on your Start Date. --------------------------------- 11. Confidentiality of Terms. You agree to follow the Company's strict ------------------------ policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. 12. At-Will Employment. Notwithstanding the Company's obligation ------------------ described in Sections 5a, 7 or elsewhere herein, your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without obligation or liability, except as specifically provided herein. We are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the Proprietary Information Agreement. This letter, together with the Proprietary Information Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. Very truly yours, June 28, 1999 Page 6 ORATEC INTERVENTIONS, INC. By: /s/ Kenneth W. Anstey --------------------- Title: President and Chief Executive Officer ACCEPTED AND AGREED: NANCY V. WESTCOTT /s/ Nancy V. Westcott - --------------------- Signature 10/30/97 - --------------------- Date Enclosure: Proprietary Information Agreement SCHEDULE 1 ESTIMATED RELOCATION EXPENSES ----------------------------- EX-10.3 11 EMPLOYMENT AGREEMENT BETWEEN ORATEC AND K. ANSTEY EXHIBIT 10.3 ORATEC INTERVENTIONS, INC. EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (the "Agreement") is dated as of July 14, 1997 by --------- and between Kenneth W. Anstey ("Employee") and Oratec Interventions, Inc., a -------- California corporation (the "Company"). ------- 1. Employment Term. The Company agrees to employ Employee, and Employee --------------- agrees to be employed by the Company, under the terms and conditions set forth in this Agreement, for a period commencing on July 14, 1997 and ending July 13, 2001, unless such period is terminated earlier pursuant to Section 5 below (the "Initial Term"). This Agreement may be extended for additional one (1) year term(s) after the end of the Initial Term if Employee and the Company mutually agree in writing to such extension(s). 2. Duties. ------ (a) Position. Employee shall be employed as President and Chief -------- Executive Officer of the Company. In such capacity he shall report to and be subject to the direction and control of the Company's Board of Directors. Employee shall also continue to serve on, and be a member of, the Company's Board of Directors. (b) Obligations to the Company. Employee agrees to the best of his -------------------------- ability and experience that he will at all times loyally and conscientiously perform all of the duties and obligations required of and from Employee pursuant to the terms hereof. During the term of Employee's employment relationship with the Company, Employee further agrees that he will devote all of his business time and attention to the business of the Company, he will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and he will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this Agreement will prevent Employee from accepting speaking engagements in exchange for honoraria, from serving on boards of charitable organizations or on the boards of up to three for-profit corporations other than the Company (provided that Employee may serve on the boards of up to four such corporations until December 31, 1997), or from investing in other businesses provided he is not actively participating in any such business as a director, employee, independent contractor, partner, principal, agent or otherwise, and provided further that any such business is not competitive with the business conducted by the Company (as conducted now or during the term of Employee's employment), and no consent from the Company's Board of Directors shall be required for any such activities. Employee will comply with and be bound by the Company's operating policies, procedures and practices from time to time in effect during the term of Employee's employment. 3. At-Will Employment. The Company and Employee acknowledge that ------------------ Employee's employment is and shall continue to be at-will, as defined under applicable law, and that Employee's employment with the Company may be terminated by either party at any time for any or no reason, subject only to the specific provisions of this Agreement. If Employee's employment terminates for any reason, Employee shall not be entitled to any payments, benefits, damages, award or compensation other than as provided in this Agreement. The rights and duties created by this Section 3 may not be modified in any way except by a written agreement executed by Company's Board of Directors and Employee. 4. Compensation. For the duties and services to be performed by Employee ------------ hereunder, the Company shall pay Employee, and Employee agrees to accept, the salary, bonuses stock options, and other benefits described below in this Section 4 during the Initial Term. (a) Salary. Employee shall receive a monthly salary of $16,667 ------ payable in two equal payments per month pursuant to the Company's normal payroll practices. The Base Salary shall be reviewed annually by the Company's Board of Directors or its Compensation Committee, and any adjustment will be effective as of the date determined appropriate by the Board of Directors or its Compensation Committee. (b) Bonuses. For each fiscal year of the Company during the Initial ------- Term, Employee shall be eligible to receive a cash bonus of up to 40% of the Base Salary. At such time as the Company completes an initial public offering of its Common Stock, the eligible bonus amount shall increase to 50% of the Base Salary. Such bonus shall be based on achievement of specified corporate and individual performance targets established by the Board of Directors or its Compensation Committee. The bonus shall be structured to provide for a portion of the bonus to be earned upon partial achievement of the targets, and to provide for an overachievement bonus upon achieving results in excess of the targets, in each case based on a formula to be determined by the Board of Directors or its Compensation Committee. (c) Stock Options. In connection with the commencement of Employee's ------------- employment, the Board of Directors shall grant to Employee an option to purchase 420,000 shares of the Company's Common Stock (the "Shares"). The option shall ------ be granted with an exercise price equal to the fair market value on the date of the grant. The option shall become exercisable during Employee's employment at the rate of six forty-eighths (6/48) of the Shares six (6) months after the Vesting Commencement Date and one-forty-eighth (1/48) of the Shares at the end of each calendar month thereafter. The Vesting Commencement Date shall be the date on which Employee commences his employment with the Company. Notwithstanding the above, in the event that (i) Employee's employment is terminated by the Company or a successor other than for Cause (as defined in Section 6 below), or (ii) Employee's job duties, responsibilities and requirements are materially reduced or changed such that they are inconsistent with Employee's prior duties, responsibilities and requirements, in either case in connection with, or as a result of, a Change of Control (as defined in Section 8 below), one hundred percent (100%) of the option has not yet become exercisable shall become exercisable on the effective date of such termination, reduction or change. The option will be an incentive stock option to the maximum extent allowed by the Internal Revenue Code of 1986, as amended, and will be subject to the terms of the Company's 1995 Stock Plan and the Stock Option Agreement between Employee and the Company. Subject to the discretion of the Company's Board of Directors, Employee shall be eligible to receive additional grants of stock options from -2- time to time in the future, on such terms and subject to such conditions as the Board of Directors shall determine as of the date of any such grant. (d) Employee Benefits. Employee shall be entitled to participate, to ----------------- the extent he is eligible under the terms and conditions thereof, in any medical insurance plans, 401(k) plans, deferred compensation plans, life insurance plans, vacation, retirement or other employee benefit plans which are generally available to executives of the Company or are available to senior executives or a select group of executives of the Company and which may be in effect from time to time during Employee's employment with the Company. The Company shall be under no obligation to institute or continue the existence of any employee benefit plan described herein and may from time to time amend, modify or terminate any such employee benefit plan. (e) Relocation. Upon submission of appropriate receipts, the Company ---------- shall reimburse Employee for the following relocation expenses incurred during Employee's employment with the Company: (i) Closing costs incurred on the sale of Employee's apartment in Boston if such sale occurs within two (2) years of commencement of Employee's employment with the Company; (ii) Closing costs incurred on the purchase of a new residence for Employee in California if such purchase occurs within two (2) years of commencement of Employee's employment with the Company; (iii) All reasonable out-of-pocket moving expenses incurred by Employee in moving to a new residence in California; (iv) Reasonable travel expenses for up to three (3) househunting trips for Employee and his family, including transportation, accommodations and reasonable expenses for meals and other incidentals; and (v) Housing expenses in California for Employee and his family for up to ninety (90) days after commencement of Employee's employment with the Company until Employee moves into a new residence in California. Employee shall be responsible for the payment of any taxes payable under applicable tax law on the relocation payments payable under this section 4(e). (f) Car Allowance. The Company shall provide to Employee a car ------------- allowance of $500 a month. Employee shall be responsible for the payment of any taxes payable under applicable tax law on such allowance. (g) Reimbursement of Expenses. Employee shall be authorized to incur ------------------------- on behalf and for the benefit of, and shall be reimbursed by, the Company for reasonable expenses, provided that such expenses are substantiated in accordance with Company policies. -3- 5. Termination of Employment and Severance Benefits. ------------------------------------------------ (a) Termination of Employment. This Agreement may be terminated upon ------------------------- the occurrence of any of the following events: (i) The date written notice is delivered to Employee by the Company stating that the Company terminating Employee for Cause (as defined in Section 6 below) ("Termination for Cause"); provided that nothing contained in --------------------- this Section 5(a)(i) shall limit or otherwise modify Employee's right to contest in the manner set forth in Section 15(h) below the Company's determination that such termination is for Cause (as defined in Section 6 below). (ii) The date written notice is delivered to Employee by the Company stating that the Company is terminating Employee without Cause, which determination may be made by the Company at any time at the Company's sole discretion, for any or no reason ("Involuntary Termination"); ----------------------- (iii) The date written notice is delivered to the Company by Employee stating that Employee is electing to terminate his employment with the Company ("Voluntary Termination"); or --------------------- (iv) Following Employee's death or disability (as defined in Section 9 below). (b) Severance Benefits. Employee shall be entitled to receive ------------------ severance benefits upon termination of employment only as set forth in this Section 5(b): (i) Termination for Cause. If Employee's employment is --------------------- terminated for Cause, then Employee shall not be entitled to receive payment of any severance benefits. Employee will receive payment(s) for all salary and unpaid vacation accrued as of the date of Employee's termination of employment and Employee's benefits will be continued under the Company's then existing benefit plans and policies to the extent, if any, provided for under such plans and policies in effect on the date of termination and in accordance with applicable law. (ii) Involuntary Termination. If Employee's employment is ----------------------- terminated as a result of an Involuntary Termination other than for Cause (as defined in Section 6 below) and other than by reason of Employee's Voluntary Termination, Employee will be entitled to receive a severance payment equal to twelve (12) months of the Base Salary plus the amount of Employee's target bonus for the fiscal year in which the termination occurs to the extent that the bonus has been earned as of such date, as determined by the Board of Directors or its Compensation Committee based upon the specific corporate and individual performance targets established for such fiscal year. Such payment shall be reduced by applicable income and employment taxes and shall be made in two equal installments as follows: (i) one-half within seven (7) days of the effective date of the termination, and (ii) one-half on the six-month anniversary thereof. Health insurance benefits with the same coverage provided to Employee prior to the termination and in all other respects significantly comparable to those in place immediately prior to the termination will be provided at the Company's cost for a period of -4- twelve (12) months through reimbursement of premiums paid by Employee for such coverage (which coverage shall be provided pursuant to the terms of the Consolidated Omnibus Reconciliation Act of 1985, as amended, ("COBRA") once available to employees of the Company). In addition, the stock option held by Employee that is unexercisable as of the date of such termination shall become exercisable on the effective date of such termination with respect to fifty percent (50%) of the Shares (as defined in Section 4(c) above) subject to such unexercisable option. As a condition of, and in exchange for, the receipt of such severance benefits, Employee shall execute and deliver to the Company (and remain in full compliance with): (i) a Settlement Agreement and Release of Claims in a form satisfactory to the Company; and (ii) a resignation from all of Employee's positions with the Company, including from the Board of Directors and any committee thereof on which Employee serves, in a form satisfactory to the Company. (iii) Voluntary Termination. If Employee's employment terminates --------------------- by Voluntary Termination, then Employee shall not be entitled to receive payment of any severance benefits. Employee will receive payment(s) for all salary and unpaid vacation accrued as of the date of Employee's termination of employment plus the amount of Employee's target bonus for the fiscal year in which the termination occurs to the extent that the bonus has been earned as of such date, as determined by the Board of Directors or its Compensation Committee based upon the specific corporate and individual performance targets established for such fiscal year. In addition, Employee's benefits will be continued under the Company's then existing benefit plans and policies to the extent, if any, provided for under such plans and policies in effect on the date of termination and in accordance with applicable law. (iv) Termination by Reason of Death or Disability. In the event -------------------------------------------- that Employee's employment with the Company terminates as a result of Employee's death or Disability (as defined in Section 9 below), Employee or Employee's estate or representative will receive all salary and unpaid vacation accrued as of the date of Employee's death or Disability and any other benefits payable under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of death or Disability and in accordance with applicable law. In addition, Employee's estate or representative will receive the amount of Employee's target bonus for the fiscal year in which the death or Disability occurs to the extent that the bonus has been earned as of the date of Employee's death or Disability, as determined by the Board of Directors or its Compensation Committee based on the specific corporate and individual performance targets established for such fiscal year. 6. Definition of Cause. For purposes of this Agreement, "Cause" for ------------------- ----- Employee's termination will exist at any time after the happening of one or more of the following events, in each case as determined in good faith by the Company's Board of Directors: (a) Employee's (i) willful misconduct or gross negligence in performance of his duties hereunder, or -5- (ii) refusal to comply in any material respect with the legal directives of the Company's Board of Directors so long as such directives are not inconsistent with the Employee's position and duties, which is not remedied (if remediable) within twenty (20) working days after written notice from the Company's Board of Directors, which written notice shall state that failure to remedy such conduct may result in Termination for Cause; (b) Employee's deliberate attempt to do an injury to the Company; (c) Employee's conduct, dishonest, fraudulent or otherwise, that materially discredits the Company or is materially detrimental to the reputation of the Company; (d) Employee's conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company; or (e) Employee's material breach of any element of the Company's Proprietary Information Agreement, including without limitation, Employee's theft or other misappropriation of the Company's proprietary information. 7. Definition of Involuntary Termination. For purposes of this Agreement, ------------------------------------- "Involuntary Termination" shall include (a) any termination by the Company other ----------------------- than for Cause, (b) any reduction in Employee's base salary except as part of a general salary reduction applicable to all of the Company's executive officers, and (c) any Voluntary Termination by Employee following a material reduction or change in job duties, responsibilities and requirements inconsistent with Employee's position with the Company and Employee's prior duties, responsibilities, and requirements or a change in Employee's reporting relationship such that Employee is no longer reporting to the Company's Board of Directors, provided that, in the case of subsection (c), Employee provides written notice to the Company within thirty (30) days of the effective date of such reduction or change. 8. Definition of Change of Control. For purposes of this Agreement, a ------------------------------- "Change of Control" shall mean the occurrence of any of the following events: - ------------------ (i) an acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of the Company), or (ii) a sale of all or substantially all of the assets of the Company (collectively, a "Merger"), so long as in either case (x) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than fifty percent (50%) of the voting power of the surviving or acquiring entity, or (y) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than sixty percent (60%) of the voting power of the surviving or acquiring entity and a majority of the members of the Board of Directors of the surviving or acquiring entity immediately after such Merger were not members of the Board of Directors of the Company immediately prior to such Merger. 9. Definition of Disability. For purposes of this Agreement, "Disability" ------------------------ ---------- shall mean that Employee has been unable to perform his duties hereunder as the result of his -6- incapacity due to physical or mental illness, and such inability, which continues for at least 120 consecutive calendar days or 150 calendar days during any consecutive twelve-month period, if shorter, after its commencement, is determined to be total and permanent by a physician selected by the Company and its insurers and acceptable to Employee or to Employee's legal representative (with such agreement on acceptability not to be unreasonably withheld). 10. Proprietary Agreement. Employee shall sign a Proprietary Information --------------------- Agreement (the "Proprietary Agreement") in the form attached hereto as Exhibit --------------------- ------- A. Employee hereby agrees to continue to abide by the terms of the Proprietary Agreement and further agrees that the provisions of the Proprietary Agreement shall survive any termination of this Agreement or of Employee's employment relationship with the Company. 11. Noncompetition Covenant. Employee hereby agrees that he shall not, ----------------------- during the term of his employment pursuant to this Agreement and for six (6) months thereafter, without the prior written consent of the Company's Board of Directors, participate in any business or activity (as a director, employee, independent contractor, partner, principal, agent, shareholder or otherwise) which is competitive with the business conducted by the Company (as conducted now or during the term of Employee's employment), nor engage in any other activities that conflict with Employee's obligations to the Company. 12. Nonsolicitation Covenant. Employee hereby agrees that he shall not, ------------------------ during the term of his employment pursuant to this Agreement and for twelve (12) months thereafter, do any of the following, directly or indirectly, without the prior written consent of the Company's Board of Directors: (a) Solicit Business. Solicit or influence or attempt to influence ---------------- any client, customer or other person either directly or indirectly, to direct his or its purchase of the Company's products and/or services to any person, firm, corporation, institution or other entity in competition with the business of the Company; and (b) Solicit Personnel. Solicit, induce, recruit or encourage any ----------------- person employed by the Company to terminate or otherwise cease his employment with the Company. This Section 12(b) is to be read in conjunction with Section 7 of the Confidentiality Agreement executed by Employee. 13. Limitation on Stock Option Acceleration Benefit. In the event that ----------------------------------------------- the stock option acceleration benefits provided for in this Agreement to the Employee (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee's acceleration benefits under Section 4(c) shall be payable either: (a) in full, or (b) as to such lesser amount which would result in no portion of such benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into -7- account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis, of the greatest amount of benefits under Section 4(c), notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 13 shall be made in writing by independent public accountants appointed by the Employee and reasonably acceptable to the Company (the "Accountants"), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this Section 13, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 13. 14. Conflicts. Employee represents that his performance of all the terms --------- of this Agreement will not breach any other agreement to which Employee is a party. Employee has not, and will not during the term of this Agreement, enter into any oral or written agreement in conflict with any of the provisions of this Agreement. Employee further represents that he is entering into or has entered into an employment relationship with the Company of his own free will. 15. Miscellaneous Provisions. ------------------------ (a) No Duty to Mitigate. Employee shall not be required to mitigate ------------------- the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor, except as otherwise provided in this Agreement, shall any such payment be reduced by any earnings that Employee may receive from any other source. (b) Amendments and Waivers. Any term of this Agreement may be amended ---------------------- or waived only with the written consent of the parties. (c) Sole Agreement. This Agreement, including any Exhibits hereto, -------------- constitutes the sole agreement of the parties and supersedes all oral negotiations and prior writings with respect to the subject matter hereof. (d) Notices. Any notice required or permitted by this Agreement shall ------- be in writing and shall be deemed sufficient upon receipt, when delivered personally or by a nationally-recognized delivery service (such as Federal Express or UPS), or forty-eight (48) hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. -8- (e) Choice of Law. The validity, interpretation, construction and ------------- performance of this Agreement shall be governed by the laws of the State of California, without giving effect to the principles of conflict of laws. (f) Severability. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (g) Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (h) Arbitration. Any dispute or claim arising out of or in ----------- connection with this Agreement shall be finally settled by binding arbitration in San Mateo County, California in accordance with the rules of the American Arbitration Association applicable to commercial arbitration by one arbitrator appointed in accordance with said rules. The arbitrator shall apply California law, without reference to rules of conflicts of law or rules of statutory arbitration, to the resolution of any dispute. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of competent jurisdiction for preliminary or interim equitable relief, or to compel arbitration in accordance with this paragraph, without breach of this arbitration provision. This Section 15(h) shall not apply to the Proprietary Agreement. (i) Advice of Counsel Each Party to this Agreement acknowledges that, ----------------- in executing this Agreement, such party has had the opportunity to seek the advice of independent legal counsel, and has read and understood all of the terms and provisions of this Agreement. This Agreement shall not be construed against any party by reason of the drafting of preparation hereof. [SIGNATURE PAGE FOLLOWS] -9- The parties have executed this Agreement the date first written above. ORATEC INTERVENTIONS, INC. By: /s/ Hugh Sharkey ________________________________ Title:_____________________________ Address: 3700 Haven Court Menlo Park, CA 94025 KENNETH W. ANSTEY Signature: /s/ Kenneth W. Anstey ------------------------- Address:___________________________ ___________________________ -10- EX-10.4 12 EMPLOYMENT AGREEMENT BETWEEN ORATEC AND H. SHARKEY EXHIBIT 10.4 EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of this 21st day of August 1996, by and between Oratec Interventions, Inc., a California corporation (the "Company") and Hugh Sharkey ("Executive"). RECITALS -------- A. The Executive is currently an employee of the Company; and B. The Company and Executive desire to enter into an agreement to set forth certain of the terms and conditions of Executive's employment as President and Chief Executive Officer of the Company and, after the hiring of a new President and Chief Executive Officer, as Executive Vice President of the Company; NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENT --------- 1. Employment. The Company shall employ Executive as President and Chief ---------- Executive Officer of the Company, and, after the hiring of a new President and Chief Executive Officer, as Executive Vice President of the Company. 2. Term of Agreement. This Agreement shall be effective as of August 21, ----------------- 1996 and shall have a term of two (2) years. This Agreement will be renewable for one (1) year periods after the expiration of the original term if mutually agreed in writing by Executive and the Company. 3. Duties; Compensation. -------------------- (a) Duties. Subject to the authority of the Board of Directors (the ------ "Board") while Executive is President and Chief Executive Officer, and of the President and Chief Executive Officer once Executive becomes Executive Vice President, Executive shall have authority associated with such offices, and shall perform, on behalf of the Company, all duties and services as are customarily incident to such offices. Executive shall devote his full time, effort and attention during regular business hours to the business and affairs of the Company and shall perform his duties and services hereunder to the best of his ability. The Company acknowledges that Executive may in the future serve as a director, as a trustee or in a similar position with other corporations or entities. Any fees or other compensation received by Executive for service as a director, as a trustee or in a similar position with another corporation or entity shall be retained by Executive. (b) Confidentiality. On August 21, 1996, Executive executed the --------------- Proprietary Information Agreement attached as Exhibit A hereto (the "Confidentiality Agreement"). Executive hereby represents and warrants to the Company that he has complied with all obligations under the Confidentiality Agreement and agrees to continue to abide by the terms of the Confidentiality Agreement and further agrees that the provisions of the Confidentiality Agreement shall survive any termination of this Agreement or his employment by the Company. 4. Compensation. For the duties and services to be performed by Executive ------------ hereunder in his capacity as President and Chief Executive Officer of the Company, the Company shall pay Executive and Executive agrees to accept, the salary, stock options, bonuses and other benefits described below in this Section 4. (a) Salary. Executive shall receive a monthly base salary of ------ $11,666.67, which is the equivalent of $140,000 per year, payable in bi-weekly installments (or at such other times as the other executive officers of the Company are paid). The base salary shall be reviewed annually by the Board or its Compensation Committee and any annual increases will be effective as of the date determined appropriate by the Board or its Compensation Committee. (b) Bonuses. Executive shall be eligible for an annual bonus based on ------- achievement of performance objectives established and agreed to by Executive and the Board or its Compensation Committee. (c) Employee Benefits. Executive shall be entitled to participate, to ----------------- the extent he is eligible under the terms and conditions thereof, in any hospitalization or medical insurance plans, 401(k) plans, deferred compensation plans, life insurance plans, vacation, retirement or other employee benefit plans which are generally available to executives of the Company or are available to senior executives or a select group of executives of the Company and which may be in effect from time to time during Executive's employment with the Company. The Company shall be under no obligation to institute or continue the existence of any employee benefit plan described herein and may from time to time amend, modify or terminate any such employee benefit plan. For purposes of the right to the continuation of medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, Executive's employment shall not be deemed terminated until the expiration of the Company's obligation to make payments to Executive under Section 5 below. (d) Car Allowance. Executive shall be entitled to receive a car ------------- allowance payment of $500 per month. (e) Reimbursement of Expenses. Executive shall be authorized to incur ------------------------- and shall be reimbursed by the Company for reasonable expenses, provided that such expenses are substantiated in accordance with Company policies. 5. Termination and Termination Payments. ------------------------------------ (a) Voluntary Termination. Executive has the right to terminate his --------------------- employment by the Company upon not less than one (1) month prior written notice to the Company. In the event of such election, Executive's employment shall terminate effective upon the date set forth in such notice. In such event, the Company shall pay Executive all compensation (including base salary but excluding bonus) due him to the date of termination. (b) Involuntary Termination Without Cause. The Company shall have the ------------------------------------- right to terminate Executive's employment without Cause upon not less than one month prior written notice to Executive. If the Company shall terminate Executive's employment without Cause the Company shall (i) pay Executive all compensation (including the base salary and an amount equal to the most recent annual bonus, if any, paid to Executive) and benefits due him to the date of his termination and for a period of one (1) year following the date of such termination if such termination occurs during the first year of the term of this Agreement, and for a period of six (6) months if such termination occurs during the second year of the term of this Agreement or any renewal period; and (ii) accelerate the vesting of all restricted stock and stock options held by Executive such that the restricted stock and options shall be immediately vested or exercisable in full, as applicable, as of the date of termination. During such period, Executive shall continue to be entitled to participate in the Company's employee benefits plans or arrangements (as set forth in Section 4 above) on the same basis as if he were an employee. (c) Involuntary Termination With Cause. The Company shall have the ---------------------------------- right to terminate Executive's employment with "Cause" upon three (3) days written notice to Executive. In such event, the Company shall pay Executive all compensation (including base salary but excluding bonus) due him to the date of his termination. (d) "Cause" Defined. For the purposes of this Agreement, "Cause" -------------- shall mean (A) willful and repeated failure to comply with the lawful written directions of the Board while Executive is President and Chief Executive Officer, and of the President and Chief Executive Officer, once Executive becomes Executive Vice President, (B) gross negligence or willful misconduct in the performance of duties to the Company and/or it subsidiaries, (C) commission of any act of fraud with respect to the Company and/or its subsidiaries, or (D) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company and/or it subsidiaries, in each case as determined in good faith by the Board while Executive is President and Chief Executive Officer, and by the President and Chief Executive Officer once Executive becomes Executive Vice President. In each of the foregoing circumstances except (D), written notice shall be given to Executive specifying in reasonable detail the facts giving rise thereto and that continuation may be cause for termination unless such conduct is cured to the satisfaction of the Board while Executive is President and Chief Executive Officer, and of the President and Chief Executive Officer once Executive becomes Executive Vice President within five (5) business days of receipt of such notice by Executive. 6. Noncompetition Covenant. During the period specified below, Executive ----------------------- hereby agrees that he shall not do any of the following without the prior written consent of the Board: (a) Compete. Carry on anywhere in the United State any business or ------- activity (whether directly or indirectly, as a partner, shareholder, principal, agent, director, affiliate or consultant) which is directly competitive with the Business conducted by the Company. It is agreed that ownership of no more than one percent of the outstanding voting stock of a publicly traded corporation, ownership of no more than five percent of the outstanding voting stock of a privately held corporation or ownership of no more than ten percent of the limited partnership interests of a partnership shall not constitute a violation of this provision. As used herein, the "Business" conducted by the Company shall consist of the ablation of neural and other tissues in and around the spine (to exclude the brain) and coagulation of collagenous musculo-skeletal structures. (b) Solicit Business. Solicit or influence or attempt to influence ---------------- any client, customer or other person either directly or indirectly, to direct his or its purchase of the Company's products and/or services to any person, firm, corporation, institution or other entity in competition with the Business of the Company. (c) Solicit Personnel. Solicit or influence or attempt to influence ----------------- any person employed by the Company to terminate or otherwise cease his employment with the Company or become an employee of any competitor of the Company. (d) Termination. The covenants set forth in this Section 6 shall be ----------- effective commencing as of the date hereof and shall continue for so long as cash payments are made to Executive under this Agreement. 7. Successors. Any successor to the Company (whether direct or indirect ---------- and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of Executive's rights hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. Notices and all other communications contemplated by this ------ Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by facsimile or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the address recorded in Executive's personnel file. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. 9. Miscellaneous Provisions. ------------------------ (a) No Duty to Mitigate. Employee shall not be required to mitigate ------------------- the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that Employee may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived ------ or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No waiver by either party or any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understanding --------------- (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereto. (d) Choice of Law. The validity, interpretation, construction and ------------- performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. If any term or provision of this Agreement or the ------------ application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such terms or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (f) Employment Taxes. All payments made pursuant to this Agreement ---------------- will be subject to withholding of applicable income and employment taxes. (g) Assignment of Company. The Company may assign its rights under --------------------- this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs you. (h) Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of this together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. ORATEC INTERVENTIONS, INC. By: /s/ Patrick Latterell ---------------------- Title: HUGH SHARKEY, an individual /s/ Hugh Sharkey -------------------------- Hugh Sharkey EXHIBIT A CONFIDENTIALITY AGREEMENT FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "First Amendment") is --------------- entered into as of July 14, 1997 (the "Effective Date") between Oratec -------------- Interventions, Inc., a California corporation ("Oratec"), and Hugh Sharkey ------ ("Executive"). --------- RECITALS -------- A. The Company and Executive entered into an Employment Agreement dated as of August 21, 1996 (the "Agreement"). --------- B. On the Effective Date, the Company hired a new President and Chief Executive Officer, as contemplated in the Agreement, and Executive resigned from such positions. C. The Compensation Committee of the Board of Directors has approved certain amendments to the Agreement, and the parties wish to amend the Agreement in accordance therewith. Terms used herein but not defined herein shall have the same meanings ascribed to them in the Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENT --------- 1. Employment. Executive hereby resigns as President and Chief Executive ---------- Officer of the Company. The Company shall employ Executive as Executive Vice President and Chief Technical Officer of the Company. 2. Duties. Subject to the authority of the Board, Executive shall have ------ the authority associated with the offices of Executive Vice President and Chief Technical Officer, and shall perform, on behalf of the Company, all duties and services as are customarily incident to such offices. Among other things, Executive is expected to participate in business development and fund raising, including participation in "working group" meetings associated with an initial public offering of the Company's securities. In addition, Executive may continue to attend a reasonable number of business conferences, seminars, meetings of professional societies to the extent such activities contribute to the performance of Executive's duties. 3. Bonus. The Company shall pay Executive, within seven (7) days of the ----- closing of the Company's Series D financing, the amount of $70,000, representing a 25% annual bonus of Executive's base salary of $11,666.67 per month for Executive's two (2) years of service as the Company's President and Chief Executive Officer. In addition, within a reasonable period of time following the Effective Date, the Company shall institute a performance bonus plan for Executive based upon milestones determined by the President of the Company. 4. Common Stock. Executive shall be entitled to keep 5,000 shares of the ------------ Company's Common Stock currently registered in Executive's name on certificate CS-81 which Executive repurchased from Ron Lax on October 25, 1995. 5. Acceleration of Vesting. In the event of a Change of Control, (a) ----------------------- Executive's option for 40,000 shares of Common Stock granted on April 25, 1996 will be deemed to be 100% vested, and (b) the Company's repurchase option with respect to (i) 150,000 shares of Common Stock held in the name of Smith Barney Shearson as IRA Custodian FBO Hugh Sharkey IRA Account #595-62497-1-7-019 and (ii) 444,000 shares of Common Stock held in the name of Sharkey-Daly Family Trust U/D/T dated 9-23-96, will lapse in its entirety, in each case as of the date of consummation of such Merger. For purposes of the Agreement, a "Change ------ of Control" shall mean the occurrence of any of the following events: (i) an - ---------- acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of the Company), or (ii) a sale of all or substantially all of the assets of the Company (collectively, a "Merger"), so long as in either case (x) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than fifty percent (50%) of the voting power of the surviving or acquiring entity, or (y) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than sixty percent (60%) of the voting power of the surviving or acquiring entity and a majority of the members of the Board of Directors of the surviving or acquiring entity immediately after such Merger were not members of the Board of Directors of the Company immediately prior to such Merger. 6. Except as expressly amended by this First Amendment, the Agreement shall remain in full force and effect, and the terms of the Agreement are incorporated herein and made a part hereof. The parties have executed this First Amendment to Employment Agreement, effective as of the Effective Date. ORATEC INTERVENTIONS, INC. HUGH SHARKEY, An individual By: /s/ Kenneth Anstey /s/ Hugh Sharkey ----------------------------- ----------------------------- Kenneth Anstey, President and CEO Hugh Sharkey EX-10.5 13 CHANGE OF CONTROL LETTER AGREEMENT WITH R. LIPTON EXHIBIT 10.5 January 1, 1996 Mr. Roger Lipton [Address] Dear Roger: On November 29, 1995, (the "Grant Date") Oratec's Board of Directors granted you an option to purchase 110,000 shares of Oratec's Common Stock (the "Option") and a warrant to purchase 50,000 shares of Oratec's Series B Preferred Stock (the Warrant"). Both the Option and the Warrant contain certain vesting provisions. The Board has determined to modify the terms of the Option and the Warrant. In the event of a merger or consolidation of the Company in which the Company is not the surviving corporation or a sale of all or substantially all of the Company's assets (collectively, a "Merger"), the Option and the Warrant shall become fully exercisable immediately prior to the completion of the Merger. Please let me know if you have questions regarding the above.. Sincerely, /s/ Hugh Sharkey Hugh Sharkey President and Chief Executive Officer EX-10.6 14 1995 STOCK PLAN, AS AMENDED, AND FORM OF OPTION AGMT. Exhibit 10.6 ORATEC INTERVENTIONS, INC. 1995 STOCK PLAN (As amended through July 1999) 1. Purposes of the Plan. The purposes of this 1995 Stock Plan are to -------------------- attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or nonstatutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock purchase rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees appointed ------------- pursuant to Section 4 of the Plan. (b) "Affiliate" means an entity other than a Subsidiary in which the --------- Company owns an equity interest or which, together with the Company, is under common control of a third person or entity. (c) "Applicable Laws" means the legal requirements relating to the --------------- administration of stock option, restricted stock purchase and stock bonus plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange rules or regulations and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time. (d) "Board" means the Board of Directors of the Company. ----- (e) "Code" means the Internal Revenue Code of 1986, as amended. ---- (f) "Committee" means the Committee appointed by the Board of --------- Directors in accordance with Section 4(a) of the Plan. (g) "Common Stock" means the Common Stock of the Company. ------------ (h) "Company" means Oratec Interventions, Inc., a California ------- corporation. (i) "Consultant" means any person, including an advisor, who is ---------- engaged by the Company or any Parent, Subsidiary or Affiliate to render services and is compensated for such services, and any director of the Company whether compensated for such services or not. (j) "Continuous Status as an Employee or Consultant" means the ---------------------------------------------- absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or their respective successors. For purposes of this Plan, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute an interruption of Continuous Status as an Employee or Consultant. (k) "Director" means a member of the Board. -------- (l) "Employee" means any person (including if appropriate, any Named -------- Executive, Officer or Director) employed by the Company or any Parent, Subsidiary or Affiliate of the Company, with the status of employment determined based upon such minimum number of hours or periods worked as shall be determined by the Administrator in its discretion, subject to any requirements of the Code. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (n) "Fair Market Value" means, as of any date, the fair market value ----------------- of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales price for such stock on the date of grant of the Option (or in the event the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal or such other source as the ----------------------- Administrator deems reliable; (ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the bid and asked prices for the Common Stock on the date of grant of the Option, as reported in The Wall Street Journal or such other source as ------------------------ the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable written option agreement. -2- (p) "Listed Security" means any security of the Company that is --------------- listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. (q) "Named Executive" means any individual who, on the last day of --------------- the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four most highly compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (r) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option, as designated in the applicable written option agreement. (s) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16(a) of the Exchange Act and the rules and regulations promulgated thereunder. (t) "Option" means a stock option granted pursuant to the Plan. ------ (u) "Optioned Stock" means the Common Stock subject to an Option or a -------------- Stock Purchase Right. (v) "Optionee" means an Employee or Consultant who receives an Option -------- or a Stock Purchase Right. (w) "Parent" means a "parent corporation", whether now or hereafter ------ existing, as defined in Section 424(e) of the Code, or any successor provision. (x) "Plan" means this 1995 Stock Plan. ---- (y) "Reporting Person" means an Officer, Director, or greater than ---------------- ten percent shareholder of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act. (z) "Restricted Stock" means shares of Common Stock acquired pursuant ---------------- to a grant of a Stock Purchase Right under Section 11 below. (aa) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, ---------- as the same may be amended from time to time, or any successor provision. (bb) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 13 of the Plan. (cc) "Stock Exchange" means any stock exchange or consolidated stock -------------- price reporting system on which prices for the Common Stock are quoted at any given time. -3- (dd) "Stock Purchase Right" means the right to purchase Common Stock -------------------- pursuant to Section 11 below. (ee) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code, or any successor provision. (ff) "Ten Percent Holder" means a person who owns stock representing ------------------ more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of ------------------------- the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 3,000,000 shares of Common Stock (on a post-split basis) plus an automatic annual increase on the first day of each of the company's fiscal years beginning in 2000 and ending in 2002 equal to the lesser of: (i) 750,000 shares; (ii) four percent (4%) of the shares outstanding on the last day of the immediately preceding fiscal year; or (iii) such lesser number of shares as is determined by the board of directors. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock which are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise shall be treated as not issued and shall continue to be available under the Plan. 4. Administration of the Plan. -------------------------- (a) General. The Plan shall be administered by the Board or a ------- Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Optionees and, if permitted by the Applicable Laws, the Board may authorize one or more officers (who may (but need not) be Officers) to grant Options or Stock Purchase Rights to Employees and Consultants. (b) Administration With Respect to Reporting Persons. With respect to ------------------------------------------------ Options and Stock Purchase Rights granted to Reporting Persons and Named Executives, the Plan may (but need not) be administered so as to permit such Options and Stock Purchase Rights to qualify for the exemption set forth in Rule 16b-3 and to qualify as performance-based compensation under Section 162(m) of the Code. (c) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any Stock Exchange, the Administrator shall have the authority, in its discretion: -4- (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(n) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder; (vii) to determine whether and under what circumstances an Option may be settled in cash under Section 10(f) instead of Common Stock; (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; and (x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (xi) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs. (c) Effect of Administrator's Decision. All decisions, ---------------------------------- determinations and interpretations of the Administrator shall be final and binding on all holders of Options or Stock Purchase Rights. 5. Eligibility. ----------- (a) Recipients of Grants. Nonstatutory Stock Options and Stock -------------------- Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees, provided however that Employees of Affiliates shall not be eligible to receive Incentive Stock Options. An Employee or Consultant who has been granted an Option or -5- Stock Purchase Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) Type of Option. Each Option shall be designated in the written -------------- option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares subject to an Incentive Stock Option shall be determined as of the date of the grant of such Option. (c) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with such Optionee's right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 20 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in -------------- the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement and provided further that, in the case of an Option granted to an Optionee who, at the time the Option is granted, is a Ten Percent Holder, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the written option agreement. After the date, if any, on which the Common Stock becomes a Listed Security, the five (5) year limitation on option grants to Ten Percent Holders described above shall only apply to the grant of Incentive Stock Options. 8. Limitation on Grants to Employees. Subject to adjustment as provided --------------------------------- in Section 13 below, the maximum number of Shares which may be subject to Options and Stock Purchase Rights granted to any one Employee under this Plan for any fiscal year of the Company shall be 1,000,000 Shares. 9. Option Exercise Price and Consideration. --------------------------------------- (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board and set forth in the applicable agreement, but shall be subject to the following: (i) In the case of an Incentive Stock Option that is: -6- (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option that is: (A) granted, prior to the date, if any, on which the Common Stock becomes a Listed Security, to a person who, at the time of the grant of such Option, is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted to a person who, at the time of the grant of such Option, is a Named Executive, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant if such Option is intended to qualify as performance-based compensation under Section 162(m) of the Code; (C) granted, prior to the date, if any, on which the Common Stock becomes a Listed Security, to a person other than a Named Executive or a Ten Percent Holder, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) authorization for the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (6) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable income or employment taxes, (7) any combination of the foregoing methods of payment, or (8) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to -7- accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, and reflected in the written option agreement, which may include vesting requirements and/or performance criteria with respect to the Company and/or the Optionee; provided that if required by the Applicable Laws, any option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security, shall become exercisable at the rate of at least twenty percent (20%) per year over five (5) years from the date the Option is granted. In the event that any of the Shares issued upon exercise of an Option (which exercise occurs prior to the date, if any, upon which the Common Stock becomes a Listed Security) should be subject to a right of repurchase in the Company's favor, such repurchase right shall, if required by the Applicable Laws, lapse at the rate of at least twenty percent (20%) per year over five (5) years from the date the Option is granted. Notwithstanding the above, in the case of an Option granted to an officer, Director or Consultant of the Company or any Parent, Subsidiary or Affiliate of the Company, the Option may become fully exercisable, or a repurchase right, if any, in favor of the Company shall lapse, at any time or during any period established by the Administrator. The Administrator shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided however that in the absence of such determination, vesting of Options shall be tolled during any such leave. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to which the Option is exercised. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, not withstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. Subject to ---------------------------------------------------- Sections 10(c) and 10(d), in the event of termination of an Optionee's Continuous Status as an Employee or Consultant with the Company, such Optionee may, but only within three (3) -8- months (or such other period of time not less than thirty (30) days as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option and not exceeding three (3) months) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. No termination shall be deemed to occur and this Section 10(b) shall not apply if (i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee is an Employee who becomes a Consultant. (c) Disability of Optionee. ---------------------- (i) Notwithstanding Section 10(b) above, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her total and permanent disability (within the meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (ii) In the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of a disability which does not fall within the meaning of total and permanent disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. However, to the extent that such Optionee fails to exercise an Option which is an Incentive Stock Option ("ISO") (within the meaning of Section 422 of the Code) within three (3) months of the date of such termination, the Option will not qualify for ISO treatment under the Code. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within six months (6) from the date of termination, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee ----------------- during the period of Continuous Status as an Employee or Consultant since the date of grant of the Option, or within thirty (30) days following the termination of Optionee's Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death, or, if earlier, the date of termination of -9- Optionee's Continuous Status as an Employee or Consultant. To the extent that Optionee is not entitled to exercise the Option as set forth above, or if the Option is not exercised to the extent it is exercisable within the time specified herein, the Option shall terminate. (e) Rule 16b-3. Options granted to Reporting Persons shall comply ---------- with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption for Plan transactions. (f) Buyout Provisions. The Administrator may at any time offer to ----------------- buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. --------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued either ------------------ alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. In the case of a Stock Purchase Right granted prior to the date, if any, on which the Common Stock becomes a Listed Security and if required by the Applicable Laws at such time, the purchase price of Shares subject to such Stock Purchase Rights shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the price shall not be less than 100% of the Fair Market Value of the Shares as of the date of the offer. If the Applicable Laws do not impose the requirements set forth in the preceding sentence and with respect to any Stock Purchase Rights granted after the date, if any, on which the Common Stock becomes a Listed Security, the purchase price of Shares subject to Stock Purchase Rights shall be as determined by the Administrator. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as "Restricted Stock." (b) Repurchase Option. Unless the Administrator determines ----------------- otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original purchase price paid by the purchaser and may be paid by cancellation of any indebtedness of the Purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine, provided, however, that with respect to a Stock Purchase Right granted prior to the date, if any, on which the Common Stock becomes a Listed Security to a purchaser who is not an officer -10- (including an Officer), Director or Consultant of the Company or any Parent, Subsidiary or Affiliate of the Company, it shall lapse at a minimum rate of 20% per year. (c) Other Provisions. The Restricted Stock purchase agreement shall ---------------- contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser. (d) Rights as a Shareholder. Once the Stock Purchase Right is ----------------------- exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Taxes. ----- (a) As a condition of the exercise of an Option or Stock Purchase Right granted under the Plan, the Participant (or in the case of the Participant's death, the person exercising or receiving the Option or Stock Purchase Right) shall make such arrangements as the Administrator may require for the satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of Option or Stock Purchase Right and the issuance of Shares. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. (b) In the case of an Employee and in the absence of any other arrangement, the Employee shall be deemed to have directed the Company to withhold or collect from his or her compensation an amount sufficient to satisfy such tax obligations from the next payroll payment otherwise payable after the date of an exercise of the Option or Stock Purchase Right. (c) This Section 12(c) shall apply only after the date, if any, upon which the Common Stock becomes a Listed Security. In the case of Participant other than an Employee (or in the case of an Employee where the next payroll payment is not sufficient to satisfy such tax obligations, with respect to any remaining tax obligations), in the absence of any other arrangement and to the extent permitted under the Applicable Laws, the Participant shall be deemed to have elected to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the amount required to be withheld. For purposes of this Section 12, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Laws (the "Tax Date"). -------- (d) If permitted by the Administrator, in its discretion, a Participant may satisfy his or her tax withholding obligations upon exercise of an Option or Stock Purchase Right by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Participant for more than six (6) months on the date of -11- surrender, and (ii) have a Fair Market Value determined as of the applicable Tax Date equal to the amount required to be withheld. (e) Any election or deemed election by a Participant to have Shares withheld to satisfy tax withholding obligations under Section 12(c) or (d) above shall be irrevocable as to the particular Shares as to which the election is made and shall be subject to the consent or disapproval of the Administrator. Any election by a Participant under Section 12(d) above must be made on or prior to the applicable Tax Date. (f) In the event an election to have Shares withheld is made by a Participant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the applicable Tax Date. 13. Adjustments Upon Changes in Capitalization, Merger or Certain Other ------------------------------------------------------------------- Transactions. - ------------ (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, the number of Shares described in Section 3(a)(i) and 8 above, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Sale of Assets. In the event of a proposed sale of all ------------------------ or substantially all of the Company's assets or a merger of the Company with or into another corporation where the successor corporation issues its securities to the Company's shareholders, each -12- outstanding Option or Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the successor corporation does not agree to assume the Option or Stock Purchase Right or to substitute an equivalent option or right, or to accept assignment of the conditions and restrictions with respect to Restricted Stock, in which case such Option or Stock Purchase Right shall terminate upon the consummation of the merger or sale of assets and all conditions or restrictions with respect to Restricted Stock shall lapse upon the consummation of the merger or sale of assets. (d) Certain Distributions. In the event of any distribution to the --------------------- Company's shareholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution. 14. Non-Transferability of Options and Stock Purchase Rights. Options and -------------------------------------------------------- Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution, provided that, after the date, if any, upon which the Common Stock becomes a Listed Security, the Administrator may in its discretion grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the manner in which such Nonstatutory Stock Options are transferable and (ii) that any such transfer shall be subject to the Applicable Laws. The designation of a beneficiary by an Optionee will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the holder of Option or Stock Purchase Right, only by such holder or a transferee permitted by this Section 14. 15. Time of Granting Options and Stock Purchase Rights. The date of -------------------------------------------------- grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 16. Amendment and Termination of the Plan. ------------------------------------- (a) Authority to Amend or Terminate. The Board may at any time amend, ------------------------------- alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made that would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with the Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. No amendment or termination ---------------------------------- of the Plan shall adversely affect Options already granted, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 17. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Pur- -13- chase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any Stock Exchange. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law. 18. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. Agreements. Options and Stock Purchase Rights shall be evidenced by ---------- written agreements in such form as the Administrator shall approve from time to time. 20. Shareholder Approval. Continuance of the Plan shall be subject to -------------------- approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under the Applicable Laws. All Options and Stock Purchase Rights issued under the Plan shall become void in the event such approval is not obtained. 21. Information to Optionees and Purchasers. Prior to the date, if any, --------------------------------------- upon which the Common Stock becomes a Listed Security and if required by the Applicable Laws, the Company shall provide financial statements at least annually to each Optionee and to each individual who acquired Shares Pursuant to the Plan, during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares. The Company shall not be required to provide such information if the issuance of Options or Stock Purchase Rights under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. -14- 1995 STOCK PLAN NOTICE OF STOCK OPTION GRANT ---------------------------- Optionee's Name and Address: You have been granted an option to purchase Common Stock of Oratec Interventions, Inc., (the "Company") as follows: Board Approval Date: ___________________ Date of Grant (Later of Board Approval Date or Commencement of Employment/Consulting): Exercise Price Per Share: Total Number of Shares Granted: Total Price of Shares Granted: Type of Option: Shares Incentive Stock Option Shares Nonstatutory Stock Option Term/Expiration Date: Vesting Commencement Date: Vesting Schedule: Termination Period: Option may be exercised for a period of 60 days after termination of employment or consulting relationship except as set out in Sections 7 and 8 of the Stock Option Agreement (but in no event later than the Expiration Date). By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the Oratec Interventions, Inc. 1995 Stock Plan and the Stock Option Agreement, all of which are attached and made a part of this document. OPTIONEE: ORATEC INTERVENTIONS, INC. ______________________ By:_________________________ Signature ______________________ Title:______________________ Print Name ORATEC INTERVENTIONS, INC. STOCK OPTION AGREEMENT ---------------------- 1. Grant of Option. Oratec Interventions, Inc., a Delaware corporation --------------- (the "Company"), hereby grants to the Optionee named in the Notice of Stock ------- Option Grant attached to this Agreement ("Optionee"), an option (the "Option") -------- ------ to purchase the total number of shares of Common Stock (the "Shares") set forth ------ in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms, -------------- definitions and provisions of the 1995 Stock Plan (the "Plan") adopted by the ---- Company, which is incorporated in this Agreement by reference. In the event of a conflict between the terms of the Plan and the terms of this Agreement, the terms of the Plan shall govern. Unless otherwise defined in this Agreement, the terms used in this Agreement shall have the meanings defined in the Plan. To the extent designated an Incentive Stock Option in the Notice of Stock Option Grant, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and, to the extent not so designated, this Option is ---- intended to be a Nonstatutory Stock Option. 2. Exercise of Option. This Option shall be exercisable during its term ------------------ in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and with the provisions of Sections 9 and 10 of the Plan as follows: (a) Right to Exercise. ----------------- (i) This Option may not be exercised for a fraction of a share. (ii) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitations contained in paragraphs (iii) and (iv) below. (iii) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Stock Option Grant. (iv) If designated an Incentive Stock Option in the Notice of Stock Option Grant, in the event that the Shares subject to this Option (and all other Incentive Stock Options granted to Optionee by the Company or any Parent or Subsidiary) that vest in any calendar year have an aggregate fair market value (determined for each Share as of the Date of Grant of the option covering such Share) in excess of $100,000, the Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option, in accordance with Section 5 of the Plan. (b) Method of Exercise. ------------------ (i) This Option shall be exercisable by delivering to the Company a written notice of exercise (in the form attached as Exhibit A) which --------- shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. (ii) As a condition to the exercise of this Option, Optionee agrees to make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the exercise of the Option or disposition of Shares, whether by withholding, direct payment to the Company, or otherwise. (iii) No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares purchasable -------------------------- pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), at the time this -------------- Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in customary form, a copy of which is available for Optionee's review from the Company upon request. 4. Method of Payment. Payment of the Exercise Price shall be by any of ----------------- the following, or a combination of the following, at the election of Optionee: (a) cash; (b) check; (c) surrender of other Shares of Common Stock of the Company that (i) either have been owned by Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; or (d) if there is a public market for the Shares and they are registered under the Securities Act, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 5. Restrictions on Exercise. This Option may not be exercised until such ------------------------ time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as ------------ promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. Termination of Relationship. In the event of termination of Optionee's --------------------------- Continuous Status as an Employee or Consultant, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), ---------------- exercise this Option during the Termination Period set out in the Notice of Stock Option Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified in the Notice of Stock Option Grant, the Option shall terminate. 7. Disability of Optionee. ---------------------- (i) Notwithstanding the provisions of Section 6 above, in the event of termination of Optionee's Continuous Status as an Employee or Consultant as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), exercise the Option to the extent otherwise so entitled at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified in this Agreement, the Option shall terminate. (ii) In the event of termination of Optionee's Continuous Status as an Employee or Consultant as a result of any disability not constituting a total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), exercise this Option to the extent he was entitled to exercise it at the date of such termination; provided, however, that if this is an Incentive Stock Option and Optionee fails to exercise this Incentive Stock Option within three (3) months from the date of termination of employment, this Option will cease to qualify as an Incentive Stock Option (as defined in Section 422 of the Code) and Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such exercise in an amount generally measured by the difference between the exercise price for the Shares and the fair market value of the Shares on the date of exercise. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. 8. Death of Optionee. In the event of the death of Optionee during the ----------------- period of Continuous Status as an Employee or Consultant since the date of grant of the Option, or within thirty (30) days following the termination of Optionee's Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death, or, if earlier, the date of termination of Optionee's Continuous Status as an Employee or Consultant. 9. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution. The designation of a beneficiary does not constitute a transfer. An Option may be exercised during the lifetime of Optionee only by Optionee or a transferee permitted by this section. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 10. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 11. No Additional Employment Rights. Optionee understands and agrees that ------------------------------- the vesting of Shares pursuant to the Vesting Schedule is earned only by continuing as an Employee or Consultant at the will of the Company (not through the act of being hired, being granted this Option or acquiring Shares under this Agreement). Optionee further acknowledges and agrees that nothing in this Agreement, nor in the Plan which is incorporated in this Agreement by reference, shall confer upon Optionee any right with respect to continuation as an Employee or Consultant with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 12. Tax Consequences. Optionee acknowledges that he or she has read the ---------------- brief summary set forth below of certain federal tax consequences of exercise of this Option and disposition of the Shares under the law in effect as of the date of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of Incentive Stock Option. If this Option is an ---------------------------------- Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an item of alternative minimum taxable income for federal tax purposes and may subject Optionee to the alternative minimum tax in the year of exercise. (b) Exercise of Nonstatutory Stock Option. If this Option does not ------------------------------------- qualify as an Incentive Stock Option, Optionee may incur regular federal income tax liability upon the exercise of the Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. In addition, if Optionee is an employee of the Company, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (c) Disposition of Shares. If this Option is an Incentive Stock --------------------- Option and if Shares transferred pursuant to the Option are held for more than one year after exercise and more than two years after the Date of Grant, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an Incentive Stock Option are disposed of before the end of either of such two holding periods, then any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (i) the fair market value of the Shares on the date of exercise, or (ii) the sales proceeds, over the Exercise Price. If this Option is a Nonstatutory Stock Option, then gain realized on the disposition of Shares will be treated as long-term or short-term capital gain depending on whether or not the disposition occurs more than one year after the exercise date. In the case of either an Incentive Stock Option or a Nonstatutory Stock Option, the long-term capital gain will be taxed for federal income tax and alternative minimum tax purposes at a maximum rate of 20%. (d) Notice of Disqualifying Disposition. If the Option granted to ----------------------------------- Optionee in this Agreement is an Incentive Stock Option, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the Incentive Stock Option on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after transfer of such Shares to Optionee upon exercise of the Incentive Stock Option, Optionee shall notify the Company in writing within thirty (30) days after the date of any such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by Optionee from the early disposition by payment in cash or out of the current earnings paid to Optionee. 13. Signature. This Stock Option Agreement shall be deemed executed by --------- the Company and Optionee upon execution by such parties of the Notice of Stock Option Grant attached to this Stock Option Agreement. [Remainder of page left intentionally blank] EXHIBIT A --------- NOTICE OF EXERCISE ------------------ To: Oratec Interventions, Inc. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option -------------------------------------------- This is official notice that the undersigned ("Optionee") intends to -------- exercise Optionee's option to purchase __________ shares of Oratec Interventions, Inc. Common Stock, under and pursuant to the Company's 1995 Stock Plan and the Stock Option Agreement dated ___________, as follows: Grant Number: ________________________________ Date of Purchase: ________________________________ Number of Shares: ________________________________ Purchase Price: ________________________________ Method of Payment of Purchase Price: ________________________________ Social Security No.: __________________________________ The shares should be issued as follows: Name: ____________________________ Address:____________________________ ____________________________ ____________________________ Signed: ____________________________ Date: ____________________________ EX-10.7 15 1999 DIRECTORS' STOCK OPTION PLAN AND FORM OF OPTION AGMT. EXHIBIT 10.7 ORATEC INTERVENTIONS, INC. 1999 DIRECTORS' STOCK OPTION PLAN --------------------------------- 1. Purposes of the Plan. The purposes of this Directors' Stock Option -------------------- Plan are to attract and retain the best available individualsl for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Board" means the Board of Directors of the Company. ----- (b) "Change of Control" means a sale of all or substantially all of ----------------- the Company's assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction. (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Common Stock" means the Common Stock of the Company. ------------ (e) "Company" means Oratec Interventions, Inc., a California ------- corporation. (f) "Continuous Status as a Director" means the absence of any ------------------------------- interruption or termination of service as a Director. (g) "Corporate Transaction" means a dissolution or liquidation of the --------------------- Company, a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (h) "Director" means a member of the Board. -------- (i) "Employee" means any person, including any officer or Director, -------- employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (j) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (k) "Option" means a stock option granted pursuant to the Plan. All ------ options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code). (l) "Optioned Stock" means the Common Stock subject to an Option. -------------- (m) "Optionee" means an Outside Director who receives an Option. -------- (n) "Outside Director" means a Director who is not an Employee. ---------------- (o) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (p) "Plan" means this 1999 Directors' Stock Option Plan. ---- (q) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 11 of the Plan. (r) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 200,000 Shares of Common Stock (the "Pool"). The Shares may ---- be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option, or any withholding taxes due with respect to such exercise, shall be treated as not issued and shall continue to be available under the Plan. If Shares that were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan. 4. Administration of and Grants of Options under the Plan. ------------------------------------------------------ (a) Administrator. Except as otherwise required herein, the Plan ------------- shall be administered by the Board. (b) Procedure for Grants. All grants of Options hereunder shall be -------------------- automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: -2- (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase 20,000 Shares (the "First Option") on the date on which such person first becomes an Outside Director after the effective date of this Plan, whether through election by the shareholders of the Company or appointment by the Board of Directors to fill a vacancy. (iii) Each Outside Director, including an Outside Director who did not receive a First Option grant, shall be automatically granted an Option to purchase 5,000 Shares (the "Subsequent Option") on the date of each Annual Meeting of the Company's stockholders immediately following which such Outside Director is serving on the Board, provided that, on such date, he or she shall have served on the Board for at least six (6) months prior to the date of such Annual Meeting. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors receiving an Option on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (v) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an Option made before the Company has obtained stockholder approval of the Plan in accordance with Section 17 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 17 hereof. (vii) The terms of each Option granted hereunder shall be as follows: (1) each Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 below; (2) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of each Option, determined in accordance with Section 8 hereof; (3) each Option shall be fully vested and exercisable as of the date of grant. (c) Powers of the Board. Subject to the provisions and restrictions ------------------- of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the -3- Common Stock; (ii) to determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 8 of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan. (d) Effect of Board's Decision. All decisions, determinations and -------------------------- interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. (e) Suspension or Termination of Option. If the Chief Executive ----------------------------------- Officer or his or her designee reasonably believes that an Optionee has committed an act of misconduct, such officer may suspend the Optionee's right to exercise any option pending a determination by the Board (excluding the Outside Director accused of such misconduct). If the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. 5. Eligibility. Options may be granted only to Outside Directors. All ----------- Options shall be automatically granted in accordance with the terms set forth in Section 4(b) above. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. Term of Plan; Effective Date. The Plan shall become effective on the ---------------------------- effectiveness of the registration statement under the Securities Act of 1933, as amended, relating to the Company's initial public offering of securities. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan. 7. Term of Options. The term of each Option shall be ten (10) years from --------------- the date of grant thereof unless an Option terminates sooner pursuant to Section 9 below. -4- 8. Exercise Price and Consideration. -------------------------------- (a) Exercise Price. The per Share exercise price for the Shares to -------------- be issued pursuant to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of the Option. (b) Fair Market Value. The fair market value shall be determined by ----------------- the Board; provided however that in the event the Common Stock is traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the closing sales price on such system or exchange on the date of grant of the Option (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall -------- Street Journal, or if there is a public market for the Common Stock but the - -------------- Common Stock is not traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter market on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise ------------------------ reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System). (c) Form of Consideration. The consideration to be paid for the --------------------- Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 9. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times as are set forth in Section 4(b) above; provided however that no Options shall be exercisable prior to stockholder approval of the Plan in accordance with Section 17 below has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise -5- of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Continuous Status as a Director. If an Outside ---------------------------------------------- Director ceases to serve as a Director, he or she may, but only within sixty (60) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (c) Disability of Optionee. Notwithstanding Section 9(b) above, in ---------------------- the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within twelve (12) months from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee: (A) ----------------- during the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, or (B) within three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or the date of termination, as applicable. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that an Optionee was not entitled to exercise the Option at the date of death or termination or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan. 10. Nontransferability of Options. The Option may not be sold, pledged, ----------------------------- assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code -6- or the rules thereunder). The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section. 11. Adjustments Upon Changes in Capitalization; Corporate Transactions. ------------------------------------------------------------------ (a) Adjustment. Subject to any required action by the shareholders ---------- of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii) and (iii) above, and the number of Shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company) or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Corporate Transactions; Change of Control. In the event of a ----------------------------------------- Corporate Transaction, including a Change of Control, and except as otherwise provided in a Stock Option Agreement issued under the Plan, each outstanding Option shall be assumed or an equivalent option shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation, unless the successor corporation does not agree to assume the outstanding Options or to substitute equivalent options, in which case the Options shall terminate upon the consummation of the transaction. For purposes of this Section 11(b), an Option shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon such Corporate Transaction or Change of Control, each Optionee would be entitled to receive upon exercise of an Option the same number and kind of shares of stock or the same amount of property, cash or securities as the Optionee would have been entitled to receive upon the occurrence of such transaction if the Optionee had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option at such time (after giving effect to any adjustments in the number of Shares covered by the Option as provided for in this Section 11); provided however that if such consideration received in the transaction was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the Option to be solely common stock of the successor corporation or its Parent equal -7- to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction. (c) Certain Distributions. In the event of any distribution to the --------------------- Company's stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option to reflect the effect of such distribution. 12. Time of Granting Options. The date of grant of an Option shall, for ------------------------ all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may amend or terminate the ------------------------- Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the stockholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation. (b) Effect of Amendment or Termination. Any such amendment or ---------------------------------- termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Notwithstanding any other ---------------------------------- provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the legal requirements relating to the administration of stock option plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange or Nasdaq rules or regulations to which the Company may be subject and the applicable laws of any other country or jurisdiction where Options are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time (the "Applicable Laws"). Such compliance shall be determined by the --------------- Company in consultation with its legal counsel. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law. -8- 15. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 16. Option Agreement. Options shall be evidenced by written option ---------------- agreements in such form as the Board shall approve. 17. Stockholder Approval. If required by the Applicable Laws, continuance -------------------- of the Plan shall be subject to approval by the stockholders of the Company. Such stockholder approval shall be obtained in the manner and to the degree required under the Applicable Laws. -9- ORATEC INTERVENTIONS, INC. 1999 DIRECTORS' STOCK OPTION PLAN NOTICE OF STOCK OPTION GRANT ---------------------------- ((Optionee)) ((OptioneeAddress1)) ((OptioneeAddress2)) You have been granted an option to purchase Common Stock of Oratec Interventions, Inc. (the "Company") as follows: ------- Date of Grant ((GrantDate)) Vesting Commencement Date ((VestingStartDate)) Exercise Price per Share ((ExercisePrice)) Total Number of Shares Granted ((SharesGranted)) Total Exercise Price ((TotalExercisePrice)) Expiration Date ((ExpirDate)) Vesting Schedule: This Option may be exercised, in ---------------- whole or in part, in accordance with the following schedule: 100% of the Option Shares shall be vested and exercisable in full as of the Date of Grant. Termination Period: This Option may be exercised for ------------------ 60 days after termination of Optionee's Continuous Status as a Director, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan, but in no event later than the Expiration Date as provided above. -10- By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1999 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement, all of which are attached and made a part of this document. OPTIONEE: ORATEC INTERVENTIONS, INC. ____________________________ By: Signature _______________________________ ____________________________ Title: Print Name ____________________________ -11- ORATEC INTERVENTIONS, INC. NONSTATUTORY STOCK OPTION AGREEMENT ----------------------------------- 1. Grant of Option. The Board of Directors of the Company hereby grants --------------- to the Optionee named in the Notice of Stock Option Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase a number -------- ------ of Shares, as set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise -------- Price"'), subject to the terms and conditions of the 1999 Directors' Stock - ----- Option Plan (the "Plan"), which is incorporated herein by reference. ---- (Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Plan.) In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Nonstatutory Stock Option Agreement, the terms and conditions of the Plan shall prevail. 2. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its term in ----------------- accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. In the event of Optionee's death, disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an ------------------ exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), --------- --------------- which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and ---------------- such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be ----------------- by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; -12- (b) check; (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder) and may be exercised during the lifetime of Optionee only by the Optionee or a transferee permitted by Section 10 of the Plan. The terms of the Plan and this Nonstatutory Stock Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Nonstatutory Stock Option Agreement. 6. Tax Consequences. Set forth below is a brief summary of certain ---------------- federal tax consequences relating to this Option under the law in effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. Since this Option does not qualify as an --------------------- incentive stock option under Section 422 of the Code, the Optionee may incur regular federal income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. (b) Disposition of Shares. If the Optionee holds the Option Shares --------------------- for more than one year, gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. The long- term capital gain will be taxed for federal income tax purposes at a maximum rate of 20 percent. -13- By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Nonstatutory Stock Option Agreement and fully understands all provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Nonstatutory Stock Option Agreement. ORATEC INTERVENTIONS, INC. _______________________________ By: ((Optionee)) ________________________________ Title: _____________________________ -14- EXHIBIT A NOTICE OF EXERCISE ------------------ To: Oratec Interventions, Inc. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option -------------------------------------------- This is official notice that the undersigned ("Optionee") intends to -------- exercise Optionee's option to purchase __________ shares of Oratec Interventions, Inc. Common Stock, under and pursuant to the Company's 1999 Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement dated _______________, as follows: Grant Number: ______________________________________ Date of Purchase: ______________________________________ Number of Shares: ______________________________________ Purchase Price: ______________________________________ Method of Payment of Purchase Price: ______________________________________ Social Security No.: ______________________________________ The shares should be issued as follows: Name: ________________________________ Address: ________________________________ ________________________________ ________________________________ Signed: ________________________________ Date: ________________________________ -15- EX-10.8 16 1999 EMPLOYEE STOCK PURCHASE PLAN AND FORM OF SUB. AGMT. EXHIBIT 10.8 ORATEC INTERVENTIONS, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- The following constitute the provisions of the 1999 Employee Stock Purchase Plan of Oratec Interventions, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" means the Board of Directors of the Company. ----- (b) "Code" means the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" means the Common Stock of the Company. ------------ (d) "Company" means Oratec Interventions, Inc., a California ------- corporation. (e) "Compensation" means total cash compensation received by an ------------ Employee from the Company or a Designated Subsidiary. By way of illustration, but not limitation, Compensation includes regular compensation such as salary, wages, overtime, shift differentials, bonuses (other than bonuses offered in connection with, and as an inducement for, the commencement of employment), commissions and incentive compensation, but excludes relocation, expense reimbursements, tuition or other reimbursements, cash payments in lieu of sick or vacation time benefits and income realized as a result of participation in any stock option, stock purchase, or similar plan of the Company or any Designated Subsidiary. (f) "Continuous Status as an Employee" means the absence of any -------------------------------- interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Company, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company and its Designated Subsidiaries. (g) "Contributions" means all amounts credited to the account of a ------------- participant pursuant to the Plan. (h) "Corporate Transaction" means a sale of all or substantially all --------------------- of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (i) "Designated Subsidiaries" means the Subsidiaries which have been ----------------------- designated by the Board from time to time in its sole discretion as eligible to participate in the Plan; provided however that the Board shall only have the discretion to designate Subsidiaries if the issuance of options to such Subsidiary's Employees pursuant to the Plan would not cause the Company to incur adverse accounting charges. (j) "Employee" means any person, including an Officer, who is -------- customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (k) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (l) "Offering Date" means the first business day of each Offering ------------- Period of the Plan, except that in the case of an individual who becomes an eligible Employee after the first business day of an Offering Period but prior to the first business day of the fourth month of such Offering Period, the term "Offering Date" shall mean the first business day of the fourth month coinciding with or next succeeding the day on which that individual becomes an eligible Employee. Options granted after the first business day of an Offering Period will be subject to the same terms as the options granted on the first business day of such Offering Period except that they will have a different grant date (thus, potentially, a different exercise price) and, because they expire at the same time as the options granted on the first business day of such Offering Period, a shorter term. (m) "Offering Period" means a period of six (6) months commencing on --------------- May 1 and November 1 of each year, except for the first Offering Period as set forth in Section 4(a). (n) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "Plan" means this Employee Stock Purchase Plan. ---- (p) "Purchase Date" means the last day of each Offering Period of the ------------- Plan. (q) "Purchase Price" means with respect to an Offering Period an -------------- amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a Share of Common Stock on the Offering Date or on the Purchase Date, whichever is lower; provided, however, that in the event (i) of any increase in the number of Shares available for issuance under the Plan as a result of a shareholder-approved amendment to the Plan, and (ii) all or a portion of such 2 additional Shares are to be issued with respect to an Offering Period that is underway at the time of such increase ("Additional Shares"), and (iii) the Fair ----------------- Market Value of a Share of Common Stock on the date of such increase (the "Approval Date Fair Market Value") is higher than the Fair Market Value on the ------------------------------- Offering Date for any such Offering Period, then in such instance the Purchase Price with respect to Additional Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is lower. (r) "Share" means a share of Common Stock, as adjusted in accordance ----- with Section 18 of the Plan. (s) "Subsidiary" means a corporation, domestic or foreign, of which ---------- not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. ----------- (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by a series of ---------------- Offering Periods of six (6) months' duration, with new Offering Periods commencing on or about May 1 and November 1 of each year (or at such other time or times as may be determined by the Board of Directors). The first Offering Period shall commence on the effective date of the Registration Statement on Form S-1 for the initial public offering of the Company's Common Stock (the "IPO --- Date") and continue until April 30, 2000. The Plan shall continue until - ---- terminated in accordance with Section 19 hereof. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. 3 5. Participation. ------------- (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's Human Resource Department prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. The subscription agreement shall set forth the percentage of the participant's Compensation (subject to Section 6(a) below) to be paid as Contributions pursuant to the Plan. (b) Payroll deductions shall commence on the first full payroll paid following the Offering Date and shall end on the last payroll paid on or prior to the Purchase Date of the Offering Period to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. 6. Method of Payment of Contributions. ---------------------------------- (a) A participant shall elect to have payroll deductions made on each payday during the Offering Period in an amount not less than one percent (1%) and not more than fifteen percent (15%) of such participant's Compensation on each payday during the Offering Period. All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (b) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, on one occasion only during an Offering Period may decrease and on one occasion only during an Offering Period may increase the rate of his or her Contributions with respect to the Offering Period by completing and filing with the Company a new subscription agreement authorizing a change in the payroll deduction rate. The change in rate shall be effective as of the beginning of the next calendar month following the date of filing of the new subscription agreement, if the agreement is filed at least ten (10) business days prior to such date and, if not, as of the beginning of the next succeeding calendar month. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased during any Offering Period scheduled to end during the current calendar year to 0%. Payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. 7. Grant of Option. --------------- (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of Shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the applicable Purchase Price; provided however that the maximum number of Shares an Employee may purchase during each Offering Period 4 shall be 2,000 shares (subject to any adjustment pursuant to section 19 below,) and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 13. (b) The fair market value of the Company's Common Stock on a given date (the "Fair Market Value") shall be determined based on the closing sales ----------------- price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq on such date or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal. ----------------------- For purposes of the Offering Date under the first Offering Period under the Plan, the Fair Market Value of a share of the Common Stock of the Company shall be the Price to Public as set forth in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in Section 10, his or her option for the purchase of Shares will be exercised automatically on the Purchase Date of an Offering Period, and the maximum number of full Shares subject to the option will be purchased at the applicable Purchase Price with the accumulated Contributions in his or her account. No fractional Shares shall be issued. The Shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase Shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after the Purchase Date of each -------- Offering Period, the Company shall arrange the delivery to each participant, as appropriate, of the Shares purchased upon exercise of his or her option. No fractional Shares shall be issued; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full Share shall be retained in the participant's account for the subsequent Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 below. Any other amounts left over in a participant's account after a Purchase Date shall be returned to the participant. 10. Withdrawal; Termination of Employment. ------------------------------------- (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to the Purchase Date by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated, and no further Contributions for the purchase of Shares will be made during the Offering Period. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period for any reason, including retirement or death, the Contributions credited to his or her account will be returned to him or her or, in the case of 5 his or her death, to the person or persons entitled thereto under Section 14, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 11. Interest. No interest shall accrue on the Contributions of a -------- participant in the Plan. 12. Stock. ----- (a) Subject to adjustment as provided in Section 18, the maximum number of Shares which shall be made available for sale under the Plan shall be 250,000 Shares, plus an annual increase of the first day of each of the Company's fiscal years in 2001, 2002 and 2003 equal to the lesser of (i) 250,000 Shares, (ii) two percent (2.00%) of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of Shares as is determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If the Board determines that, on a given Purchase Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Purchase Date, the Board may in its sole discretion provide (x) that the Company shall make a pro rata allocation of the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and continue all Offering Periods then in effect, or (y) that the Company shall make a pro rata allocation of the shares available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and terminate any or all Offering Periods then in effect pursuant to Section 19 below. The Company may make pro rata allocation of the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company's shareholders subsequent to such Offering Date. (b) The participant shall have no interest or voting right in Shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 6 13. Administration. The Board, or a committee named by the Board, shall -------------- supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. 14. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive any Shares and/or cash, if any, from the participant's account under the Plan in the event of such participant's death prior to or subsequent to the end of an Offering Period but prior to delivery to him or her of such Shares and/or cash. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant (and his or her spouse, if any) at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither Contributions credited to a participant's --------------- account nor any rights with regard to the exercise of an option or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 14) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 16. Use of Funds. All Contributions received or held by the Company under ------------ the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 17. Reports. Individual accounts will be maintained for each participant ------- in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of Contributions, the per Share Purchase Price, the number of Shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization; Corporate Transactions. ------------------------------------------------------------------ (a) Adjustment. Subject to any required action by the shareholders of ---------- the Company, the number of Shares covered by each option under the Plan which has not yet been exercised and the number of Shares which have been authorized for issuance under the Plan but 7 have not yet been placed under option (collectively, the "Reserves"), the -------- maximum number of shares of Common Stock which may be purchased by a participant in an Offering Period, the number of shares of Common Stock set forth in Section 12(a) above, and the price per Share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company), or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an option. (b) Corporate Transactions. In the event of a dissolution or ---------------------- liquidation of the Company, the Offering Period then in progress will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or Subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for outstanding options, the Offering Period then in progress shall be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as ----------------- of which date any Offering Period then in progress will terminate. The New Purchase Date shall be on or before the date of consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this Section 18, an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to the transaction, the holder of the number of Shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of Shares covered by the option as provided for in this Section 18); provided however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the transaction. 8 The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of Shares of its outstanding Common Stock, and in the event of the Company's being consolidated with or merged into any other corporation. 19. Amendment or Termination. ------------------------ (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18, no such termination of the Plan may affect options previously granted, nor may an amendment to the Plan make any change in any option previously granted which adversely affects the rights of any participant, provided that the Plan or an Offering Period may be terminated or amended by the Board by the Board's setting a new Purchase Date with respect to an Offering Period then in progress if the Board determines that termination or amendment of the Plan and/or the Offering Period is in the best interests of the Company and the shareholders or if continuation of the Plan and/or the Offering Period would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan in the generally accepted accounting rules applicable to the Plan. In addition, to the extent necessary to comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any successor rule or provision or any applicable law or regulation), the Company shall obtain shareholder approval in such a manner and to such a degree as so required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 20. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such Shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the 9 rules and regulations promulgated thereunder, applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. Term of Plan; Effective Date. The Plan shall become effective upon ---------------------------- the IPO Date. It shall continue in effect for a term of twenty (20) years unless sooner terminated under Section 19. 23. Additional Restrictions of Rule 16b-3. The terms and conditions of ------------------------------------- options granted hereunder to, and the purchase of Shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 10 ORATEC INTERVENTIONS, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT ---------------------- New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the Oratec Interventions, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the ---- Offering Period ______________, ____ to _______________, ____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of ____% of my Compensation on each payday following a full payroll period, as those terms are defined in the Plan, applied to this purchase. I understand that this amount must not be less than 1% and not more than 15% of my Compensation during the Offering Period. (Please note that no fractional percentages are permitted). 3. I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on the Purchase Date of each Offering Period unless I otherwise withdraw from the Plan by giving written notice to the Company for such purpose. 4. I understand that I may discontinue at any time prior to the Purchase Date my participation in the Plan as provided in Section 10 of the Plan. I also understand that I can decrease or increase the rate of my Contributions on one occasion only with respect to each rate change during an Offering Period by completing and filing a new Subscription Agreement with such decrease or increase taking effect as of the first payroll date following the date of filing of the new Subscription Agreement, if filed at least five (5) business days prior to such payroll date. Further, I may change the rate of deductions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period. In addition, I acknowledge that, unless I discontinue my participation in the Plan as provided in Section 10 of the Plan, my election will continue to be effective for each successive Offering Period. 5. I have received a copy of the Company's most recent description of the Plan and a copy of the complete "Oratec Interventions, Inc. 1999 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 6. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only): ____________________________________ ____________________________________ 7. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due to me under the Plan: NAME: (Please print) ____________________________________________ (First) (Middle) (Last) ____________________ ____________________________________________ (Relationship) (Address) ____________________________________________ 8. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or within 1 year after the Purchase Date, I will be treated for federal income tax purposes as having received ordinary compensation income at the time of such disposition in an amount equal to the excess of the fair market value of the shares on the Purchase Date over the price which I paid for the shares, regardless of whether I disposed of the shares at a price less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I hereby agree to notify the Company in writing within 30 days after the ------------------------------------------------------------------------ date of any such disposition, and I will make adequate provision for federal, - ----------------------------------------------------------------------------- state or other tax withholding obligations, if any, which arise upon the - ------------------------------------------------------------------------ disposition of the Common Stock. The Company may, but will not be obligated to, - ------------------------------- withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 9. If I dispose of such shares at any time after expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received compensation income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares under the option, or (2) 15% of the fair market value of the 2 shares on the Offering Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I understand that this tax summary is only a summary and is subject to ---------------------------------------------------------------------- change. I further understand that I should consult a tax advisor concerning the - ------ tax implications of the purchase and sale of stock under the Plan. 10. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE:___________________________ SOCIAL SECURITY #:___________________ DATE:________________________________ SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse): _____________________________________ (Signature) _____________________________________ (Print name) 3 ORATEC INTERVENTIONS, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL -------------------- I, __________________________, hereby elect to withdraw my participation in the Oratec Interventions, Inc. 1999 Employee Stock Purchase Plan (the "Plan") ---- for the Offering Period that began on _________ ___, _____. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me during the Offering Period. The undersigned further understands and agrees that he or she shall be eligible to participate in succeeding offering periods only by delivering to the Company a new Subscription Agreement. Dated:___________________ ________________________________________ Signature of Employee ________________________________________ Social Security Number EX-10.9 17 LEASE BETWEEN ORATEC AND WHITE PROPERTIES DATED 5/7/98 EXHIBIT 10.9 LEASE THIS LEASE is made on the 7th day of May, 1998, by and between White Properties Joint Venture (hereinafter called "Lessor") and Oratec Interventions (hereinafter called "Lessee"). IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: 1. Premises. Lessor leases to Lessee, and Lessee leases from Lessor, upon the -------- terms and conditions herein set forth, those certain Premises ("Premises") situated in the City of Redwood City, County of San Mateo, California, as outlined in Exhibit "A" attached hereto and described as follows: +/-9,993 square feet of a larger building, commonly known as 3696-A Haven Avenue, Redwood City, California. Lessee's pro-rata share of the building is +/- 43.37%. 2. Term. The term of this Lease shall be for five (5) years, commencing on ---- July 1, 1998, or on the later date on which Lessor delivers the Premises with all tenant improvements to be installed by Lessor complete, and final city approvals or approval necessary for lawful occupancy of the Premises having been received, and ending five years thereafter, unless sooner terminated pursuant to any provision hereof. 3. Rent. Lessee shall pay to Lessor rent for the Premises of Eight thousand ----- month in lawful money of the United States of America, subject to adjustment as provided in Section A of this Paragraph. Rent shall be paid without deduction or offset, prior notice, or demand, at such place as may be designated from time to time by Lessor as follows: $8,744.00 shall be paid upon execution of the Lease by both Lessor and Lessee, which sum represents the amount of the first month's rent. A deposit of $17,488.00 as a Security Deposit shall be made by Lessee and held by Lessor pursuant to Paragraph 5 of this Lease, and shall be paid upon execution of the Lease by both Lessor and Lessee. If Lessee is not in default of any provision of this Lease, this sum, without interest thereon, shall be applied toward the rent due for the last month of the term of this Lease or the extended term, pursuant to any extension of the initial term in accordance with the provisions of this Lease. Monthly rent shall be paid in advance on the first (1st) day of each calendar month as follows:
Months Monthly Rent/NNN ------ ---------------- 01-06 $ 8,744.00 07-12 $18,698.00 13-24 $19,397.00 25-36 $20,124.00 37-48 $20,881.00 49-60 $21,668.00
Rent for any period during the term hereof which is for less than one (1) full month shall be a pro-rata portion of the monthly rent payment. Lessee acknowledges that late payment by Lessee to Lessor of rent or any other payment due Lessor will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, if any installment of rent or other payment due from Lessee is not received by Lessor within ten (10) days following the date it is due and payable, Lessee shall pay to Lessor an additional sum of ten percent (10%) of the overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will 1 incur by reason of late payment by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee's default with respect to the overdue amount, nor prevent Lessor from exercising any of the other rights and remedies available to Lessor. If, for any reason whatsoever, Lessor cannot deliver possession of the Premises on the commencement date set forth in Paragraph 2 above, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom; but in such event, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee and the commencement and termination dates of this Lease shall be revised to conform to the date of Lessor's delivery of possession. In the event that Lessor shall permit Lessee to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all of the provisions of this Lease, including the obligation to pay rent at the same monthly rate as that prescribed for the first month of the Lease term. Lessee shall have the right to enter the Premises prior to commencement date to install fixtures and equipment, provided Lessee shall not unreasonably interfere with construction of improvements by Lessor's contractors. A. Cost-of-Living Increase. Not applicable. ----------------------- B. All taxes, insurance premiums, Outside Area Charges, late charges, costs and expenses which Lessee is required to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Lessee's failure to pay such amounts, and all reasonable damages, costs, and attorney's fees and expenses which Lessor may incur by reason of any default of Lessee or failure on Lessee's part to comply with the terms of this Lease, shall be deemed to be additional rent (hereinafter, "Additional Rent"), and, in the event of non-payment by Lessee, Lessor shall have all of the rights and remedies with respect thereto as Lessor has for the non-payment of monthly installment of rent. 4. Option to Extend Term. --------------------- A. Lessee shall have the option to extend the term on all the provisions contained in this Lease for one (1) three (3)-year periods ("extended term(s)") at an adjusted rental calculated as provided in Subparagraph B below on the condition that: (i) Lessee has given to Lessor written notice of exercise of that option ("option notice") at least six (6) months before expiration of the initial term or extended term(s), as the case may be. (ii) Lessee is not in default in the performance of any of the terms and conditions of the Lease on the date of giving the option notice, and Lessee is not in default on the date that the extended term is to commence, in each case beyond the grace period provided herein. B. Monthly rent for the extended term shall be the then prevailing market rent for similar buildings in the area as agreed upon by the parties within no more than thirty (30) days after exercise by Lessee of the option described herein. If the parties are unable to agree on such amount within that time period, Lessee may rescind its option exercise or, by written notice to Lessor, request that the rent be determined by an appraisal conducted in a manner reasonably acceptable and binding to both parties. C. In no event shall the monthly rent for any extended term be less than the monthly rent paid immediately prior to such extended term. 2 5. Security Deposit. Lessor acknowledges that Lessee has deposited with ---------------- Lessor a Security Deposit in the sum of $17,488.00 to secure the full and faithful performance by Lessee of each term, covenant, and condition of this Lease. If Lessee shall at any time fail to make any payment or fail to keep or perform any term, covenant, or condition on its part to be made or performed or kept under this Lease, Lessor may, but shall not be obligated to and without waiving or releasing Lessee from any obligation under this Lease, use, apply, or retain the whole or any part of said Security Deposit (a) to the extent of any sum due to Lessor; or (b) to compensate Lessor for any loss, damage, attorneys' fees or expense sustained by Lessor due to Lessee's default. In such event, Lessee shall, within five (5) days of written demand by Lessor, remit to Lessor sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Should Lessee comply with all the terms, covenants, and conditions of this Lease and, at the end of the term of this Lease, leave the Premises in the condition required by this Lease, then said Security Deposit or any balance thereof, less any sums owing to Lessor, shall be returned to Lessee within fifteen (15) days after the termination of this Lease and vacancy of the Premises by Lessee. Lessor can maintain the Security Deposit separate and apart from Lessor's general funds, or can co- mingle the Security Deposit with the Lessor's general and other funds. 6. Use of the Premises. The Premises shall be used exclusively for the purpose ------------------- of research and development, storage, distribution, offices and marketing of medical devices. Lessee shall not use or permit the Premises, or any part thereof, to be used for any purpose or purposes other than the purpose for which the Premises are hereby leased; and no use shall be made or permitted to be made of the Premises, nor acts done, which will increase the existing rate of insurance upon the building in which the Premises are located, or cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell or permit to be kept, used, or sold, in or about the Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall not commit or suffer to be committed any waste upon the Premises or any public or private nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the premises are located; nor, without limiting the generality of the foregoing, shall Lessee allow the Premises to be used for any improper, immoral, unlawful, or objectionable purpose. Lessee shall not place any harmful liquids in the drainage system of the Premises or of the building of which the Premises form a part. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the building proper except in trash containers placed inside exterior enclosures designated for that purpose by Lessor, or inside the building proper where designated by Lessor. No materials, supplies, equipment, finished or semi-finished products, raw materials, or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building proper. Lessor represents and warrants to Lessee that to the best of knowledge there are no Toxic or Hazardous materials present on, at or under the Premises, which shall be deemed to include underlying land and groundwater, at the time of Lessee's occupancy. Lessor shall indemnify, defend and hold harmless Lessee, its partners, directors, officers, employees, lenders, and successors against all claims, obligations, liabilities, demands, damages, judgements, and costs, including reasonable attorneys' fees arising from or in connection with any prior Toxic or Hazardous materials that existed prior to Lessee's occupancy of the Premises. Lessee in turn represents to Lessor that it does not now and will not in the future permit the use or storage on the Premises of Toxic or Hazardous materials, excluding, however basic janitorial, maintenance and office supplies, and materials commonly used in connection with Lessee's business as described in paragraph 6 hereof. For purposes of this paragraph 6 "Toxic or Hazardous Materials" shall mean any product, substance, chemical, material or waste whose presence, nature, quality and/or intensity or existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in 3 combination with other materials expected to be on the leased premises, is either (i) potentially injurious to the public health, safety or welfare, the environment, or the leased premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessee and Lessor to any governmental agency or third party under any applicable statute or common law theory. "Toxic or Hazardous Materials" shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee hereunder shall be responsible for and indemnify, and hold Lessor and its partners, directors, officers, employees, lenders, successors and assigns harmless from all claims, obligations, liabilities, demands, damages, judgments and costs, including reasonable attorneys' fees arising at any time during or in connection with Lessee's causing or permitting any materials referred to under any governmental provisions or regulatory scheme as "hazardous" or "toxic" or which contain petroleum, gasoline, or other petroleum product, to be brought upon, stored, manufactured, generated, handled, disposed, or used on, under or about the Premises. Lessee's and Lessor's obligations hereunder shall survive the termination of this Lease. If, at any time during the term of this Lease, Lessor suspects that toxic waste, spillage, or other contaminants may be present on the Premises, Lessor may order a soils report, or its equivalent. If Lessee has breached the terms of this Section 6, Lessee shall pay the expense of preparing the referenced report, and Lessee shall pay such costs within fifteen (15) days from the date of the invoice by Lessor. If any such toxic waste, spillage, or other contaminants are found upon the Premises, Lessee shall deposit with Lessor, within fifteen (15) days of notice from Lessor to Lessee to do so, the amount necessary to remove the substances and remedy the problem. Lessee shall abide by all laws, ordinances, and statutes, as they now exist or may hereafter be enacted by legislative bodies having jurisdiction thereof, relating to its use and occupancy of the Premises, provided nothing herein will require Lessee to pay for or perform any of the following: removal, remediation, investigation or clean up of any Hazardous Substances the presence on, in or under the Premises of which is not attributable to Lessee, its agents, employees or contractors. 7. Improvements: Lessor, at Lessor's sole cost and expense shall install ------------ tenant improvements as specified on Exhibit B. Possession of the premises, pursuant to Paragraph 13 of this lease, shall be deemed tendered upon receipt of final city approvals. 8. Taxes and Assessments. ---------------------- A. Lessee shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or imposed upon or against Lessee's fixtures, equipment, furnishings, furniture, appliances, and personal property installed or located on or within the Premises. Lessee shall cause said fixtures, equipment, furnishings, furniture, appliances, and personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within thirty (30) days before delinquency and following timely receipt of a written statement from Lessor setting forth the taxes applicable to Lessee's property. B. All property taxes or assessments levied or assessed by or hereafter levied or assessed by any governmental authority against the Premises or any portion of such taxes or assessments which becomes due or accrued during the term of this Lease shall be paid by Lessor. Lessee shall pay to Lessor Lessee's proportionate share of such taxes or assessments within thirty (30) days before delinquency and following timely receipt of Lessor's invoice demanding such payment. Lessee's liability hereunder shall be prorated to reflect the commencement and termination dates of this Lease. 4 9. Insurance. --------- A. Indemnity. Lessee agrees to indemnify and defend Lessor against and --------- hold Lessor harmless from any and all demands, claims, causes of action, judgments, obligations, or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees) on account of, or arising out of, the use, or occupancy of the Premises. This Lease is made on the express condition that Lessor shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause, in any way connected with the condition, use, or occupancy of the Premises, specifically including, without limitation, any liability for injury to the person or property of Lessee, its agents, officers, employees, licensees, and invitees occurring for any reason other than gross negligence or willful misconduct of Lessor its agents, employees or contractors, or a breach of the obligations of Lessor hereunder. B. Liability Insurance. Lessee shall obtain, and at all times during the ------------------- term hereof, keep in force, at its own cost and expense, Commercial General Liability insurance with limits of $1,000,000 combined single limit for Bodily Injury and Property Damage per occurrence and in the aggregate. Tenant's insurance shall name Lessor as additional insured as respects the use and occupancy of the leased Premises and shall provide that Lessee's insurance company shall endeavor to furnish Lessor with 30 days advance notice of cancellation of Lessee's insurance policy. Lessee shall furnish Lessor with a certificate of insurance to this effect. C. Property Insurance. Lessor shall obtain and keep in force during the ------------------ term of this Lease a policy or policies of insurance covering loss or damage to the Premises in "all risk" extended coverage form (which may include earthquake and/or flood insurance), in the amount of the full replacement value thereof. Lessee shall pay to Lessor its pro-rata share of the cost of said insurance within ten (10) days of Lessee's receipt of Lessor's invoice demanding such payment. Lessee acknowledges that such insurance procured by Lessor shall contain a deductible which reduces Lessee's cost for such insurance, and , in the event of loss or damage, Lessee shall be required to pay to Lessor the amount of such deductible, which payment shall not exceed Five Thousand Dollars ($5,000) for any one occurrence. D. Lessee and Lessor hereby release each other and their respective partners, officers, agents, employees, and servants, from any and all claims, demands, loss, expense, or injury to the Premises or to the furnishings, fixtures, equipment, inventory, or other property of the releasing party in, about, or upon the Premises, which is caused by or results from perils, events, or happenings which are the subject of insurance in force at the time of such loss, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss.. 10. Reimbursable Expenses and Utilities. Lessee shall pay its pro-rata share of all water, gas, light, heat, power, electricity, telephone, trash removal, landscaping, sewer charges, and all other services, including normal and customary property management fees (not to exceed three percent (3%) of the base rent payable hereunder), supplied to or consumed on the Premises. In the event that any utility to the Premises is separately metered, Lessee shall pay the cost of any such utility. In the event that any such services are billed directly to Lessor, then Lessee shall pay Lessor for such expenses within ten (10) days of Lessee's receipt of Lessor's invoice demanding payment. In no event shall Lessee have any obligation to perform, to pay directly, or to reimburse Lessor for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, commissions, charges, disbursements, attorneys' fees, experts' fees, costs and expenses (collectively, "Costs"): (i) Costs for which Lessor has received reimbursement from others; (ii) Costs associated with utilities and services of a type not provided to Lessee; (iii) costs incurred in connection with negotiations or disputes between Lessor and other 5 occupants of the Building, provided that Lessee is not the cause of such dispute or negotiation; (iv) Costs arising from the violation of Lessor or any occupant of the Building (other than Lessee) of the terms and conditions of any lease or other agreement (provided that Lessee is not the cause of such violation); or (v) depreciation or other expense reserves unless required by Lessor's lender. 11. Repairs and Maintenance. ----------------------- A. Subject to provisions of paragraph 15, Lessor shall keep and maintain in good order, condition and repair the structural elements of the Premises including the roof, roof membrane, paving, floor slab, foundation, exterior walls, landscaping, irrigation and elevators. Lessor shall make such repairs, replacements, alterations or improvements as Lessor deems reasonably necessary with respect to such structural elements and Lessee shall pay to Lessor, within ten (10) business days of Lessor's invoice to Lessee therefor, Lessee's pro- rata share of such repairs, replacements, alterations or improvements; provided, however, that replacement and improvement costs in excess of $5,000 per occurrence shall be amortized over the useful life of such replacements or improvements, and Lessee shall be obligated to pay, as additional rent, only the amount which coincides with the remaining term of the Lease. Notwithstanding the foregoing, if the reason for any repair, replacement, alteration or improvement is caused by Lessee or arises because of a breach of Lessee's obligations under this Lease, then Lessee shall pay 100% of the costs or expense to remedy the same. B. Except as expressly provided in Subparagraph A above, Lessee shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including, without limitation, the windows, window frames, plate glass, glazing, truck doors, doors, all door hardware, interior of the Premises, interior walls and partitions, and electrical, plumbing, lighting, heating, and air conditioning systems in good and sanitary order, condition, and repair subject to the limitations set forth in Section 11A above. Lessee shall, at all times during the Lease term and at his expense, have in effect a service contract for the maintenance of the heating, ventilating, and air-conditioning (HVAC) equipment with an HVAC repair and maintenance contractor approved by Lessor which provides for periodic inspection and servicing at least once every three (3) months during the term hereof. Lessee shall further provide Lessor with a copy of such contract and all periodic service reports. Should Lessee fail to maintain the Premises or make repairs required of Lessee hereunder forthwith upon notice from Lessor, Lessor, in addition to all other remedies available hereunder or by law, and without waiving any alternative remedies, may make the same, and in that event, Lessee shall reimburse Lessor as additional rent for the cost of such maintenance or repairs on the next date upon which rent becomes due. Lessee hereby expressly waives the provision of Subsection 1 of Section 1932, and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Lessor, as provided in Section 942 of said Civil Code. 12. Alterations and Additions. Lessee shall not make, or suffer to be made, -------------------------- alterations, improvements, or additions in, on, or about, or to the Premises or any part thereof, without prior written consent of Lessor, which shall not be unreasonably withheld or delayed, and without a valid building permit issued by the appropriate governmental authority. Lessor retains, at his sole option, the right to retain a General Contractor of his own choosing to perform all repairs, alterations, improvements, or additions in, on, about, or to said Premises or any part thereof. As a condition to giving such consent, Lessor may require that Lessee agree to remove any such alterations, improvements, or additions at the termination of this Lease, and to restore the Premises to their prior condition. Upon Lessee's written request, Lessor shall designate, at the time that Lessor consents 6 to the installation of any such alteration, improvement or addition, whether removal of any such alteration, improvement or addition will be required. Any alteration, addition, or improvement to the Premises, shall become the property of Lessor upon the expiration or earlier termination of the Lease term (except with respect to those items which have been installed at the sole expense of Lessee, which Lessee may remove, provided that Lessee repairs any damage attributable to such removal), and shall remain upon and be surrendered with the Premises at the termination of this Lease. Alterations and additions which are not to be deemed as trade fixtures include heating, lighting, electrical systems, air conditioning, partitioning, electrical signs, carpeting, or any other installation which has become an integral part of the Premises. In the event that Lessor consents to Lessee's making any alterations, improvements, or additions, Lessee shall be responsible for preparing and providing Lessor with a notice of non-responsibility which Lessor shall sign and return to Lessee for posting , which shall remain posted until completion of the alterations, additions, or improvements. Lessee's failure to post notices of non-responsibility as required hereunder shall be a breach of this Lease. Notwithstanding anything to the contrary herein, if, during the term hereof, any alteration, addition, or change of any sort through all or any portion of the Premises or of the building of which the Premises form a part, is required by law, regulation, ordinance, or order of any public agency, including without limitation Americans with Disabilities Act (ADA) , then if such legal requirement is not imposed because of Lessee's specific use of the Premises and is not "triggered" by Lessee's alterations or Lessee's application for a building permit or any other governmental approval (in which instance Lessee shall be responsible for 100% of the cost of such improvement), Lessor shall be responsible for constructing such improvement and Lessee shall be responsible for its proportional share of the cost for said improvement, amortized over the useful life of such improvement that coincides with the remaining Lease term including any extensions. 13. Acceptance of the Premises and Covenant to Surrender. By entry and taking ---------------------------------------------------- possession of the Premises pursuant to this Lease, Lessee accepts the Premises as being in good and sanitary order, condition, and repair, and accepts the Premises in their condition existing as of date of such entry, and Lessee further accepts any tenant improvements to be constructed by Lessor, if any, as being completed in accordance with the plans and specifications for such improvements, subject to items identified by Lessee in one final punch list submitted to Lessor within thirty (30) days of occupancy, which items Lessor shall promptly correct. Lessee agrees on the last day of the term hereof, or on sooner termination of this Lease, to surrender the Premises, together with all alterations, additions, and improvements which may have been made in, to, or on the Premises by Lessor or Lessee, unto Lessor in good and sanitary order, condition, and repair, excepting for such wear and tear as would be normal for the period of the Lessee's occupancy. Lessee, on or before the end of the term or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Lessee. Lessee further agrees that at the end of the term or sooner termination of this Lease, Lessee, at its sole expense, shall have the carpets steam cleaned, the walls and columns painted, the flooring waxed, any damaged ceiling tile replaced, the windows cleaned, the drapes cleaned, and any damaged doors replaced, if necessary to restore the Premises to its original condition, normal wear and tear excepted. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. 14. Default. In the event of any breach of this Lease by the Lessee, or an ------- abandonment of the Premises by the Lessee, which is not cured within ten (10) days after written notice thereof in the case of any monetary obligation and which is not cured within thirty (30) days after written notice thereof in the 7 case of any non-monetary obligation, the Lessor has the option of (1.) removing all persons and property from the Premises and repossessing the Premises, in which case any of the Lessee's property which the Lessor removes from the Premises may be stored in a public warehouse or elsewhere at the cost of, and for the account of, Lessee; or (2.) allowing the Lessee to remain in full possession and control of the Premises. If the Lessor chooses to repossess the Premises, the Lease will automatically terminate in accordance with the provisions of the California Civil Code, Section 1951.2. In the event of such termination of the Lease, the Lessor may recover from the Lessee: (1.) the worth at the time of award of the unpaid rent which had been earned at the time of termination, including interest at the maximum rate an individual is permitted by law to charge; (2.) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided, including interest at the maximum rate an individual is permitted by law to charge; (3.) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (4.) any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the Lease or which, in the ordinary course of things, would be likely to result therefrom. "The worth at the time of award," as used in (1.) and (2.) of this Paragraph, is to be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth at the time of award," as used in (3.) of this Paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). If the Lessor chooses not to repossess the Premises, but allows the Lessee to remain in full possession and control of the Premises, then, in accordance with provisions of the California Civil Code, Section 1951.4, the Lessor may treat the Lease as being in full force and effect, and may collect from the Lessee all rents as they become due through the termination date of the Lease, as specified in the Lease. For the purpose of this paragraph, the following do not constitute a termination of Lessee's right to possession: (1.) acts of maintenance or preservation, or efforts to relet the property; (2.) the appointment of a receiver on the initiative of the Lessor to protect his interest under this Lease. Lessee shall be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises, including, without limitation, brokers' commissions, reasonable expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Lessee shall pay to Lessor the rent due under this Lease on the dates the rent is due, less the rent Lessor receives from any reletting. No act by Lessor allowed by this Section shall terminate this Lease unless Lessor notifies Lessee that Lessor elects to terminate this Lease. After Lessee's default and for as long as Lessor does not terminate Lessee's right to possession of the Premises, if Lessee obtains Lessor's consent, Lessee shall have the right to assign or sublet its interest in this Lease, but Lessee shall not be released from liability. Lessor's consent to a proposed assignment or subletting shall not be unreasonably withheld. If Lessor elects to relet the Premises as provided in this Paragraph, rent that Lessor receives from reletting shall be applied to the payment of: (1.) any indebtedness from Lessee to Lessor other than rent due from Lessee; (2.) all costs, including for maintenance, incurred by Lessor in reletting; (3.) rent due and unpaid under this Lease. After deducting the payments referred to in this Paragraph, any sum remaining from the rent Lessor receives from reletting shall be held by Lessor and applied in payment of future rent as rent becomes due under this Lease. In no event shall Lessee by entitled to any excess rent received by Lessor. If, on the date rent is due under this Lease, the rent received from reletting is less than the rent due on that date, Lessee shall pay to Lessor, in addition to the remaining rent due, all costs, including for maintenance, Lessor incurred in reletting that remain after applying the rent received from the reletting, as provided in this Paragraph. Lessor, at any time after Lessee commits a default, can cure the default at Lessee's cost. If 8 Lessor, at any time after Lessee commits a default, can cure the default at Lessee's cost. If Lessor at any time, by reason of Lessee's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Lessor shall be due immediately from Lessee to Lessor at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Lessor until Lessor is reimbursed by Lessee. The sum, together with interest on it, shall be additional rent. Rent not paid when due shall bear interest at the maximum rate an individual is permitted by law to charge from the date due until paid. 15. Destruction. In the event the Premises are destroyed in whole or in part ----------- from any cause, Lessor may, at its option, (1.) rebuild or restore the Premises to their condition prior to the damage or destruction or (2.) terminate the Lease. If Lessor does not give Lessee notice in writing within thirty (30) days from the destruction of the Premises of its election either to rebuild and restore the Premises, or to terminate this Lease, Lessor shall be deemed to have elected to rebuild or restore them, in which event Lessor agrees, at its expense, promptly to rebuild or restore the Premises to its condition prior to the damage or destruction. If Lessor does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Lessee or because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond control of Lessor), then Lessee shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Lessor. Lessor's obligation to rebuild or restore shall not include restoration of Lessee's trade fixtures, equipment, merchandise, or any improvements, alterations, or additions made by Lessee to the Premises. If Lessor reasonably estimates that the restoration referenced herein will require 180 days or more, which estimate shall be delivered to Lessee within nor more than thirty (30) days after the occurrence of the casualty, Lessee shall be entitled to terminate this Lease effective upon written notice of such election to Lessor, provided Lessee is not the cause of said damage or destruction. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Lessee hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than fifty (50%) of the replacement cost thereof, Lessor may elect to terminate this Lease, whether the Premises be injured or not. 16. Condemnation. If any part of the Premises shall be taken for any public ------------- or quasi-public use, under any statute or by right of eminent domain, or private purchase in lieu thereof, and a part thereof remains, which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after taking such bears to the value of the entire Premises prior to such taking. Lessor shall have the option to terminate this Lease in the event that such taking causes a reduction in rent payable hereunder by fifty percent (50%) or more. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, as reasonably necessary for Lessee's conduct of its business as contemplated in this Lease, this Lease shall thereupon terminate. If a part of all of the Premises be taken, all compensation awarded upon such taking shall go to the Lessor, and the Lessee shall have no claim thereto, and the Lessee hereby irrevocably assigns and transfers to the Lessor any right to compensation or damages to which the Lessee may become entitled during the term hereof by reason of the purchase or condemnation of all or a part of the Premises, except that Lessee shall have the right to recover its share of any award or consideration for (1.) moving expenses; (2) 9 relocation costs; (3) unamortized costs of improvements installed by Lessee (4.) loss or damage to Lessee's trade fixtures, furnishings, equipment, and other personal property; and (5.) business goodwill. Each party waives the provisions of the Code of Civil Procedure, Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. 17. Free from Liens. Lessee shall (1.) pay for all labor and services ---------------- performed for materials used by or furnished to Lessee, or any contractor employed by Lessee with respect to the Premises, and (2.) indemnify, defend, and hold Lessor and the Premises harmless and free from any liens, claims, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for materials used by or furnished to Lessee or any contractor employed by Lessee with respect to the Premises, and (3.) give notice to Lessor in writing five (5) days prior to employing any laborer or contractor to perform services related, or receiving materials for use upon the Premises, and (4.) Lessee shall be responsible for preparing and providing Lessor with a notice of non-responsibility which Lessor shall sign and return to Lessee for posting , which shall remain posted until completion of the alterations, additions, or improvements. In the event an improvements bond with a public agency in connection with the above is required to be posted, Lessee agrees to include Lessor as an additional obligee. 18. Compliance with Laws. Lessee shall, at its own cost, comply with and -------------------- observe all requirements of all municipal, county, state, and federal authority now in force, or which may hereafter be in force, pertaining to the use and occupancy of the Premises. Notwithstanding anything contained in Paragraphs 11, 12 and 18 of Lease, if it becomes necessary to make capital improvements required by laws enacted or legal requirements imposed by governmental agency(ies), then if such legal requirement is not imposed because of Lessee's specific use of the Premises and is not "triggered" by Lessee's alterations or Lessee's application for a building permit or any other governmental approval (in which instance Lessee shall be responsible for 100% of the cost of such improvement), Lessor shall be responsible for constructing such improvement and Lessee shall be responsible for its proportional share of the cost for said improvement, amortized over the useful life of such improvement that coincides with the remaining Lease term and any extensions thereof. 19. Subordination. Lessee agrees that this Lease shall, at the option of -------------- Lessor, be subjected and subordinated to any mortgage, deed of trust, or other instrument of security, which has been or shall be placed on the land and building, or land or building of which the Premises form a part, and this subordination is hereby made effective without any further act of Lessee or Lessor. The Lessee shall, within five (5) business days after receipt of request, execute any instruments, releases, or other documents that may be required by any mortgagee, mortgagor, trustor, or beneficiary under any deed of trust, for the purpose of subjecting or subordinating this Lease to the lien of any such mortgage, deed of trust, or other instrument of security. Lessee's failure to execute and deliver any such documents or instruments shall be deemed a breach of Lease. 20. Abandonment. Lessee shall not vacate or abandon the Premises at any time ----------- during the term; and if Lessee shall abandon, vacate, or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and left on the Premises shall be deemed to be abandoned, at the option of Lessor, except such property as may be mortgaged to Lessor; provided, however, that Lessee shall not be deemed to have abandoned or vacated the Premises so long as Lessee continues to pay all rents as and when due, and otherwise performs pursuant to the terms and conditions of this Lease. 21. Assignment and Subletting. -------------------------- 10 A. Definitions. For purposes of this Paragraph 21, the following terms ----------- shall be defined as follows: (i) Sublet. The term "Sublet" shall mean any transfer, sublet, ------ assignment, license or concession agreement, change of ownership, mortgage, or hypothecation of this Lease or the Lessee's interest in the Lease or in and to all or a portion of the Premises. (ii) Subrent. The term "Subrent" shall mean any consideration of any kind ------- received, or to be received, by Lessee from a Sublessee if such sums are related to Lessee's interest in this Lease or in the Premises, including, but not limited to, bonus money and payments (in excess of fair market value) for Lessee's assets including its trade fixtures, equipment and other personal property remaining in the Premises but excluding, without limitation, goodwill, general intangibles, and any capital stock or other equity ownership of Lessee. (iii) Sublessee. The term "Sublessee" shall mean the person or entity with --------- whom a Sublet agreement is proposed to be or is made. B. Lessor's Consent. Lessee shall not enter into a Sublet without ----------------- Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed. Any attempted or purported Sublet without Lessor's prior written consent shall be void and confer no rights upon any third person and, at Lessor's election, shall terminate this Lease. In determining whether or not to consent to a proposed Sublet, Lessor may consider the following factors, among others, all of which shall be deemed reasonable; (i) whether the proposed Sublessee has a net worth equal to or greater than the net worth of Lessee at the time Lessee executed this Lease; (ii) whether the proposed use of the Premises by the proposed Sublessee is consistent with the permitted use for the Premises set forth in Paragraph 6 of this Lease; (iii) whether the experience and business reputation of the proposed Sublessee is equal to or greater than that of Lessee; (iv) whether the rent payable by the Sublessee under the proposed Sublet reflects the current fair market rent for the subleased Premises as reasonably determined by Lessee; and (v) whether Lessor's consent will result in a breach of any other lease or agreement to which Lessor is a party affecting the Building. Each Sublessee shall agree in writing, for the benefit of Lessor, to assume, to be bound by, and to perform the terms and conditions and covenants of this Lease to be performed by Lessee. Notwithstanding anything contained herein, Lessee shall not be released from liability for the performance of each term, condition and covenant of this Lease by reason of Lessor's consent to a Sublet unless Lessor specifically grants such release in writing. Consent by Lessor to any Sublet unless Lessor specifically grants such release in writing. Consent by Lessor to any Sublet shall not be deemed a consent to any subsequent Sublet. Lessee shall reimburse Lessor for all reasonable and customary costs and attorneys' fees incurred by Lessor in connection with the evaluation, processing and/or documentation of any requested Sublet, whether or not Lessor's consent is granted. C. Information to be Furnished. If Lessee desires at any time to Sublet the Premises or any portion thereof, it shall first notify Lessor of its desire to do so and shall submit in writing to Lessor: (i) the name and legal composition of the proposed Sublessee, (ii) the nature of the proposed Sublessee's business to be carried on in the Premises; (iii) the terms and provisions of the proposed Sublet and a copy of the proposed Sublet form containing a description of the subject premises; (iv) a statement of all consideration to be paid by the Sublessee in connection with the Sublet; (v) a current financial statement of Lessee; and (vi) such financial information, including financial statements, as Lessor may reasonably request concerning the proposed Sublessee. D. Lessor's Alternatives. At any time within fifteen (15) days after ---------------------- the Lessor's receipt of the information specified in Paragraph 21.C., Lessor may, by written notice to Lessee, elect: (i) to 11 consent to the Sublet by Lessee; (ii) to refuse its consent to the Sublet, or (iii) elect to terminate this Lease, or in the case of a partial Sublet, terminate this Lease as to the portion of the Premises proposed to be Sublet. If Lessor consents to the Sublet, Lessee may thereafter enter into a valid Sublet of the Premises or portion thereof, upon the terms and conditions and with the proposed Sublessee set forth in the information furnished by Lessee to Lessor pursuant to Paragraph 21.B., subject, however, at Lessor's election, to the condition that seventy-five percent (75%) of any excess of the Subrent over the Rent required to be paid by less this Lease, after Lessee has deducted therefrom its reasonable and customary costs to effect the Sublet, including with limitation, brokerage commissions, legal fees, and tenant improvement costs not to exceed $4.00 per square foot, shall be paid to Lessor. E. Proration. If a portion of the Premises is Sublet, the pro rata --------- share of the Rent attributable to such partial area of the Premises shall be determined by Lessor by dividing the Rent payable by Lessee hereunder by the total square footage of the Premises and multiplying the resulting quotient (the per square foot rent) by the number of square foot rent of the Premises which are Sublet. F. Exempt Sublets. Notwithstanding the above, Lessor's prior written -------------- consent shall not be required for an assignment of this Lease or the sublet of the Premises to an entity which controls, is controlled by or under common control with, Lessee, or a corporation into which Lessee merges or consolidates, provided that (i) Lessee gives Lessor prior written notice of the name any such assignee, (ii) at the time of such assignment, the assignee has net worth that is equal to or greater than the net worth of Lessee immediately prior to such assignment; and (iii) the assignee assumes, in writing, for the benefit of Lessor, all of Lessee's obligations under the Lease. An assignment or other transfer of this Lease to a purchaser of all or substantially all of the assets of Lessee shall be deemed a Sublet requiring Lessor's prior written consent. Lessor's right to excess subrent shall not apply to a sublet described in this Section F. In addition, the sale of Lessee's shares over a public exchange shall not be deemed a sublet requiring Lessor's consent. 22. Parking Charges. Lessee agrees to pay upon demand, based on its percent of occupancy of the entire Premises, its pro-rata share of any parking charges, surcharges, or any other cost hereafter levied or assessed by local, state, or federal governmental agencies in connection with the use of the parking facilities serving the Premises, including, without limitation, parking surcharge imposed by or under the authority of the Federal Environmental Protection Agency. 23. Insolvency or Bankruptcy. Either (1.) the appointment of a receiver to take possession of all or substantially all of the assets of Lessee, or (2.) a general assignment by Lessee for the benefit of creditors, or (3.) any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this Lease by Lessee. Upon the happening of any such event, this Lease shall terminate ten (10) days after written notice of termination from Lessor to Lessee. This section is to be applied consistent with the applicable state and federal law in effect at the time such event occurs. 24. Lessor Loan or Sale. Lessee agrees promptly following request by Lessor ------------------- to (1.) execute and deliver to Lessor any documents, including estoppel certificates presented to Lessee by Lessor, (a.) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (b.) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, and (c.) evidencing the status of the Lease as may be required either by a lender making a loan to Lessor, to be secured by deed of trust or mortgage covering the Premises, or a purchaser of the Premises from Lessor, and (2.) to deliver to Lessor the current financial statements of Lessee with an opinion of a 12 certified public accountant, including a balance sheet and profit and loss statement, for the current fiscal year and the two immediately prior fiscal years, all prepared in accordance with Generally Accepted Accounting Principles consistently applied, or if Lessee does not prepare financial statements in the manner specified above, Lessee shall provide Lessor with the financial statements which most accurately reflect the financial condition of Lessee. Lessee's failure to deliver an estoppel certificate within five (5) business days following such request shall constitute a default under this Lease and shall be conclusive upon Lessee that this Lease is in full force and effect and has not been modified except as may be represented by Lessor. Lessee's failure to deliver estoppel certificates within the five (5) business days shall be deemed a breach of Lease. 25. Surrender of Lease. The voluntary or other surrender of this Lease by ------------------ Lessee, or a mutual cancellation thereof, shall not work a merger nor relieve Lessee of any of Lessee's obligations under this Lease, and shall, at the option of Lessor, terminate all or any existing Subleases or Subtenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such Subleases or Subtenancies. 26. Attorneys' Fees. If, for any reason, any suit be initiated to enforce any --------------- provision of this Lease, the prevailing party shall be entitled to legal costs, expert witness expenses, and reasonable attorneys' fees, as fixed by the court. 27. Notices. All notices to be given to Lessee may be given in writing, ------- personally, or by depositing the same in the United States mail, postage prepaid, and addressed to Lessee at the said Premises, whether or not Lessee has departed from, abandoned, or vacated the Premises. Any notice or document required or permitted by this Lease to be given Lessor shall be addressed to Lessor at the address set forth below, or at such other address as it may have theretofore specified by notice delivered in accordance herewith: LESSOR: White Properties Joint Venture 900 Welch Road, Suite 10 Palo Alto, California 94304 LESSEE: Oratec Interventions, Inc. 3700 Haven Court Menlo Park, CA 94025 28. Transfer of Security. If any security be given by Lessee to secure the -------------------- faithful performance of all or any of the covenants of this Lease on the part of Lessee, Lessor may transfer and/or deliver the security, as such, to the purchaser of the reversion, in the event that the reversion be sold, and thereupon Lessor shall be discharged from any further liability in reference thereto, upon the assumption by such transferee of Lessor's obligations under this Lease. 29. Waiver. The waiver by Lessor or Lessee of any breach of any term, covenant, ------ or condition, herein contained shall not be deemed to be a waiver of such term, covenant, or condition, or any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 30. Holding Over. Any holding over after the expiration of the term or any extension thereof, with the consent of Lessor, shall be construed to be a tenancy from month-to-month, at a rental of one and 13 one-half (1 1/2) times the previous month's rental rate per month, and shall otherwise be on the terms and conditions herein specified, so far as applicable. 31. Covenants, Conditions, and Restrictions. Not applicable. --------------------------------------- 32. Limitation on Lessor's Liability. If Lessor is in default of this Lease, -------------------------------- and, as a consequence, Lessee recovers a money judgment against Lessor, the judgment shall be satisfied only out of the proceeds of sale received on execution of the judgment and levy against the right, title, and interest of Lessor in the Premises, or in the building, other improvements, and land of which the Premises are part, and out of rent or other income from such real property receivable by Lessor or out of the consideration received by Lessor from the sale or other disposition of all or any part of Lessor's right, title, and interest in the Premises or in the building, other improvements, and land of which the Premises are part. Neither Lessor nor any of the partners comprising the partnership designated as Lessor shall be personally liable for any deficiency. 33. Miscellaneous. ------------- A. Time is of the essence of this Lease, and of each and all of its provisions. B. The term "building" shall mean the building in which the Premises are situated. C. If the building is leased to more than one tenant, then each such tenant, its agents, officers, employees, and invitees, shall have the non-exclusive right (in conjunction with the use of the part of the building leased to such Tenant) to make reasonable use of any driveways, sidewalks, and parking areas located on the parcel of land on which the building is situated, except such parking areas as may from time to time be leased for exclusive use by other Tenant(s). D. Lessee's reasonable use of parking areas shall not exceed that percent of the total parking areas which is equal to the ratio which floor space of the Premises bears to floor space of the building. E. The term "assign" shall include the term "transfer." F. The invalidity or unenforceability of any provision of this Lease shall not affect the validity or enforceability of the remainder of this Lease. G. All parties hereto have equally participated in the preparation of this Lease. H. The headings and titles to the Paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. I. Lessor has made no representation(s) whatsoever to Lessee (express or implied) except as may be expressly stated in writing in this Lease instrument. J. This instrument contains all of the agreements and conditions made between the parties hereto, and may not be modified orally or in any other manner than by agreement in writing, signed by all of the parties hereto or their respective successors in interest. K. It is understood and agreed that the remedies herein given to Lessor shall be cumulative, 14 and the exercise of any one remedy by Lessor shall not be to the exclusion of any other remedy. L. The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, and administrators, and assigns of all the parties hereto; and all of the parties hereto shall jointly and severally be liable hereunder. M. This Lease has been negotiated by the parties hereto and the language hereof shall not be construed for or against either party. N. All exhibits to which reference is made are deemed incorporated into this Lease, whether covenants or conditions, on the part of Lessee shall be deemed to be both covenants and conditions. O. Where receipt of notice, demand or invoice is not specified, Lessee's time for response or remittance commences three (3) business days from the date of such notice, demand or invoice. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date first above-written. LESSOR: LESSEE: BY: /s/ Howard White BY: /s/ Hugh Sharkey ---------------------- ---------------------- ITS: General Partner ITS: --------------------- --------------------- DATE: 8/13/96 DATE: -------------------- -------------------- 15 ADDENDUM I TO THAT CERTAIN LEASE DATED MAY 7, 1998, BY AND BETWEEN WHITE PROPERTIES JOINT VENTURE, LESSOR AND ORATEC INTERVENTIONS, 3696-A HAVEN AVENUE, LESSEE. To that certain Lease the following wording is added: 1. EXPANSION --------- Effective December 15, 1999, Lessor and Lessee hereby agree to expand the Premises to include approximately 5,770 square feet known as 3698-B Haven Avenue (as shown on Exhibit A attached hereto). Lessee's Premises shall therefore consist of:
Unit Square Feet Pro-Rata Share - ---- ----------- -------------- 3696-A (plus or minus) 9,993 square feet (plus or minus) 43.37% of 3696 Haven Avenue 3698-B (plus or minus) 5,770 square feet (plus or minus) 25.00% of 3698 Haven Avenue
Rent for the expanded Premises shall be as follows: Period Monthly Rent/NNN - ------ ---------------- 12/15/99 - 12/14/00 $10,675.00 12/15/00 - 12/14/01 $11,102.00 12/15/01 - 12/14/02 $11,546.00 12/15/02 - 07/12/03 $12,008.00 Lessor shall provide a Tenant Improvement Allowance of $28,850.00 for mutually agreed upon Tenant Improvements. All other terms and conditions of the base Lease remain in full force and effect. AGREED AND ACCEPTED: LESSOR LESSEE WHITE PROPERTIES JOINT VENTURE ORATEC INTERVENTIONS /S/ HOWARD J. WHITE, III /S/ NANCY V. WESTCOTT - ---------------------------- -------------------------------- Howard J. White, III Authorized Representative General Partner Date: 5/10/99 Date: 5/4/99 ---------------------- -------------------------- EX-10.10 18 LEASE BETWEEN ORATEC & HUETTIG & SCHROMM/HEATON & KEYSER EXHIBIT 10.10 LEASE THIS LEASE is made on the 2nd day of August, 1996, by and between Huettig & Schromm/Heaton & Keyser (hereinafter called "Lessor") and Oratec Interventions (hereinafter called "Lessee"). IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: 1. Premises. Lessor leases to Lessee, and Lessee leases from Lessor, upon the -------- terms and conditions herein set forth, those certain Premises ("Premises") situated in the City of Menlo Park, County of San Mateo, California, as outlined in Exhibit "A" attached hereto and described as follows: +/-15,440 square foot building commonly known as 3700 Haven Court, Menlo Park, California. Lessee's pro-rata share of the building is 100%. 2. Term. The term of this Lease shall be for four (4) years, commencing on ---- October 1, 1996, or on the later date on which Lessor delivers the Premises with all tenant improvements to be installed by Lessor complete, and final city approvals or approval necessary for lawful occupancy of the Premises having been received, and ending on September 30, 2000, unless sooner terminated pursuant to any provision hereof. 3. Rent. Lessee shall pay to Lessor rent for the Premises of Eighteen Thousand ---- Five Hundred Twenty-Eight Dollars ($18,528.00) per month in lawful money of the United States of America, subject to adjustment as provided in Section A of this Paragraph. Rent shall be paid without deduction or offset, prior notice, or demand, at such place as may be designated from time to time by Lessor as follows: $18,528.00 shall be paid upon execution of the Lease by both Lessor and Lessee, which sum represents the amount of the first month's rent. A deposit of $18,528.00 as a Security Deposit shall be made by Lessee and held by Lessor pursuant to Paragraph 5 of this Lease, and shall be paid upon execution of the Lease by both Lessor and Lessee. If Lessee is not in default of any provision of this Lease, this sum, without interest thereon, shall be applied toward the rent due for the last month of the term of this Lease or the extended term, pursuant to any extension of the initial term in accordance with the provisions of this Lease. Monthly rent shall be paid in advance on the first (1st) day of each calendar month as follows:
Months Monthly Rent/NNN ------ ---------------- 01-12 $18,528.00 13-24 $19,300.00 25-36 $20,072.00 37-48 $20,844.00
Rent for any period during the term hereof which is for less than one (1) full month shall be a pro-rata portion of the monthly rent payment. Lessee acknowledges that late payment by Lessee to Lessor of rent or any other payment due Lessor will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, if any installment of rent or other payment due from Lessee is not received by Lessor within ten (10) days following the date it is due and payable, Lessee shall pay to Lessor an additional sum of ten percent (10%) of the overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee's default with respect to the overdue amount, nor prevent Lessor from exercising any of the other rights and remedies available to Lessor. 1 If, for any reason whatsoever, Lessor cannot deliver possession of the Premises on the commencement date set forth in Paragraph 2 above, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom; but in such event, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee and the commencement and termination dates of this Lease shall be revised to conform to the date of Lessor's delivery of possession. In the event that Lessor shall permit Lessee to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all of the provisions of this Lease, including the obligation to pay rent at the same monthly rate as that prescribed for the first month of the Lease term. Lessee shall have the right to enter the Premises prior to commencement date to install fixtures and equipment, provided Lessee shall not unreasonably interfere with construction of improvements by Lessor's contractors. A. Cost-of-Living Increase. Not applicable. ----------------------- -------------- B. All taxes, insurance premiums, Outside Area Charges, late charges, costs and expenses which Lessee is required to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Lessee's failure to pay such amounts, and all reasonable damages, costs, and attorney's fees and expenses which Lessor may incur by reason of any default of Lessee or failure on Lessee's part to comply with the terms of this Lease, shall be deemed to be additional rent (hereinafter, "Additional Rent"), and, in the event of non-payment by Lessee, Lessor shall have all of the rights and remedies with respect thereto as Lessor has for the non-payment of monthly installment of rent. 4. Option to Extend Term. --------------------- A. Lessee shall have the option to extend the term on all the provisions contained in this Lease for one (1) three (3)-year periods ("extended term(s)") at an adjusted rental calculated as provided in Subparagraph B below on the condition that: (i) Lessee has given to Lessor written notice of exercise of that option ("option notice") at least six (6) months before expiration of the initial term or extended term(s), as the case may be. (ii) Lessee is not in default in the performance of any of the terms and conditions of the Lease on the date of giving the option notice, and Lessee is not in default on the date that the extended term is to commence, in each case beyond the grace period provided herein. B. Monthly rent for the extended term shall be the then prevailing market rent for similar buildings in the area as agreed upon by the parties within no more than thirty (30) days after exercise by Lessee of the option described herein. If the parties are unable to agree on such amount within that time period, Lessee may rescind its option exercise or, by written notice to Lessor, request that the rent be determined by an appraisal conducted in a manner reasonably acceptable to both parties. C. In no event shall the monthly rent for any extended term be less than the monthly rent paid immediately prior to such extended term. 5. Security Deposit. Lessor acknowledges that Lessee has deposited with ------------------ Lessor a Security Deposit in the sum of $18,528.00 to secure the full and faithful performance by Lessee of each term, covenant, and condition of this Lease. If Lessee shall at any time fail to make any payment or fail to 2 keep or perform any term, covenant, or condition on its part to be made or performed or kept under this Lease, Lessor may, but shall not be obligated to and without waiving or releasing Lessee from any obligation under this Lease, use, apply, or retain the whole or any part of said Security Deposit (a) to the extent of any sum due to Lessor; or (b) to compensate Lessor for any loss, damage, attorneys' fees or expense sustained by Lessor due to Lessee's default. In such event, Lessee shall, within five (5) days of written demand by Lessor, remit to Lessor sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Should Lessee comply with all the terms, covenants, and conditions of this Lease and, at the end of the term of this Lease, leave the Premises in the condition required by this Lease, then said Security Deposit or any balance thereof, less any sums owing to Lessor, shall be returned to Lessee within fifteen (15) days after the termination of this Lease and vacancy of the Premises by Lessee. Lessor can maintain the Security Deposit separate and apart from Lessor's general funds, or can co- mingle the Security Deposit with the Lessor's general and other funds. 6. Use of the Premises. The Premises shall be used exclusively for the purpose ------------------- of research and development, storage, distribution, offices and marketing of medical devices. Lessee shall not use or permit the Premises, or any part thereof, to be used for any purpose or purposes other than the purpose for which the Premises are hereby leased; and no use shall be made or permitted to be made of the Premises, nor acts done, which will increase the existing rate of insurance upon the building in which the Premises are located, or cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell or permit to be kept, used, or sold, in or about the Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall not commit or suffer to be committed any waste upon the Premises or any public or private nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the premises are located; nor, without limiting the generality of the foregoing, shall Lessee allow the Premises to be used for any improper, immoral, unlawful, or objectionable purpose. Lessee shall not place any harmful liquids in the drainage system of the Premises or of the building of which the Premises form a part. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the building proper except in trash containers placed inside exterior enclosures designated for that purpose by Lessor, or inside the building proper where designated by Lessor. No materials, supplies, equipment, finished or semi-finished products, raw materials, or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building proper. Lessee shall comply with all the covenants, conditions, and/or restrictions ("C.C. & R.'s") affecting the Premises Lessor represents and warrants to Lessee that an underground storage tank has been removed from the property. Remedial action has been completed and site closure has been received. Lessor represents and warrants to Lessee that to the best of its knowledge there are no Toxic or Hazardous materials present on, at or under the Premises, which shall be deemed to include underlying land and groundwater, at the time of Lessee's occupancy. Lessor shall indemnify, defend and hold harmless Lessee, its partners, directors, officers, employees, lenders, and successors against all claims, obligations, liabilities, demands, damages, judgements, and costs, including reasonable attorneys' fees arising from or in connection with any prior Toxic or Hazardous materials that existed prior to Lessee's occupancy of the Premises. Lessee in turn represents to Lessor that it does not now and will not in the future permit the use or storage on the Premises of Toxic or Hazardous materials, excluding, however basic janitorial, maintenance and office supplies, and materials commonly used in connection with Lessee's business as described in paragraph 6 hereof. For purposes of this paragraph 6 "Toxic or Hazardous Materials" shall mean any product, substance, chemical, material or waste whose presence, nature, quality and/or intensity or existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the leased premises, is either (i) potentially 3 injurious to the public health, safety or welfare, the environment, or the leased premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessee and Lessor to any governmental agency or third party under any applicable statute or common law theory. "Toxic or Hazardous Materials" shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee hereunder shall be responsible for and indemnify, and hold Lessor and its partners, directors, officers, employees, lenders, successors and assigns harmless from all claims, obligations, liabilities, demands, damages, judgments and costs, including reasonable attorneys' fees arising at any time during or in connection with Lessee's causing or permitting any materials referred to under any governmental provisions or regulatory scheme as "hazardous" or "toxic" or which contain petroleum, gasoline, or other petroleum product, to be brought upon, stored, manufactured, generated, handled, disposed, or used on, under or about the Premises. Lessee's and Lessor's obligations hereunder shall survive the termination of this Lease. If, at any time during the term of this Lease, Lessor suspects that toxic waste, spillage, or other contaminants may be present on the Premises, Lessor may order a soils report, or its equivalent. If Lessee has breached the terms of this Section 6, Lessee shall pay the expense of preparing the referenced report, and Lessee shall pay such costs within fifteen (15) days from the date of the invoice by Lessor. If any such toxic waste, spillage, or other contaminants are found upon the Premises, Lessee shall deposit with Lessor, within fifteen (15) days of notice from Lessor to Lessee to do so, the amount necessary to remove the substances and remedy the problem. Lessee shall abide by all laws, ordinances, and statutes, as they now exist or may hereafter be enacted by legislative bodies having jurisdiction thereof, relating to its use and occupancy of the Premises, provided nothing herein will require Lessee to pay for or perform any of the following: removal, remediation, investigation or clean up of any Hazardous Substances the presence of which is not attributable to Lessee, its agents, employees or contractors. 7. Improvements: Lessor will provide an allowance of $112,000 for improvements ------------ to the Premises as specified in Exhibit "B" . Any costs in excess of said allowance shall be the sole responsibility of Lessee. Lessee may either pay such excess costs at the time of occupancy or may choose to have the excess costs amortized as additional rent over a period of three years at a rate of Bank of America's Prime Rate plus 3%. Lessor will make reasonable efforts to complete such improvements prior to October 1, 1996. Possession of the premises, pursuant to Paragraph 13 of this lease, shall be deemed tendered upon receipt of final city approvals. 8. Taxes and Assessments. --------------------- A. Lessee shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or imposed upon or against Lessee's fixtures, equipment, furnishings, furniture, appliances, and personal property installed or located on or within the Premises. Lessee shall cause said fixtures, equipment, furnishings, furniture, appliances, and personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within thirty (30) days before delinquency and following timely receipt of a written statement from Lessor setting forth the taxes applicable to Lessee's property. B. All property taxes or assessments levied or assessed by or hereafter levied or assessed by any governmental authority against the Premises or any portion of such taxes or assessments which becomes due or accrued during the term of this Lease shall be paid by Lessor. Lessee shall pay to Lessor Lessee's proportionate share of such taxes or assessments within thirty (30) days before delinquency and following timely receipt of Lessor's invoice demanding such payment. Lessee's 4 liability hereunder shall be prorated to reflect the commencement and termination dates of this Lease. 9. Insurance. --------- A. Indemnity. Lessee agrees to indemnify and defend Lessor against and --------- hold Lessor harmless from any and all demands, claims, causes of action, judgments, obligations, or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees) on account of, or arising out of, the use, or occupancy of the Premises. This Lease is made on the express condition that Lessor shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause, in any way connected with the condition, use, or occupancy of the Premises, specifically including, without limitation, any liability for injury to the person or property of Lessee, its agents, officers, employees, licensees, and invitees occurring for any reason other than gross negligence or willful misconduct of Lessor its agents, employees or contractors, or a breach of the obligations of Lessor hereunder. B. Liability Insurance. Lessee shall obtain, and at all times during the ------------------- term hereof, keep in force, at its own cost and expense, Commercial General Liability insurance with limits of $1,000,000 combined single limit for Bodily Injury and Property Damage per occurrence and in the aggregate. Tenant's insurance shall name Lessor as additional insured as respects the use and occupancy of the leased Premises and shall provide that Lessee's insurance company shall endeavor to furnish Lessor with 30 days advance notice of cancellation of Lessee's insurance policy. Lessee shall furnish Lessor with a certificate of insurance to this effect. C. Property Insurance. Lessor shall obtain and keep in force during the ------------------ term of this Lease a policy or policies of insurance covering loss or damage to the Premises in "all risk" extended coverage form, in the amount of the full replacement value thereof. Lessee shall pay to Lessor its pro- rata share of the cost of said insurance within ten (10) days of Lessee's receipt of Lessor's invoice demanding such payment. Lessee acknowledges that such insurance procured by Lessor shall contain a deductible which reduces Lessee's cost for such insurance, and , in the event of loss or damage, Lessee shall be required to pay to Lessor the amount of such deductible, which payment shall not exceed Five Thousand Dollars ($5,000) for any one occurrence. Lessor does not currently carry earthquake insurance. However, Lessor reserves the right to do so (and Lessee shall reimburse Lessor for said cost) should it become available at commercially reasonable rates. D. Lessee and Lessor hereby release each other and their respective partners, officers, agents, employees, and servants, from any and all claims, demands, loss, expense, or injury to the Premises or to the furnishings, fixtures, equipment, inventory, or other property of the releasing party in, about, or upon the Premises, which is caused by or results from perils, events, or happenings which are the subject of insurance in force at the time of such loss, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss.. 10. Reimbursable Expenses and Utilities. Lessee shall pay for all water, gas, ----------------------------------- light, heat, power, electricity, telephone, trash removal, landscaping, sewer charges, and all other services, including normal and customary property management fees (not to exceed three percent (3%) of the base rent payable hereunder), supplied to or consumed on the Premises. In the event that any such services are billed directly to Lessor, then Lessee shall pay Lessor for such expenses within ten (10) days of Lessee's receipt of Lessor's invoice demanding payment. 5 11. Repairs and Maintenance. ----------------------- A. Subject to provisions of paragraph 15, Lessor shall keep and maintain in good order, condition and repair the structural elements of the Premises including the roof, roof membrane, paving, floor slab, foundation, exterior walls, landscaping, irrigation and elevators. Lessor shall make such repairs, replacements, alterations or improvements as Lessor deems reasonably necessary with respect to such structural elements and Lessee shall pay to Lessor, within ten (10) business days of Lessor's invoice to Lessee therefor, Lessee's pro- rata share of such repairs, replacements, alterations or improvements; provided, however, that replacement and improvement costs in excess of $5,000 per occurrence shall be amortized over the useful life of such replacements or improvements, and Lessee shall be obligated to pay, as additional rent, only the amount which coincides with the remaining term of the Lease. Notwithstanding the foregoing, if the reason for any repair, replacement, alteration or improvement is caused by Lessee or arises because of a breach of Lessee's obligations under this Lease, then Lessee shall pay 100% of the costs or expense to remedy the same. B. Except as expressly provided in Subparagraph A above, Lessee shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including, without limitation, the windows, window frames, plate glass, glazing, truck doors, doors, all door hardware, interior of the Premises, interior walls and partitions, and electrical, plumbing, lighting, heating, and air conditioning systems in good and sanitary order, condition, and repair subject to the limitations set forth in Section 11A above. Lessee shall, at all times during the Lease term and at his expense, have in effect a service contract for the maintenance of the heating, ventilating, and air-conditioning (HVAC) equipment with an HVAC repair and maintenance contractor approved by Lessor which provides for periodic inspection and servicing at least once every three (3) months during the term hereof. Lessee shall further provide Lessor with a copy of such contract and all periodic service reports. Should Lessee fail to maintain the Premises or make repairs required of Lessee hereunder forthwith upon notice from Lessor, Lessor, in addition to all other remedies available hereunder or by law, and without waiving any alternative remedies, may make the same, and in that event, Lessee shall reimburse Lessor as additional rent for the cost of such maintenance or repairs on the next date upon which rent becomes due. Lessee hereby expressly waives the provision of Subsection 1 of Section 1932, and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Lessor, as provided in Section 942 of said Civil Code. 12. Alterations and Additions. Lessee shall not make, or suffer to be made, --------------------------- any alterations, improvements, or additions in, on, or about, or to the Premises or any part thereof, without prior written consent of Lessor, which shall not be unreasonably withheld or delayed, and without a valid building permit issued by the appropriate governmental authority. Lessor retains, at his sole option, the right to retain a General Contractor of his own choosing to perform all repairs, alterations, improvements, or additions in, on, about, or to said Premises or any part thereof. As a condition to giving such consent, Lessor may require that Lessee agree to remove any such alterations, improvements, or additions at the termination of this Lease, and to restore the Premises to their prior condition. Upon Lessee's written request, Lessor shall designate, at the time that Lessor consents to the installation of any such alteration, improvement or addition, whether removal of any such alteration, improvement or addition will be required. Any alteration, addition, or improvement to the Premises, shall become the property of Lessor upon the expiration or earlier termination of the Lease term (except with respect to those items which have been installed at the sole expense of Lessee, which Lessee may remove, provided that Lessee repairs any damage attributable to such 6 removal), and shall remain upon and be surrendered with the Premises at the termination of this Lease. Alterations and additions which are not to be deemed as trade fixtures include heating, lighting, electrical systems, air conditioning, partitioning, electrical signs, carpeting, or any other installation which has become an integral part of the Premises. In the event that Lessor consents to Lessee's making any alterations, improvements, or additions, Lessee shall be responsible for the timely posting of notices of non-responsibility on Lessor's behalf, which shall remain posted until completion of the alterations, additions, or improvements. Lessee's failure to post notices of non-responsibility as required hereunder shall be a breach of this Lease. Notwithstanding anything to the contrary herein, if, during the term hereof, any alteration, addition, or change of any sort through all or any portion of the Premises or of the building of which the Premises form a part, is required by law, regulation, ordinance, or order of any public agency, then if such legal requirement is not imposed because of Lessee's specific use of the Premises and is not "triggered" by Lessee's alterations or Lessee's application for a building permit or any other governmental approval (in which instance Lessee shall be responsible for 100% of the cost of such improvement), Lessor shall be responsible for constructing such improvement and Lessee shall be responsible for its proportional share of the cost for said improvement, amortized over the useful life of such improvement that coincides with the remaining Lease term including any extensions. 13. Acceptance of the Premises and Covenant to Surrender. By entry and taking ---------------------------------------------------- possession of the Premises pursuant to this Lease, Lessee accepts the Premises as being in good and sanitary order, condition, and repair, and accepts the Premises in their condition existing as of date of such entry, and Lessee further accepts any tenant improvements to be constructed by Lessor, if any, as being completed in accordance with the plans and specifications for such improvements, subject to items identified by Lessee in one final punch list submitted to Lessor within thirty (30) days of occupancy, which items Lessor shall promptly correct. Lessee agrees on the last day of the term hereof, or on sooner termination of this Lease, to surrender the Premises, together with all alterations, additions, and improvements which may have been made in, to, or on the Premises by Lessor or Lessee, unto Lessor in good and sanitary order, condition, and repair, excepting for such wear and tear as would be normal for the period of the Lessee's occupancy. Lessee, on or before the end of the term or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Lessee. Lessee further agrees that at the end of the term or sooner termination of this Lease, Lessee, at its sole expense, shall have the carpets steam cleaned, the walls and columns painted, the flooring waxed, any damaged ceiling tile replaced, the windows cleaned, the drapes cleaned, and any damaged doors replaced, if necessary to restore the Premises to its original condition, normal wear and tear excepted. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. 14. Default. In the event of any breach of this Lease by the Lessee, or an -------- abandonment of the Premises by the Lessee, which is not cured within ten (10) days after written notice thereof in the case of any monetary obligation and which is not cured within ten (10) days after written notice thereof in the case of any non-monetary obligation, the Lessor has the option of (1.) removing all persons and property from the Premises and repossessing the Premises, in which case any of the Lessee's property which the Lessor removes from the Premises may be stored in a public warehouse or elsewhere at the cost of, and for the account of, Lessee; or (2.) allowing the Lessee to remain in full possession and control of the Premises. If the Lessor chooses to repossess the Premises, the Lease will automatically terminate in accordance with the provisions of the California Civil Code, Section 1951.2. In the event of such termination of the Lease, the Lessor may recover from the 7 Lessee: (1.) the worth at the time of award of the unpaid rent which had been earned at the time of termination, including interest at the maximum rate an individual is permitted by law to charge; (2.) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided, including interest at the maximum rate an individual is permitted by law to charge; (3.) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (4.) any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the Lease or which, in the ordinary course of things, would be likely to result therefrom. "The worth at the time of award," as used in (1.) and (2.) of this Paragraph, is to be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth at the time of award," as used in (3.) of this Paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). If the Lessor chooses not to repossess the Premises, but allows the Lessee to remain in full possession and control of the Premises, then, in accordance with provisions of the California Civil Code, Section 1951.4, the Lessor may treat the Lease as being in full force and effect, and may collect from the Lessee all rents as they become due through the termination date of the Lease, as specified in the Lease. For the purpose of this paragraph, the following do not constitute a termination of Lessee's right to possession: (1.) acts of maintenance or preservation, or efforts to relet the property; (2.) the appointment of a receiver on the initiative of the Lessor to protect his interest under this Lease. Lessee shall be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises, including, without limitation, brokers' commissions, reasonable expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Lessee shall pay to Lessor the rent due under this Lease on the dates the rent is due, less the rent Lessor receives from any reletting. No act by Lessor allowed by this Section shall terminate this Lease unless Lessor notifies Lessee that Lessor elects to terminate this Lease. After Lessee's default and for as long as Lessor does not terminate Lessee's right to possession of the Premises, if Lessee obtains Lessor's consent, Lessee shall have the right to assign or sublet its interest in this Lease, but Lessee shall not be released from liability. Lessor's consent to a proposed assignment or subletting shall not be unreasonably withheld. If Lessor elects to relet the Premises as provided in this Paragraph, rent that Lessor receives from reletting shall be applied to the payment of: (1.) any indebtedness from Lessee to Lessor other than rent due from Lessee; (2.) all costs, including for maintenance, incurred by Lessor in reletting; (3.) rent due and unpaid under this Lease. After deducting the payments referred to in this Paragraph, any sum remaining from the rent Lessor receives from reletting shall be held by Lessor and applied in payment of future rent as rent becomes due under this Lease. In no event shall Lessee by entitled to any excess rent received by Lessor. If, on the date rent is due under this Lease, the rent received from reletting is less than the rent due on that date, Lessee shall pay to Lessor, in addition to the remaining rent due, all costs, including for maintenance, Lessor incurred in reletting that remain after applying the rent received from the reletting, as provided in this Paragraph. Lessor, at any time after Lessee commits a default, can cure the default at Lessee's cost. If Lessor at any time, by reason of Lessee's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Lessor shall be due immediately from Lessee to Lessor at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Lessor until Lessor is reimbursed by Lessee. The sum, together with interest on it, shall be additional rent. Rent not paid when due shall bear interest at the maximum rate an individual is permitted by law to charge from the date due until paid. 8 15. Destruction. In the event the Premises are destroyed in whole or in part ----------- from any cause, Lessor may, at its option, (1.) rebuild or restore the Premises to their condition prior to the damage or destruction or (2.) terminate the Lease. If Lessor does not give Lessee notice in writing within thirty (30) days from the destruction of the Premises of its election either to rebuild and restore the Premises, or to terminate this Lease, Lessor shall be deemed to have elected to rebuild or restore them, in which event Lessor agrees, at its expense, promptly to rebuild or restore the Premises to its condition prior to the damage or destruction. If Lessor does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Lessee of because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond control of Lessor), then Lessee shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Lessor. Lessor's obligation to rebuild or restore shall not include restoration of Lessee's trade fixtures, equipment, merchandise, or any improvements, alterations, or additions made by Lessee to the Premises. If Lessor reasonably estimates that the restoration referenced herein will require 180 days or more, which estimate shall be delivered to Lessee within nor more than thirty (30) days after the occurrence of the casualty, Lessee shall be entitled to terminate this Lease effective upon written notice of such election to Lessor, provided Lessee is not the cause of said damage or destruction. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Lessee hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than fifty (50%) of the replacement cost thereof, Lessor may elect to terminate this Lease, whether the Premises be injured or not. 16. Condemnation. If any part of the Premises shall be taken for any public ------------- or quasi-public use, under any statute of by right of eminent domain, or private purchase in lieu thereof, and a part thereof remains, which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after taking such bears to the value of the entire Premises prior to such taking. Lessor shall have the option to terminate this Lease in the event that such taking causes a reduction in rent payable hereunder by fifty percent (50%) or more. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, as reasonably necessary for Lessee's conduct of its business as contemplated in this Lease, this Lease shall thereupon terminate. If a part of all of the Premises be taken, all compensation awarded upon such taking shall go to the Lessor, and the Lessee shall have no claim thereto, and the Lessee hereby irrevocably assigns and transfers to the Lessor any right to compensation or damages to which the Lessee may become entitled during the term hereof by reason of the purchase or condemnation of all or a part of the Premises, except that Lessee shall have the right to recover its share of any award or consideration for (1.) moving expenses; (2.) loss or damage to Lessee's trade fixtures, furnishings, equipment, and other personal property; and (3.) business goodwill. Each party waives the provisions of the Code of Civil Procedure, Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. 17. Free from Liens. Lessee shall (1.) pay for all labor and services ---------------- performed for materials used by or 9 furnished to Lessee, or any contractor employed by Lessee with respect to the Premises, and (2.) indemnify, defend, and hold Lessor and the Premises harmless and free from any liens, claims, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for materials used by or furnished to Lessee or any contractor employed by Lessee with respect to the Premises, and (3.) give notice to Lessor in writing five (5) days prior to employing any laborer or contractor to perform services related, or receiving materials for use upon the Premises, and (4.) shall post, on behalf of Lessor, a notice of non-responsibility in accordance with the statutory requirements of the California Civil Code, Section 3904, or any amendment thereof. In the event an improvement bond with a public agency in connection with the above is required to be posted, Lessee agrees to include Lessor as an additional obligee. 18. Compliance with Laws. Lessee shall, at its own cost, comply with and -------------------- observe all requirements of all municipal, county, state, and federal authority now in force, or which may hereafter be in force, pertaining to the use and occupancy of the Premises. Notwithstanding anything contained in Paragraphs 11, 12 and 18 of Lease, if it becomes necessary to make capital improvements required by laws enacted or legal requirements imposed by governmental agency(ies), then if such legal requirement is not imposed because of Lessee's specific use of the Premises and is not "triggered" by Lessee's alterations or Lessee's application for a building permit or any other governmental approval (in which instance Lessee shall be responsible for 100% of the cost of such improvement), Lessor shall be responsible for constructing such improvement and Lessee shall be responsible for its proportional share of the cost for said improvement, amortized over the useful life of such improvement that coincides with the remaining Lease term and any extensions thereof. 19. Subordination. Lessee agrees that this Lease shall, at the option of -------------- Lessor, be subjected and subordinated to any mortgage, deed of trust, or other instrument of security, which has been or shall be placed on the land and building, or land or building of which the Premises form a part, and this subordination is hereby made effective without any further act of Lessee or Lessor. The Lessee shall, at any time hereinafter, on demand, execute any instruments, releases, or other documents that may be required by any mortgagee, mortgagor, trustor, or beneficiary under any deed of trust, for the purpose of subjecting or subordinating this Lease to the lien of any such mortgage, deed of trust, or other instrument of security. If Lessee fails to execute and deliver any such documents or instruments, Lessee irrevocably constitutes and appoints Lessor as Lessee's special attorney-in-fact to execute and deliver any such documents or instruments. 20. Abandonment. Lessee shall not vacate or abandon the Premises at any time ----------- during the term; and if Lessee shall abandon, vacate, or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and left on the Premises shall be deemed to be abandoned, at the option of Lessor, except such property as may be mortgaged to Lessor; provided, however, that Lessee shall not be deemed to have abandoned or vacated the Premises so long as Lessee continues to pay all rents as and when due, and otherwise performs pursuant to the terms and conditions of this Lease. 21. Assignment and Subletting. Lessee's interest in this Lease is not ------------------------- assignable, by operation of law or otherwise, nor shall Lessee have the right to sublet the Premises, transfer any interest of Lessee's therein, or permit any use of the Premises by another party, without the prior written consent of Lessor to such assignment, subletting, or transfer of use, which consent shall not be unreasonably withheld or delayed. If Lessee is a partnership, a withdrawal or change, voluntary, involuntary, or by operation of law, of any partner (s) owning fifty percent (50%) or more of the partnership, of the dissolution of the partnership, shall be deemed as a voluntary assignment. If Lessee consists of more than one person, a purported assignment, voluntary, involuntary, 10 or by operation of law, from one person to the other or from a majority of persons to the others, shall be deemed a voluntary assignment. If Lessee is a corporation, any dissolution, merger, consolidation, or other reorganization of Lessee, or the sale or other transfer of a controlling percentage of the capital stock of Lessee, or sale of at least fifty-one percent (51%) of the value of the assets of Lessee, shall be deemed a voluntary assignment. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing at least fifty- one percent (51%) of the total combined voting power of all classes of Lessee's capital stock issued, outstanding, and entitled to vote for the election of directors. This Paragraph shall not apply to corporations the stock of which is traded through an exchange or over the counter. In the event of any subletting or transfer which is consented to, or not consented to, by Lessor, a subtenant or transferee agrees to pay monies or other consideration, whether by increased rent or otherwise, in excess of or in addition to those provided for herein, then all of such excess or additional monies or other consideration (after first deducting Lessee's reasonable costs associated with said subletting or transfer) shall be paid solely to Lessor, and this shall be one of the conditions to obtaining Lessor's consent. Lessee immediately and irrevocably assigns to Lessor, as security for Lessee's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted by this Lease, and Lessor, as assignee and as attorney-in-fact for Lessee, or a receiver for Lessee appointed on Lessor's application, may collect such rent and apply it toward Lessee's obligations under this Lease; except that, until the occurrence of an act of default by the Lessee, Lessee shall have the right to collect such rent. A consent to one assignment, subletting, occupation, or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupation, or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of the Lessor, terminate this Lease. Lessor's waiver or consent to any assignment or subletting hereunder shall not relieve Lessee from any obligation under this Lease unless the consent shall so provide. If Lessee requests Lessor to consent to a proposed assignment or subletting, Lessee shall pay to Lessor, whether or not consent is ultimately given, Lessor's reasonable attorneys' fees incurred in conjunction with each such request. 22. Parking Charges. Lessee agrees to pay upon demand, based on its percent of --------------- occupancy of the entire Premises, its pro-rata share of any parking charges, surcharges, or any other cost hereafter levied or assessed by local, state, or federal governmental agencies in connection with the use of the parking facilities serving the Premises, including, without limitation, parking surcharge imposed by or under the authority of the Federal Environmental Protection Agency. 23. Insolvency or Bankruptcy. Either (1.) the appointment of a receiver to take ------------------------ possession of all or substantially all of the assets of Lessee, or (2.) a general assignment by Lessee for the benefit of creditors, or (3.) any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this Lease by Lessee. Upon the happening of any such event, this Lease shall terminate ten (10) days after written notice of termination from Lessor to Lessee. This section is to be applied consistent with the applicable state and federal law in effect at the time such event occurs. 24. Lessor Loan or Sale. Lessee agrees promptly following request by Lessor -------------------- to (1.) execute and deliver to Lessor any documents, including estoppel certificates presented to Lessee by Lessor, (a.) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (b.) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, and (c.) 11 evidencing the status of the Lease as may be required either by a lender making a loan to Lessor, to be secured by deed of trust or mortgage covering the Premises, or a purchaser of the Premises from Lessor, and (2.) to deliver to Lessor the current financial statements of Lessee with an opinion of a certified public accountant, including a balance sheet and profit and loss statement, for the current fiscal year and the two immediately prior fiscal years, all prepared in accordance with Generally Accepted Accounting Principles consistently applied, or if Lessee does not prepare financial statements in the manner specified above, Lessee shall provide Lessor with the financial statements which most accurately reflect the financial condition of Lessee. Lessee's failure to deliver an estoppel certificate within three (3) days following such request shall constitute a default under this Lease and shall be conclusive upon Lessee that this Lease is in full force and effect and has not been modified except as may be represented by Lessor. If Lessee fails to deliver the estoppel certificates within the three (3) days, Lessee irrevocably constitutes and appoints Lessor as its special attorney-in-fact to execute and deliver the certificate to any third party. 25. Surrender of Lease. The voluntary or other surrender of this Lease by ------------------ Lessee, or a mutual cancellation thereof, shall not work a merger nor relieve Lessee of any of Lessee's obligations under this Lease, and shall, at the option of Lessor, terminate all or any existing Subleases or Subtenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such Subleases or Subtenancies. 26. Attorneys' Fees. If, for any reason, any suit be initiated to enforce any --------------- provision of this Lease, the prevailing party shall be entitled to legal costs, expert witness expenses, and reasonable attorneys' fees, as fixed by the court. 27. Notices. All notices to be given to Lessee may be given in writing, ------- personally, or by depositing the same in the United States mail, postage prepaid, and addressed to Lessee at the said Premises, whether or not Lessee has departed from, abandoned, or vacated the Premises. Any notice or document required or permitted by this Lease to be given Lessor shall be addressed to Lessor at the address set forth below, or at such other address as it may have theretofore specified by notice delivered in accordance herewith: LESSOR: Huettig & Schromm/Heaton & Keyser 900 Welch Road, Suite 10 Palo Alto, California 94304 LESSEE: Oratec Interventions 3700 Haven Court Menlo Park, CA 94025 28. Transfer of Security. If any security be given by Lessee to secure the -------------------- faithful performance of all or any of the covenants of this Lease on the part of Lessee, Lessor may transfer and/or deliver the security, as such, to the purchaser of the reversion, in the event that the reversion be sold, and thereupon Lessor shall be discharged from any further liability in reference thereto, upon the assumption by such transferee of lessor's obligations under this Lease. 29. Waiver. The waiver by Lessor or Lessee of any breach of any term, covenant, ------ or condition, herein contained shall not be deemed to be a waiver of such term, covenant, or condition, or any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of rent hereunder by lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such 12 preceding breach at the time of acceptance of such rent. 30. Holding Over. Any holding over after the expiration of the term or any ------------ extension thereof, with the consent of lessor, shall be construed to be a tenancy from month-to-month, at a rental of one and one-half (1 1/2) times the previous month's rental rate per month, and shall otherwise be on the terms and conditions herein specified, so far as applicable. 31. Covenants, Conditions, and Restrictions. Not applicable. --------------------------------------- 32. Limitation on Lessor's Liability. If Lessor is in default of this Lease, --------------------------------- and, as a consequence, Lessee recovers a money judgment against Lessor, the judgment shall be satisfied only out of the proceeds of sale received on execution of the judgment and levy against the right, title, and interest of Lessor in the Premises, or in the building, other improvements, and land of which the Premises are part, and out of rent or other income from such real property receivable by Lessor or out of the consideration received by Lessor from the sale or other disposition of all or any part of Lessor's right, title, and interest in the Premises or in the building, other improvements, and land of which the Premises are part. Neither Lessor nor any of the partners comprising the partnership designated as Lessor shall be personally liable for any deficiency. 33. Letter of Credit. Upon commencement of the Lease, Lessee shall provide Lessor with an irrevocable Letter of Credit in the amount of the total tenant improvement costs (which the parties estimate will be approximately $147,000) less the amount of the security deposit. This Letter of Credit can be drawn on by Lessor if Lessee defaults on any material obligation under the terms of this Lease. However, if there is no material default on the part of Lessee, the Letter of Credit shall be reduced on an annual basis as follows: Month 13 Reduced by 33.33% Month 25 Reduced by 33.33% Month 37 Released in its entirety
34. Miscellaneous. A. Time is of the essence of this Lease, and of each and all of its provisions. B. The term "building" shall mean the building in which the Premises are situated. C. If the building is leased to more than one tenant, then each such tenant, its agents, officers, employees, and invitees, shall have the non-exclusive right (in conjunction with the use of the part of the building leased to such Tenant) to make reasonable use of any driveways, sidewalks, and parking areas located on the parcel of land on which the building is situated, except such parking areas as may from time to time be leased for exclusive use by other Tenant(s). D. Lessee's such reasonable use of parking areas shall not exceed that percent of the total parking areas which is equal to the ratio which floor space of the Premises bears to floor space of the building. E. The term "assign" shall include the term "transfer." F. The invalidity or unenforceability of any provision of this Lease shall not affect the validity or enforceability of the remainder of this Lease. 13 G. All parties hereto have equally participated in the preparation of this Lease . H. The headings and titles to the Paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. I. Lessor has made no representation(s) whatsoever to Lessee (express or implied) except as may be expressly stated in writing in this Lease instrument. J. This instrument contains all of the agreements and conditions made between the parties hereto, and may not be modified orally or in any other manner than by agreement in writing, signed by all of the parties hereto or their respective successors in interest. K. It is understood and agreed that the remedies herein given to Lessor shall be cumulative, and the exercise of any one remedy by Lessor shall not be to the exclusion of any other remedy. L. The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, and administrators, and assigns of all the parties hereto; and all of the parties hereto shall jointly and severally be liable hereunder. M. This Lease has been negotiated by the parties hereto and the language hereof shall not be construed for or against either party. N. All exhibits to which reference is made are deemed incorporated into this Lease, whether covenants or conditions, on the part of Lessee shall be deemed to be both covenants and conditions. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date first above-written. LESSOR: LESSEE: BY: /s/ Howard J. White BY: /s/ Nancy Westcott --------------------- ---------------------- ITS: General Partner ITS: -------------------- --------------------- DATE: 6/4/98 DATE: 6/1/98 ------------------- -------------------- 14 EX-10.11 19 FORM OF INDEMNIFICATION AGMT. EXHIBIT 10.11 INDEMNIFICATION AGREEMENT ------------------------- This Indemnification Agreement (the "Agreement") is made as of ___________, --------- by and between ORATEC Interventions, Inc., a Delaware corporation (the "Company"), and ((IndemniteeName)) (the "Indemnitee"). ------- ---------- RECITALS -------- The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law. AGREEMENT --------- In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. Indemnification. --------------- (a) Third Party Proceedings. The Company shall indemnify Indemnitee ----------------------- if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall --------------------------------------------- indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) Mandatory Payment of Expenses. To the extent that Indemnitee has ----------------------------- been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. No Employment Rights. Nothing contained in this Agreement is intended -------------------- to create in Indemnitee any right to continued employment. 3. Expenses; Indemnification Procedure. ----------------------------------- (a) Advancement of Expenses. The Company shall advance all expenses ----------------------- incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a -------------------------------- condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in -2- writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Procedure. Any indemnification and advances provided for in --------- Section 1 and this Section 3 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of ------------------ a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated -------------------- under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel -3- by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. Notwithstanding any other provision of this Agreement, the ----- Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement -------------- shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding. 5. Partial Indemnification. If Indemnitee is entitled under any provision ----------------------- of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge --------------------- that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. -4- For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is --- not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Officer and Director Liability Insurance. The Company shall, from time ---------------------------------------- to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. 8. Severability. Nothing in this Agreement is intended to require or ------------ shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. Exceptions. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses ------------------------------ to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or -5- advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) Lack of Good Faith. To indemnify Indemnitee for any expenses ------------------ incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) Insured Claims. To indemnify Indemnitee for expenses or -------------- liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) Claims under Section 16(b). To indemnify Indemnitee for expenses -------------------------- or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. Construction of Certain Phrases. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall ------- include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" ----------------- shall include employee benefit plans; references to "fines" shall include any ----- excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any ------------------------------------- service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not --- opposed to the best interests of the Company" as referred to in this Agreement. - -------------------------------------------- 11. Attorneys' Fees. In the event that any action is instituted by --------------- Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee -6- with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 12. Miscellaneous. ------------- (a) Governing Law. This Agreement and all acts and transactions ------------- pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law. (b) Entire Agreement; Enforcement of Rights. This Agreement sets --------------------------------------- forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) Construction. This Agreement is the result of negotiations ------------ between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (d) Notices. Any notice, demand or request required or permitted to ------- be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (e) Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (f) Successors and Assigns. This Agreement shall be binding upon the ---------------------- Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs, legal representatives and assigns. (g) Subrogation. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of -7- Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights. [Signature Page Follows] -8- The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement. ORATEC INTERVENTIONS, INC. By: _______________________________ Title: _______________________________ Address: 3700 Haven Court Menlo Park, CA 94025 AGREED TO AND ACCEPTED: ((IndemniteeName)) _______________________________ (Signature) Address: ((IndemniteeAddress1)) ((IndemniteeAddress2)) -9- EX-23.1 20 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 25, 1999, in the Registration Statement (Form S-1) and related Prospectus of ORATEC Interventions, Inc. for the registration of shares of its common stock. /s/ Ernst & Young LLP Palo Alto, California July 6, 1999 EX-23.3 21 CONSENT OF WILSON SONSINI GOODRICH & ROSATI EXHIBIT 23.3 CONSENT OF WILSON SONSINI GOODRICH & ROSATI, A PROFESSIONAL CORPORATION We consent to the use of our name in the second paragraph under the caption "Experts" in the prospectus, which constitutes part of the Registration Statement for the Common Stock of ORATEC Interventions, Inc. on Form S-1. We further consent to the aforementioned use of our name in any amendments to the aforementioned Registration Statement. /s/ WILSON SONSINI GOODRICH & ROSATI, A PROFESSIONAL CORPORATION Palo Alto, California July 9, 1999 EX-27.1 22 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 3-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 MAR-31-1999 11,583 11,715 3,998 4,126 3,121 3,990 (216) (357) 1,421 1,708 20,420 22,077 6,517 7,222 (2,742) (3,654) 24,195 25,645 6,423 7,358 0 0 0 0 35,816 35,816 2 2 268 385 24,195 25,645 11,129 5,197 11,129 5,197 6,566 2,829 15,748 5,295 0 0 0 0 157 106 (11,342) (3,033) 0 0 (11,342) (3,033) 0 0 0 0 0 0 (11,342) (3,033) (4.72) (1.24) (4.72) (1.24)
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