-----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, Dd3eZQRqzzI6g1u6/bizNF168kvN9gXtlalQHjgHOA7JiaxJdim+69PeZ1IBDM+w VmgbXhK5wNjkBifHEX+K8w== 0001012870-01-500730.txt : 20010514 0001012870-01-500730.hdr.sgml : 20010514 ACCESSION NUMBER: 0001012870-01-500730 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORATEC INTERVENTIONS INC CENTRAL INDEX KEY: 0001037165 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 943180773 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26745 FILM NUMBER: 1630520 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 10-Q 1 d10q.txt QUARTERLY REPORT 03/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-26745 ================================================================================ ORATEC INTERVENTIONS, INC. (Exact name of registrant as specified in its charter) Delaware 94-3180773 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
3700 Haven Court Menlo Park, California 94025 (Address of principal executive offices, including zip code) (650) 369-9904 (Registrant's telephone number, including area code) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of April 30, 2001, there were 22,870,133 shares of the registrant's Common Stock outstanding. INDEX -----
PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (unaudited) Condensed Balance Sheets - March 31, 2001 and December 31, 2000.............................. 3 Condensed Statements of Operations - Three months ended March 31, 2001 and 2000.............. 4 Condensed Statements of Cash Flows - Three months ended March 31, 2001 and 2000.............. 5 Notes to Condensed Financial Statements...................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................ 17 Item 2. Changes in Securities and Use of Proceeds.................................................... 17 Item 3. Defaults Upon Senior Securities.............................................................. 18 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 18 Item 5. Other Information............................................................................ 18 Item 6. Exhibits and Reports on Form 8-K............................................................. 18 SIGNATURES................................................................................................. 19
-2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements. ORATEC INTERVENTIONS, INC. CONDENSED BALANCE SHEETS (In thousands, except per share data)
March 31, December 31, 2001 2000 Assets (unaudited) --------------- ---------------- Current assets: Cash and cash equivalents....................................... $ 28,968 $ 33,264 Available-for-sale investments.................................. 22,291 16,683 Accounts receivable, net........................................ 8,566 8,352 Inventories..................................................... 5,449 6,450 Prepaid expenses................................................ 1,077 1,537 Other current assets............................................ 1,467 1,787 -------- -------- Total current assets......................................... 67,818 68,073 Property and equipment, net........................................ 9,384 8,985 -------- -------- $ 77,202 $ 77,058 ======== ======== Liabilities and stockholders' equity Current liabilities: Accounts payable................................................ $ 1,165 $ 1,175 Accrued compensation and benefits............................... 2,412 3,764 Other accrued liabilities....................................... 2,021 1,760 Current portion of equipment financing obligations.............. 16 22 -------- -------- Total current liabilities.................................... 5,614 6,721 Common stock, $0.001 par value..................................... 23 22 Additional paid-in capital......................................... 101,003 100,244 Deferred stock compensation........................................ (208) (230) Receivable from stockholder........................................ (41) (49) Accumulated other comprehensive income............................. 236 - Accumulated deficit................................................ (29,425) (29,650) -------- -------- Stockholders' equity............................................... 71,588 70,337 $ 77,202 $ 77,058 ======== ========
See accompanying notes. -3- ORATEC INTERVENTIONS, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data, unaudited)
Three months ended March 31, ----------------------------- 2001 2000 ----------------------------- Sales........................................................ $12,811 $12,663 Cost of sales................................................ 4,020 3,646 Gross profit................................................. 8,791 9,017 Operating expenses: Research and development............................... 1,428 1,318 Sales and marketing.................................... 6,702 6,035 General and administrative............................. 973 1,035 Stock compensation (1)................................. 182 259 ------- ------- Total operating expenses..................................... 9,285 8,647 ------- ------- Income (loss) from operations................................ (494) 370 Interest and other income.................................... 730 168 Interest and other expense................................... (1) (321) ------- ------- Income before income taxes................................... 235 217 Provision for income taxes................................... 12 11 ------- ------- Net income................................................... $ 223 $ 206 ======= ======= Basic net income per share................................... $ 0.01 $ 0.05 ======= ======= Diluted net income per share................................. $ 0.01 $ 0.01 ======= ======= Shares used in computing basic net income per share.......... 22,671 4,555 Shares used in computing diluted net income per share........ 23,475 18,873
(1) Stock compensation expense relates to research and development and sales and marketing expenses as follows: Research and development.............................. $ 64 $ 259 Sales and marketing................................... 118 -- ----- ----- $ 182 $ 259 ===== ===== See accompanying notes. -4- ORATEC INTERVENTIONS, INC. CONDENSED STATEMENTS OF CASH FLOWS Increase (decrease) in cash and cash equivalents (In thousands, unaudited)
Three months ended March 31, ------------------------------ 2001 2000 ------------------------------ Operating activities Net income..................................................................... $ 223 $ 206 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization................................................ 1,021 861 Compensation expense for options granted to non-employees.................... 160 236 Amortization of stock compensation........................................... 22 23 Changes in operating assets and liabilities: Accounts receivable.......................................................... (214) (1,412) Inventories.................................................................. 1,001 (290) Prepaid expenses and other current assets.................................... 780 (316) Accounts payable............................................................. (11) 414 Accrued compensation and benefits............................................ (1,352) (489) Other accrued liabilities.................................................... 261 138 --------- --------- Net cash provided by (used in) operating activities...................... 1,891 (629) --------- --------- Investing activities: Purchases of available-for-sale investments.................................... (7,970) -- Sales of available-for-sale investments........................................ 2,598 2,931 Capital expenditures........................................................... (1,421) (3,345) --------- --------- Net cash used in investing activities.................................... (6,793) (414) --------- --------- Financing activities: Proceeds from issuance of common stock......................................... 603 542 Repayment of shareholder receivables........................................... 8 -- Repayment of notes payable..................................................... -- (501) Repayment of equipment financing obligations................................... (6) (314) --------- --------- Net cash provided by (used in) financing activities...................... 606 (273) --------- --------- Net decrease in cash and cash equivalents...................................... (4,296) (1,316) Cash and cash equivalents at beginning of period............................... 33,264 5,943 ========= ========= Cash and cash equivalents at end of period..................................... $28,968 $ 4,627 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest................................................. $ 1 $ 313 ========= =========
See accompanying notes. -5- ORATEC INTERVENTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation: In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of ORATEC Interventions, Inc. for the periods indicated. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods. These condensed financial statements should be read in conjunction with financial statements for the year ended December 31, 2000 contained in our report on Form 10-K. The balance sheet at December 31, 2000 was derived from audited financial statements; however, the financial statements in this report are condensed and do not include all disclosures required by generally accepted accounting principles. 2. Net Income Per Share: Basic net income per share is computed using the weighted-average number of shares of stock outstanding during the period. Diluted net income per common share is computed using the weighted average number of common shares, redeemable convertible preferred shares (on an as-converted basis) and common equivalent shares outstanding during the period. Common equivalent shares are computed using the treasury stock method and consist of shares outstanding related to stock options and warrants. Common stock equivalents and redeemable convertible preferred stock are excluded from the computation of diluted earnings per share if their effect is anti-dilutive. The following is a reconciliation of the computation for basic and diluted net income per share (in thousands, except per share data): Three months ended March 31, ---------------------------- 2001 2000 -------- ------- Net income......................................... $ 223 $ 206 ======== ======= Shares used in the calculation: Weighted-average common shares outstanding used to compute basic net income per share......... 22,671 4,555 Weighted-average effect of dilutive securities: Options............................................ 782 2,090 Warrants........................................... 22 148 Redeemable convertible preferred shares........ -- 12,080 Weighted-average shares used to compute diluted net income per share........................... 23,475 18,873 ======== ======= Net income per share: Basic.............................................. $ 0.01 $ 0.05 ======== ======= Diluted............................................ $ 0.01 $ 0.01 ======== ======= The Company issued 4,600,000 shares of common stock at the close of its initial public offering on April 10, 2000. At that time, all outstanding convertible preferred stock converted to common stock. -6- 3. Comprehensive Income: The components of comprehensive income for the three months ended March 31, 2001 and 2000 are as follows (in thousands): Three months ended March 31, ----------------- 2001 2000 ----- ----- Net income......................................... $ 223 $ 206 ----------------- Unrealized gain on available-for-sale 236 -- investments........................................ $ 459 $ 206 ================= 4. Balance Sheet Detail (in thousands): March 31, December 31, ------------------------- 2001 2000 ----------- --------- Inventory: Raw materials............................ $ 2,158 $ 2,573 Work-in-process.......................... 112 189 Finished goods........................... 2,528 3,094 Generators held for sale................. 651 594 ------- ------- Total........................................ $ 5,449 $ 6,450 ======= ======= Other accrued liabilities: Accrued professional fees................ $ 634 $ 584 Dealer commissions....................... 446 349 Clinical and development costs........... 328 281 Other.................................... 613 546 ------- ------- Total........................................ $ 2,021 $ 1,760 ======= ======= 5. Recent Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires all derivatives to be recognized as either assets or liabilities on the balance sheet and to be measured at fair value. Changes in the fair value of derivatives will be recognized in net income unless specific hedge accounting criteria are met. SFAS 133 is effective for all fiscal years beginning after June 15, 2000. The adoption of SFAS 133 had no material impact on the Company's financial statements. -7- 6. Segment Information: ORATEC's spine and arthroscopy product sales are as follows (in thousands): Three months ended March 31, ------------------ 2001 2000 ------------------ Spine........................................ $ 6,188 $ 6,760 Arthroscopy.................................. 6,623 5,903 ------- ------- $12,811 $12,663 ======= ======= Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions identify such forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties, which could cause actual results to differ materially from those expressed or forecasted. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Factors That May Affect Future Results" and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. Overview ORATEC Interventions develops and markets innovative medical devices that use controlled thermal energy to treat spine and joint disorders. In December 1995 we gained FDA 510(k) clearance for our first product, our TAC probe for the treatment of joint disorders. In March 1997, after 18 months of funding scientific and clinical studies, we formally launched this product at the American Academy of Orthopedic Surgeons convention. We received FDA 510(k) clearance for our SpineCATH product in March 1998 and formally launched this product at the North American Spine Society, or NASS, conference in October 1998. In November 1999, we introduced our Vulcan ElectroThermal Arthroscopy System. All of our revenues are generated from sales of our spine and arthroscopy products. For the three months ended March 31, 2001, 95% of our total sales were derived from our disposable spine catheters and arthroscopy probes and 5% was derived from sales of generators and accessories. During the three months ended March 31, 2001, we produced a profit of $223,000 compared to a profit of $206,000 for the three months ended March 31, 2000. Our profitability is attributable to both increased sales and interest earned on proceeds from our initial public offering in April 2000. At March 31, 2001 we had an accumulated deficit of $29.4 million. For the three months ended March 31, 2001, only 1% of our sales was derived from markets outside the U.S., and we do not expect international sales to increase significantly in the near future. In international markets, we rely exclusively on third party distributors. Our gross margins on sales through international third party distributors are less than our gross margins on U.S. sales as a result of price discounts. We have limited or no control over the sales efforts of these third party distributors. We recognize revenue upon shipment of products to customers or, in some instances, when inventory provided to customers by our employees and sales agencies has been used at their facilities, as evidenced by receipt of a purchase order. 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 -8- disposable arthroscopy probes. In connection with the market launch of our spine products, we have been placing spine generators with customers for a demonstration period, after which we convert these placements to sales. Our early product sales have mainly been to a group of early adopting physicians who are receptive to minimally invasive techniques. As we gain market share, our opportunity for further market penetration may slow and require additional sales efforts, longer term supporting clinical data, greater reimbursement acceptance by payors, and further training, in order to convince physicians who currently favor open surgery or other treatment alternatives to switch to our minimally invasive procedures. Several large insurance companies have refused to reimburse for procedures using our spine products. If our customers continue to experience difficulty in receiving reimbursement, they may refuse to use our products and we may be unable to meet our revenue goals. The medical device market is litigious and in the ordinary course of business we will become a party to product liability proceedings. We may also become a party to patent proceedings. The costs of such lawsuits may be material and could affect our earnings and financial position. An adverse outcome in a patent lawsuit could require us to cease sales of affected products or to pay royalties, which could harm our results of operations. Our future growth depends on expanding our current markets and finding new high growth markets in which we can leverage our core technologies of applying thermal energy to treat soft tissue disorders. To the extent any current or additional markets do not materialize in accordance with our expectations, our sales could be lower than expected. Results of Operations Sales Sales increased 1% to $12.8 million for the three months ended March 31, 2001 from $12.7 million for the three months ended March 31, 2000. Our arthroscopy business increased 12% to $6.6 million in the first three months of 2001 from $5.9 million for the first three months of 2000 as the continuing market acceptance of our Vulcan arthroscopy system and new product introductions led to greater account penetration, increased probe utilization rates, and a higher number of active customers. Sales decreased in our spine business to $6.2 million in the first three months of 2001 from $6.8 million in the first three months of 2000, or 8%, due to lower unit shipments to customers who continue to experience difficulty obtaining reimbursement from payors for the IDET procedure. The unit decline was partially offset by an increase in the list price of the SpineCATH catheter and increases in the number of generators placed in hospitals and clinics. Cost of sales Cost of sales increased to $4.0 million for the three months ended March 31, 2001, a 10% increase from $3.6 million for the three months ended March 31, 2000. The increase in overall cost of goods sold between 2000 and 2001 is due primarily to lower production volumes through our manufacturing operations resulting in higher unit costs and increased inventory reserves. Cost of sales consists of material, labor and overhead costs, inventory reserves, as well as depreciation on generators placed with customers for their use with our disposable products. Gross profit Gross profit decreased to $8.8 million, or 69% of sales, for the three months ended March 31, 2001 from $9.0 million, or 71% of sales, for the three months ended March 31, 2000. The decrease in overall gross profit is attributable to sales growing at a slower pace than unit manufacturing costs and inventory reserves. -9- Research and development expenses Research and development expenses increased 8% to $1.4 million for the three months ended March 31, 2001 from $1.3 million for the three months ended March 31, 2000. The increases are related to the addition of headcount and office space for increased development efforts on next-generation spine devices and advanced arthroscopy probes. Research and development expenses consist of costs related to our research and development, regulatory and clinical affairs functions, as well as costs associated with scientific and clinical studies. We expect to continue to make substantial investments in research and development and anticipate that research and development expenses will continue to increase in the future. Sales and marketing expenses Sales and marketing expenses increased 11% to $6.7 million for the three months ended March 31, 2001 from $6.0 million for the three months ended March 31, 2000. Increased expenses were primarily due to greater overall sales and marketing headcount, higher commission expenses relating sales compensation programs and expenses associated with our reimbursement function. Sales and marketing expenses consist primarily of costs for sales, marketing and reimbursement staff, sales commissions, medical conference participation and physician training programs. We anticipate that sales and marketing expenses will increase as we continue to develop our sales and reimbursement support staffs and expand our physician training programs. General and administrative expenses General and administrative expenses were $973,000 for the three months ended March 31, 2001, a 6% decrease from $1.0 million for the three months ended March 31, 2000. The decrease in expenses during the three months ended March 31, 2001 was primarily due to decreased headcount and lower reserves for bad debt based on our collection experience, partially offset by higher expenses related to being a public company. General and administrative expenses consist primarily of personnel costs, professional service fees, expenses related to intellectual property rights and general corporate expenses. We expect general and administrative expenses to increase in the future as we add personnel, continue to expand our patent portfolio and incur reporting and investor related expenses as a public company. Stock compensation expense Stock compensation expense was $182,000 and $259,000 for the three months ended March 31, 2001 and 2000, respectively. This expense relates principally to options granted to consultants for services rendered. Stock compensation expense is calculated using the Black-Scholes option pricing model, in which the stock price is one of the key variables. The options are valued over their vesting period, and the expense is recognized as the options vest. Interest and other income (expense), net Net interest and other income was $729,000 for the three months ended March 31, 2001, a change from net interest and other expense of $(153,000) for the three months ended March 31, 2000. Net interest and other income (expense) is comprised primarily of interest earned on funds from the initial public offering proceeds, offset by interest expense on equipment and debt obligations. During 2000, the company used a portion of its initial public offering proceeds to pay down substantially all of its debt balances, thereby decreasing future interest expense. Provision for income taxes The income tax provision for the three months ended March 31, 2001 and 2000 is based on an estimated effective annual tax rate of 5%. The income tax provision represents primarily current state and federal minimum income taxes after utilization of net operating loss carryforwards. As of December 31, 2000 we had net operating loss carryforwards of approximately $29.0 million for federal and $13.0 million for state income tax purposes. We also had research and development credit -10- carryforwards of approximately $400,000 for federal income tax purposes. The income tax provision for the quarter ended March 31, 2001 was $12,000. This amount primarily represents current federal and state minimum income taxes after utilization of net operating loss and research and development credit carryforwards. The net operating loss carryforwards will expire at various dates beginning in 2001 through 2020, if not utilized. The net operating loss carryforwards are subject to an annual limitation due to 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. Liquidity and Capital Resources Net cash provided by operating activities was $1.9 million for the three months ended March 31, 2001, compared to net cash used of $629,000 for the three months ended March 31, 2000. Cash provided was primarily related to increases in non-cash depreciation and amortization charges on generators and equipment and decreases in inventories and prepaid expenses, partially offset by decreases in accrued compensation and benefits. Net cash used in investing activities was $6.8 million for the three months ended March 31, 2001, compared to $414,000 for the three months ended March 31, 2000. The increase was related to the purchases of available-for-sale investments as we invested the proceeds from our initial public offering. Net cash provided by financing activities was $606,000 for the three months ended March 31, 2001, compared to net cash used by financing activities of $273,000 for the three months ended March 31, 2000. The change was due mainly to lower debt repayments in 2001 as we used part of our proceeds from our initial public offering in April 2000 to repay substantially all of our debts. As of March 31, 2001, our principal debt and other commitments consisted of $16,000 outstanding under our equipment loans. We expect to increase our capital expenditures consistent with our anticipated growth in generator placements, manufacturing and personnel. We also may increase our capital expenditures as we expand our product lines or invest to address new markets. Our principal source of liquidity at March 31, 2001 consisted of $51.3 million of cash and available-for-sale investments, primarily from our initial public offering which was completed on April 4, 2000. Our offering raised net proceeds of approximately $58.8 million. We believe that our current cash position, along with cash generated from the future sales of products, will be sufficient to meet our operating and capital requirements for 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 a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to holders of common stock, and could contain covenants that restrict our operations. Any additional funding, if required, may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional funding, if needed, 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. Factors That May Affect Future Results Because several large insurance companies have refused to reimburse health care providers for our procedures, physicians, hospitals and other health care providers may be reluctant to use our products and sales may decline. Physicians, hospitals and other health care providers are unlikely to purchase our products if they do not receive reimbursement from payors for the cost of the procedures using our products. There are payors, including a number of managed care organizations, that have refused to reimburse for the cost of procedures using our spine products until long term peer reviewed clinical data has been published. In addition, even upon the publication of peer reviewed data, payors still may not reimburse for the procedure based on individual criteria. 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 -11- outcomes. If our customers are unable to receive reimbursement for procedures using our products, we may be unable to meet our revenue goals and may not achieve or sustain profitability. If physicians do not support the use of our products, we may not achieve future sales growth. Our product sales have mainly been to a group of early adopting physicians who are receptive to minimally invasive techniques. Other physicians may not purchase our products until there is long term clinical evidence to convince them to alter their existing treatment methods and recommendations from prominent physicians that our products are effective in treating spine and joint disorders. In addition, physicians tend to be slow to change their medical treatment practices because of perceived liability risks arising from the use of new products and the uncertainty of third party reimbursement. If we fail to gain further physician support for our products, we may not achieve expected revenues and may not achieve or sustain profitability. Our stock price, like that of many early stage medical technology companies, has been volatile. If our future quarterly sales or operating results are below the expectations of securities analysts or investors, the price of our common stock would likely decline. Stock price fluctuations may be exaggerated if the trading volume of our common stock is low. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its stock. Any securities litigation claims brought against us could result in substantial expense and the diversion of management's attention from our core business. Because we lack sufficient long term outcomes data regarding the efficacy of our products, we could find that our long term data does not support our current clinical results. Because our spine products are supported by only three years of patient follow up and our arthroscopy products are supported by only four years of patient follow up, we could discover that our current clinical results cannot be supported. If longer term patient studies or clinical experience indicate that treatments with our products do not provide patients with sustained benefits, our sales could decline. If longer term patient studies or clinical experience indicate that our procedures cause tissue damage, motor impairment or other negative effects, we could be subject to significant liability. Further, because some of our data has been produced in studies that are not randomized and involve small patient groups, our results may not be reproduced in wider patient populations. In addition, we are aware of pre-clinical studies related to our spine and arthroscopy products that have produced data that is inconsistent with our scientific findings. If we are unable to produce clinical data that is supported by the independent efforts of other clinicians, our business could suffer. Because we expect operating expenses to increase substantially in the foreseeable future and cannot be certain that revenues will continue to increase, we may not achieve or sustain profitability. We anticipate that our operating expenses will increase substantially in absolute dollars for the foreseeable future as we expand our sales and marketing, manufacturing, product development and administrative staff. Although we attained profitability during the first three quarters of 2000 and the first quarter of 2001, we were not profitable in the fourth quarter of 2000. If sales do not continue to grow, we may not be able to achieve or maintain profitability in the future. We incurred losses of $9.7 million in 1999 and generated income of $1.0 million in 2000. As of March 31, 2001, we had an accumulated deficit of approximately $29.4 million. Because we are introducing new products and technology into the spine and arthroscopy markets, we may fail to gain market acceptance for our products and our business could suffer. We have developed products for spine and joint disorders that we believe are not effectively addressed by existing medical devices. Because we are introducing novel technology into these markets, we face the challenge of gaining widespread acceptance of our products. If we fail at this task, we may not achieve expected revenues and may not achieve or sustain profitability. -12- Because we face significant competition from companies with greater resources than we have, we may be unable to compete effectively. The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We compete with many larger companies that enjoy several competitive advantages, including: . established distribution networks; . products that are supported by long term clinical data; . products that have been approved for reimbursement; . established relationships with health care providers and payors; and . greater resources for product development, sales and marketing and patent litigation. At any time, other companies may develop additional directly competitive products. For example, Radionics Inc., a division of Tyco International, has launched a spine product which we expect to compete directly with the IDET system. Because of the importance of our patent portfolio to our business, we may lose market share to our competitors if we fail to protect our intellectual property rights. Protection of our patent portfolio is key to our future success, particularly because we compete in the medical device industry. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure and confidentiality agreements and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our patents may be challenged, invalidated or circumvented by third parties. Our patent applications and the notices of allowance we have received may not issue as patents in a form that will be advantageous to us. Our patents and applications cover particular aspects of our products and technology. There may be more effective technologies, designs or methods. If the most effective treatment method is not covered by our patents or applications, it could have an adverse effect on our sales. If we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Finally, even if our intellectual property rights are adequately protected, litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and result in a substantial diversion of management attention. If our intellectual property is not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products and compete more directly with us, which could result in a decrease in our market share. Because the medical device industry is litigious, we are susceptible to an intellectual property suit. There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry generally, and in the spine and arthroscopy market segments particularly. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. 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 that our products may infringe. There could also be existing patents that one or more of our products may inadvertently be infringing of which we are unaware. As the number of competitors in the markets for minimally invasive treatment of spine and joint disorders grows, the possibility of a patent infringement claim against us increases. Infringement and other intellectual property claims, with or without merit, can be expensive and time consuming to litigate and divert management's attention from our core business. -13- If we are sued for patent infringement, we could be prevented from selling our products and our business could suffer. We are aware of the existence of patents held by competitors in the spine and arthroscopy markets, which could result in a patent lawsuit against us. However, following a review of those patents with outside experts, we believe they are invalid or that if valid, we do not infringe. In the event that we are subject to a patent infringement lawsuit and if the relevant patent claims are upheld as valid and enforceable, we believe we have defenses based on noninfringement. If our products are found to infringe a valid patent, we could be prevented from selling them unless we can obtain a license or are able to redesign the 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 could 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 are not successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business could suffer. Product liability claims brought against us could result in payment of substantial damages to plaintiffs. We manufacture medical devices that are used on patients in surgical procedures, and we are thus subject to product liability lawsuits as part of our ordinary course of business. Although we are involved in product liability actions, we do not believe any of these are material to our business or financial condition. We have reported to the FDA instances of burns, probe breakage and nerve inflammation which were related to the use of our arthroscopy products. We have also reported to the FDA instances involving electrical shorts in our SpineCATH catheter which resulted in small burns at the entry point on the skin and instances of SpineCATH catheter breakage. We believe that both the electrical shorts and catheter breakage were related, in the majority of the reported instances, to overmanipulation of the catheter, which caused the catheter to kink. In addition, we have reported instances of infection and motor and nerve impairment related to the IDET procedure. We do not believe that any of these instances were the result of design flaws. In addition, we have emphasized to our physician customers the importance of following the correct protocol during the IDET procedure. Any product liability claim brought against us, with or without merit, could result in an increase in 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. You may have a difficult time evaluating 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. Any failure to build and manage our sales organization may negatively affect our market share and revenues. We currently have two separate sales forces, one for each of our spine and arthroscopy product lines, and we rely on a combination of direct sales employees and sales agents to sell each product line in the U.S. We need to expand both the spine and arthroscopy sales teams during this fiscal year 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; -14- . 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. Any failure in our physician training efforts could significantly reduce product sales. It is critical to the success of our sales effort to train a sufficient number of physicians and to provide them adequate instruction in the use of our products. We rely on physicians to spend their time and money to attend our training sessions. If physicians are not properly trained, they may misuse or ineffectively use our products. This may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our product sales. If we fail to support our anticipated growth in operations, our business could suffer. To succeed in the implementation of our business strategy, our management team must rapidly execute our sales strategy and further develop products, while managing anticipated growth by implementing effective planning and operating processes. To manage anticipated growth in operations, we must increase our manufacturing and quality assurance staff, expand our sales teams and expand our manufacturing facility. Our systems, procedures and controls may not be adequate to support our expected growth in operations. Because we have limited control over third party distributors, we may be unable to sell our products in international markets. We rely on third party distributors, over whom we have limited control, to sell our products in international markets. We have an exclusive agreement with, and are dependent upon, DePuy AcroMed for the marketing and sales of our spine products internationally. We also have exclusive distributor relationships for the sale of our arthroscopy products in foreign countries, including Australia, Canada, Italy, Korea, Spain and Taiwan. Because we compete with Mitek, an Ethicon division of Johnson & Johnson, in the arthroscopy market, a conflict with them could negatively affect our international spine sales efforts, which are conducted exclusively by DePuy AcroMed, another division of Johnson & Johnson. Because our exclusive international spine product distributor is affiliated with competitors in both the spine and arthroscopy markets, they may devote insufficient resources to sales of our products or a conflict may arise which could disrupt international sales. If DePuy AcroMed fails to devote adequate resources to our products, we could fail to achieve expected international sales. If a conflict arises which we could not readily resolve, there could be a period of declining international sales as we search for an alternative means of international product distribution. Complying with FDA and other regulations is an expensive and time consuming process and any failure to comply could result in substantial penalties. We are subject to a host of federal, state, local and international regulations regarding the testing, manufacture, distribution, marketing, promotion, record keeping and reporting of our products. In particular, our failure to comply with FDA regulations could result in, among other things, recalls of our products, substantial fines and/or criminal charges against us and our employees. Product sales, introductions or modifications may be delayed or canceled as a result of the FDA regulatory process, which could cause our sales to decline. Before we can sell a new medical device in the U.S., we must obtain FDA clearance, which can be a lengthy and time consuming process. The products we market have obtained the necessary clearances from the FDA through premarket notification under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or were exempt from the 510(k) clearance process. We have modified some of our products, but we do not believe these modifications require us to submit new 510(k) notifications. However, if the FDA disagrees with us and requires us to submit a new 510(k) notification for modifications to our existing -15- products, we may be required to stop marketing the products while the FDA reviews the 510(k) notification, or if the FDA requires us to go through a lengthier, more rigorous examination than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain premarket approval, or PMA, process. Off label use of our products could result in substantial penalties. 510(k) clearance only permits us to promote our products for the uses indicated on the labels cleared by the FDA. We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared product as a condition of clearance. If the FDA determines that we have promoted our products for off label use, we could be subject to fines, injunctions or other penalties. Our disposable probes have been cleared by the FDA for single use, but we are aware that from time to time physicians reuse our disposable products. We have strongly advised physicians against reuse of our products. We may need to raise additional capital in the future and may be unable to do so on acceptable terms. We may need to raise additional funds for operations and to execute our business strategy. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to holders of common stock, and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. Our executive officers and directors own a large percentage of our voting stock and could exert significant influence over matters requiring stockholder approval. Our executive officers and directors, and their respective affiliates, own a substantial percentage 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, Delaware law and our stockholder rights plan contain provisions that could discourage a takeover. Provisions of our certificate of incorporation, our bylaws, Delaware law and our stockholder rights plan contain provisions that may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. We may engage in future acquisitions that could disrupt our business and dilute our stockholders. As part of our business strategy, we expect to review acquisition prospects that we believe would be advantageous to the development of our business. If we make any acquisitions, we could take any or all of the following actions, any of which could materially and adversely affect our financial results and the price of our common stock: . issue equity securities that would dilute existing stockholders' percentage ownership; . incur substantial debt; . assume contingent liabilities; or -16- . take substantial charges in connection with the amortization of goodwill and other intangible assets. Acquisitions also entail numerous risks, including: . difficulties in assimilating acquired operations, products and personnel with our current business; . unanticipated costs; . diversion of management's attention from other business concerns; . adverse effects on existing relationships with our customers; . risks of entering markets in which we have limited or no prior experience; and . potential loss of key employees from either our current business or the acquired organization. We may be unable to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our market risk disclosures have not changed significantly from those set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K filing dated March 23, 2001 for the year ended December 31, 2000. PART II. OTHER INFORMATION Item 1. 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. Item 2. Changes in Securities and Use of Proceeds. On April 4, 2000, in connection with our initial public offering, a Registration Statement on Form S-1 (No. 333-95815) was declared effective by the Securities and Exchange Commission, pursuant to which 4,600,000 shares of our Common Stock were sold on April 10, 2000 for the account of the Company at a price of $14.00 per share, generating aggregate gross proceeds of $64.4 million before payment of underwriting discounts and commissions and transaction expenses. The managing underwriters were Merrill Lynch & Co., J.P. Morgan & Co. and U.S. Bancorp Piper Jaffray. After deducting approximately $4.5 million in underwriting discounts and commissions and $1.1 million in other transaction expenses, the net proceeds of the offering were approximately $58.8 million. None of the payments for underwriting discounts and commissions and other transaction expenses represented direct or indirect payments to directors, officers or other affiliates of the Company. The net proceeds of the offering have been invested in short term, investment grade, and interest bearing securities. As of March 31, 2001, we had used approximately $10.9 million of the proceeds of the offering to repay debt balances and an additional $9.5 million to purchase capital equipment. We intend to use the proceeds from the offering to expand sales, marketing and reimbursement activities, to develop the Company's product lines, to fund acquisitions or investments and to fund general corporate purposes, including working capital. In February 2001, we issued 62,237 shares to one of our lenders upon exercise of a warrant at a purchase price of $4.25 per share. This issuance was deemed exempt from registration under Section 4(2) of the Securities Act of 1933 as a transaction not involving a public offering. -17- Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 10.8++ 1999 Stock Plan, as amended, and form of option agreement. 10.9++ 1999 Directors' Stock Option Plan, as amended, and form of option agreement. ++ Supercedes previously filed exhibit. (b) Reports on Form 8-K: Not applicable. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORATEC INTERVENTIONS, INC. By: /s/ Nancy V. Westcott ----------------------------------- Nancy V. Westcott Chief Financial Officer and Vice President of Administration Date: May 11, 2001 -19- EXHIBIT INDEX ------------- 10.8++ 1999 Stock Plan, as amended, and form of option agreement. 10.9++ 1999 Directors' Stock Option Plan, as amended, and form of option agreement. ++ Supercedes previously filed exhibit. -20- EX-10.8 2 dex108.txt 1999 STOCK PLAN AND FORM OF OPTION AGREEMENT EXHIBIT 10.8 ORATEC INTERVENTIONS, INC. 1999 STOCK PLAN, AS AMENDED 1. Purposes of the Plan. The purposes of this 1999 Stock Plan are to -------------------- attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or nonstatutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock purchase rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees ------------- appointed pursuant to Section 4 of the Plan. (b) "Affiliate" means an entity other than a Subsidiary in which the --------- Company owns an equity interest or which, together with the Company, is under common control of a third person or entity. (c) "Applicable Laws" means the legal requirements relating to the --------------- administration of stock option, restricted stock purchase and stock bonus plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange rules or regulations and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time. (d) "Board" means the Board of Directors of the Company. ----- (e) "Cause" means (a) willful misconduct or gross negligence in ----- performance of an Optionee's duties with the Company; (b) refusal to comply in any material respect with the legal directives of the Company so long as such directives are not inconsistent with an Optionee's position and duties, which is not remedied (if remediable) within twenty (20) working days after written notice from the Company, which written notice shall state that failure to remedy such conduct may result in termination for Cause; (c) a deliberate attempt to do an injury to the Company; (d) engaging in any conduct, that materially discredits the Company or is materially detrimental to the reputation of the Company; (e) commission of any act of theft or fraud with respect to the Company; (f) conviction of a felony or a crime involving moral turpitude; or (g) material breach of any element of the Company's Proprietary Information and Inventions Assignment Agreement or any nondisclosure agreement between an Optionee and the Company, including without limitation, the theft or other misappropriation of the Company's proprietary information, in each case as determined in good faith by the Company's Chief Executive Officer. (f) "Change of Control" means the occurrence of any of the following ----------------- events: (a) an acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but excluding any merger effected exclusively for the purpose of changing the domicile of the Company), or (b) a sale of all or substantially all of the assets of the Company (collectively, a "Merger"), so long as in either case (i) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than fifty percent (50%) of the voting power of the surviving or acquiring entity, or (ii) the Company's shareholders of record immediately prior to such Merger will, immediately after such Merger, hold less than sixty percent (60%) of the voting power of the surviving or acquiring entity and a majority of the members of the Board of Directors of the surviving or acquiring entity immediately after such Merger were not members of the Board of Directors of the Company immediately prior to such Merger. (g) "Code" means the Internal Revenue Code of 1986, as amended. ---- (h) "Committee" means the Committee appointed by the Board of --------- Directors in accordance with Section 4(a) of the Plan. (i) "Common Stock" means the Common Stock of the Company. ------------ (j) "Company" means ORATEC Interventions, Inc., a Delaware ------- corporation. (k) "Consultant" means any person, including an advisor, who is ---------- engaged by the Company or any Parent, Subsidiary or Affiliate to render services and is compensated for such services, and any director of the Company whether compensated for such services or not. (l) "Continuous Status as an Employee or Consultant" means the ---------------------------------------------- absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or their respective successors. For purposes of this Plan, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute an interruption of Continuous Status as an Employee or Consultant. (m) "Director" means a member of the Board. -------- (n) "Employee" means any person (including if appropriate, any Named -------- Executive, Officer or Director) employed by the Company or any Parent, Subsidiary or Affiliate of the Company, with the status of employment determined based upon such minimum number of hours or periods worked as shall be determined by the Administrator in its discretion, subject to any requirements of the Code. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (o) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (p) "Fair Market Value" means, as of any date, the fair market value ----------------- of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales price for such stock on the date of grant of the Option (or in the event the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal or such other source as the ------------------------ Administrator deems reliable; (ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the bid and asked prices for the Common Stock on the date of grant of the Option, as reported in The Wall Street Journal or such other source as ------------------------ the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (q) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable written option agreement. (r) "Involuntary Termination" means the occurrence of any of the ----------------------- following events: (a) any termination by the Company other than for Cause, (b) a material reduction or change in an Optionee's job duties, responsibilities and requirements inconsistent with the Optionee's position with the Company and Optionee's prior duties, responsibilities and requirements, or (c) any reduction greater than 20% of an Optionee's base compensation (other than in connection with a general decrease in base salaries for employees of the Company). (s) "Listed Security" means any security of the Company that is --------------- listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. (t) "Named Executive" means any individual who, on the last day of --------------- the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four most highly compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (u) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option, as designated in the applicable written option agreement. (v) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16(a) of the Exchange Act and the rules and regulations promulgated thereunder. (w) "Option" means a stock option granted pursuant to the Plan. ------ (x) "Optioned Stock" means the Common Stock subject to an Option or a -------------- Stock Purchase Right. (y) "Optionee" means an Employee or Consultant who receives an Option -------- or a Stock Purchase Right. (z) "Parent" means a "parent corporation", whether now or hereafter ------ existing, as defined in Section 424(e) of the Code, or any successor provision. (aa) "Plan" means this 1999 Stock Plan. ---- (bb) "Reporting Person" means an Officer, Director, or greater than ---------------- ten percent shareholder of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act. (cc) "Restricted Stock" means shares of Common Stock acquired pursuant ---------------- to a grant of a Stock Purchase Right under Section 11 below. (dd) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, ---------- as the same may be amended from time to time, or any successor provision. (ee) "Share" means a share of the Common Stock or Preferred Stock, as ----- adjusted in accordance with Section 13 of the Plan. (ff) "Stock Exchange" means any stock exchange or consolidated stock -------------- price reporting system on which prices for the Common Stock are quoted at any given time. (gg) "Stock Purchase Right" means the right to purchase Common Stock -------------------- pursuant to Section 11 below. (hh) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code, or any successor provision. (ii) "Ten Percent Holder" means a person who owns stock representing ------------------ more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of ------------------------- the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 2,707,374 shares of Common Stock plus an automatic annual increase on the first day of each of the Company's fiscal years beginning in 2002 and ending in 2005 equal to the lesser of: (i) 1,450,000 Shares; (ii) five and one half percent (5.5%) of the Shares outstanding on the last day of the immediately preceding fiscal year; or (iii) such lesser number of shares as is determined by the Board of Directors. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock which are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise shall be treated as not issued and shall continue to be available under the Plan. 4. Administration of the Plan. -------------------------- (a) General. The Plan shall be administered by the Board or a ------- Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Optionees and, if permitted by the Applicable Laws, the Board may authorize one or more officers (who may (but need not) be Officers) to grant Options or Stock Purchase Rights to Employees and Consultants. (b) Administration With Respect to Reporting Persons. With respect ------------------------------------------------ to Options and Stock Purchase Rights granted to Reporting Persons and Named Executives, the Plan may (but need not) be administered so as to permit such Options and Stock Purchase Rights to qualify for the exemption set forth in Rule 16b-3 and to qualify as performance-based compensation under Section 162(m) of the Code. (c) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any Stock Exchange, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(p) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder; (vii) to determine whether and under what circumstances an Option may be settled in cash under Section 10(g) instead of Common Stock; (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; and (x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (xi) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs. (c) Effect of Administrator's Decision. All decisions, ---------------------------------- determinations and interpretations of the Administrator shall be final and binding on all holders of Options or Stock Purchase Rights. 5. Eligibility. ----------- (a) Recipients of Grants. Nonstatutory Stock Options and Stock -------------------- Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees, provided however that Employees of Affiliates shall not be eligible to receive Incentive Stock Options. An Employee or Consultant who has been granted an Option or Stock Purchase Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) Type of Option. Each Option shall be designated in the written -------------- option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares subject to an Incentive Stock Option shall be determined as of the date of the grant of such Option. (c) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with such Optionee's right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 20 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in -------------- the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement and provided further that, in the case of an Option granted to an Optionee who, at the time the Option is granted, is a Ten Percent Holder, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the written option agreement. After the date, if any, on which the Common Stock becomes a Listed Security, the five (5) year limitation on option grants to Ten Percent Holders described above shall only apply to the grant of Incentive Stock Options. 8. Limitation on Grants to Employees. Subject to adjustment as provided --------------------------------- in Section 13 below, the maximum number of Shares which may be subject to Options and Stock Purchase Rights granted to any one Employee under this Plan for any fiscal year of the Company shall be 1,000,000 Shares. 9. Option Exercise Price and Consideration. --------------------------------------- (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board and set forth in the applicable agreement, but shall be subject to the following: (i) In the case of an Incentive Stock Option that is: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option that is: (A) granted, prior to the date, if any, on which the Common Stock becomes a Listed Security, to a person who, at the time of the grant of such Option, is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted, prior to the date, if any, on which the Common Stock becomes a Listed Security to any other eligible person, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator. (C) granted on or after the date, if any, on which the Common Stock becomes a Listed Security to any eligible person, the per share Exercise Price shall be such price as determined by the Administrator; provided, however, that if such eligible person is, at the time of the grant of such Option, a Named Executive of the Company, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant if such Option is intended to qualify as performance-based compensation under Section 162(m) of the Code. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) authorization for the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (6) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable income or employment taxes, (7) any combination of the foregoing methods of payment, or (8) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, and reflected in the written option agreement, which may include vesting requirements and/or performance criteria with respect to the Company and/or the Optionee; provided that if required by the Applicable Laws, any option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security, shall become exercisable at the rate of at least twenty percent (20%) per year over five (5) years from the date the Option is granted. In the event that any of the Shares issued upon exercise of an Option (which exercise occurs prior to the date, if any, upon which the Common Stock becomes a Listed Security) should be subject to a right of repurchase in the Company's favor, such repurchase right shall, if required by the Applicable Laws, lapse at the rate of at least twenty percent (20%) per year over five (5) years from the date the Option is granted. Notwithstanding the above, in the case of an Option granted to an officer, Director or Consultant of the Company or any Parent, Subsidiary or Affiliate of the Company, the Option may become fully exercisable, or a repurchase right, if any, in favor of the Company shall lapse, at any time or during any period established by the Administrator. The Administrator shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided however that in the absence of such determination, vesting of Options shall be tolled during any such leave. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to which the Option is exercised. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, not withstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. Subject to ---------------------------------------------------- Sections 10(c) and 10(d), in the event of termination of an Optionee's Continuous Status as an Employee or Consultant with the Company, such Optionee may, but only within three (3) months (or such other period of time not less than thirty (30) days as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option and not exceeding three (3) months) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. No termination shall be deemed to occur and this Section 9(b) shall not apply if (i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee is an Employee who becomes a Consultant. (c) Disability of Optionee. ---------------------- (i) Notwithstanding Section 10(b) above, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her total and permanent disability (within the meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (ii) In the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of a disability which does not fall within the meaning of total and permanent disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. However, to the extent that such Optionee fails to exercise an Option which is an Incentive Stock Option ("ISO") (within the meaning of Section 422 of the Code) within three (3) months of the date of such termination, the Option will not qualify for ISO treatment under the Code. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within six months (6) from the date of termination, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee ----------------- during the period of Continuous Status as an Employee or Consultant since the date of grant of the Option, or within thirty (30) days following the termination of Optionee's Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death, or, if earlier, the date of termination of Optionee's Continuous Status as an Employee or Consultant. To the extent that Optionee is not entitled to exercise the Option as set forth above, or if the Option is not exercised to the extent it is exercisable within the time specified herein, the Option shall terminate. (e) Extension of Exercise Period. The Administrator shall have full ---------------------------- power and authority to extend the period of time for which an Option is to remain exercisable following termination of an Optionee's Continuous Status as an Employee or Consultant from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in the Option Agreement to such greater time as the Board shall deem appropriate, provided that in no event shall such Option be exercisable later than the date of expiration of the term of such Option as set forth in the Option Agreement. (f) Rule 16b-3. Options granted to Reporting Persons shall comply ---------- with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption for Plan transactions. (g) Buyout Provisions. The Administrator may at any time offer to ----------------- buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. --------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued either ------------------ alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. In the case of a Stock Purchase Right granted prior to the date, if any, on which the Common Stock becomes a Listed Security and if required by the Applicable Laws at such time, the purchase price of Shares subject to such Stock Purchase Rights shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the price shall not be less than 100% of the Fair Market Value of the Shares as of the date of the offer. If the Applicable Laws do not impose the requirements set forth in the preceding sentence and with respect to any Stock Purchase Rights granted after the date, if any, on which the Common Stock becomes a Listed Security, the purchase price of Shares subject to Stock Purchase Rights shall be as determined by the Administrator. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as "Restricted Stock." (b) Repurchase Option. Unless the Administrator determines ----------------- otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original purchase price paid by the purchaser and may be paid by cancellation of any indebtedness of the Purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine, provided, however, that with respect to a Stock Purchase Right granted prior to the date, if any, on which the Common Stock becomes a Listed Security to a purchaser who is not an officer (including an Officer), Director or Consultant of the Company or any Parent, Subsidiary or Affiliate of the Company, it shall lapse at a minimum rate of 20% per year. (c) Other Provisions. The Restricted Stock purchase agreement shall ---------------- contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser. (d) Rights as a Shareholder. Once the Stock Purchase Right is ----------------------- exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. Taxes. ----- (a) As a condition of the exercise of an Option or Stock Purchase Right granted under the Plan, the Participant (or in the case of the Participant's death, the person exercising or receiving the Option or Stock Purchase Right) shall make such arrangements as the Administrator may require for the satisfaction of applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of Option or Stock Purchase Right and the issuance of Shares. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. (b) In the case of an Employee and in the absence of any other arrangement, the Employee shall be deemed to have directed the Company to withhold or collect from his or her compensation an amount sufficient to satisfy such tax obligations from the next payroll payment otherwise payable after the date of an exercise of the Option or Stock Purchase Right. (c) This Section 12(c) shall apply only after the date, if any, upon which the Common Stock becomes a Listed Security. In the case of a Participant other than an Employee (or in the case of an Employee where the next payroll payment is not sufficient to satisfy such tax obligations, with respect to any remaining tax obligations), in the absence of any other arrangement and to the extent permitted under the Applicable Laws, the Participant shall be deemed to have elected to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the minimum statutory withholding amount for federal and state tax purposes, including payroll taxes, applicable to the exercise. For purposes of this Section 12, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Laws (the "Tax Date"). -------- (d) If permitted by the Administrator, in its discretion, a Participant may satisfy his or her tax withholding obligations upon exercise of an Option or Stock Purchase Right by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Participant for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value determined as of the applicable Tax Date equal to or less than the minimum statutory withholding amount for federal and state tax purposes, including payroll taxes, applicable to the exercise. (e) Any election or deemed election by a Participant to have Shares withheld to satisfy tax withholding obligations under Section 12(c) or (d) above shall be irrevocable as to the particular Shares as to which the election is made and shall be subject to the consent or disapproval of the Administrator. Any election by a Participant under Section 12(d) above must be made on or prior to the applicable Tax Date. (f) In the event an election to have Shares withheld is made by a Participant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the applicable Tax Date. 13. Adjustments Upon Changes in Capitalization; Change of Control. ------------------------------------------------------------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, the number of Shares described in Sections 3 and 8 above, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Change of Control. In the event of a Change of Control, each ----------------- outstanding Option or Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the successor corporation does not agree to assume the Option or Stock Purchase Right or to substitute an equivalent option or right or to accept assignment of the conditions and restrictions with respect to Restricted Stock, in which case such Option or Stock Purchase Right shall terminate upon the consummation of the merger or sale of assets and all rights of repurchase with respect to Restricted Stock shall lapse upon the consummation of the Change of Control. If an Optionee is an Employee of the Company and the Optionee's employment with the Company or a successor corporation terminates as a result of Involuntary Termination other than for Cause at any time within two years following a Change of Control, and as part of the Change of Control the successor corporation agrees to assume outstanding Options or Stock Purchase Rights or to substitute an equivalent option or right or to accept assignment of the conditions and restrictions with respect to Restricted Stock, then, (i) in the case of an Option with a vesting commencement date that is more than two years prior to the termination date, the unvested shares under such Option shall automatically be accelerated such that 100% of the total number of unvested shares as of the effective date of such Involuntary Termination shall automatically become vested, (ii) in the case of an Option with a vesting commencement date that is within one year prior to the termination date and in the event that such Option has not vested 1/48 for each month immediately following the grant of such Option, the unvested shares under such Option shall automatically be accelerated such that 1/48 of the total number of unvested shares as of the effective date of such Involuntary Termination shall automatically become vested for each month of Optionee's employment with the Company following the vesting commencement date of such Option, (iii) in the case of Restricted Stock with a vesting commencement date that is more than two years prior to the termination date, any rights of repurchase with respect to such Restricted Stock shall automatically terminate with respect to 100% of the total number of unvested shares as of the effective date of such Involuntary Termination; and (iv) in the case of Restricted Stock with a vesting commencement date that is within one year prior to the termination date and in the event that repurchase rights have not already terminated with regard to 1/48 of such Restricted Stock for each month immediately following the grant of such Restricted Stock, any rights of repurchase with respect to such Restricted Stock shall automatically terminate with respect to 1/48 of the total number of unvested shares as of the effective date of the Involuntary Termination for each month of the Optionee's employment with the Company following the vested commencement date of such Restricted Stock. In the event that, following a Change of Control, the successor corporation does not agree to assume the Option or Stock Purchase Right or to substitute an equivalent option or right or to accept assignment of the conditions and restrictions with respect to Restricted Stock, then the vesting acceleration benefits in the paragraph above shall apply on the date immediately prior to the effective date of the Change of Control transaction. If Optionee is a Consultant to the Company, in the event of a Change of Control, 100% of the total number of unvested shares held by such Consultant shall automatically become vested immediately prior to the effective date of the Change of Control transaction. In the event that the Company commences substantive discussions with a potential acquiror prior to April 12, 2000 and such substantive discussions result in a Change of Control transaction, the provisions set forth in this Section 13(c) would not apply. (d) Certain Distributions. In the event of any distribution to the --------------------- Company's shareholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution. 14. Non-Transferability of Options and Stock Purchase Rights. Options and -------------------------------------------------------- Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution, provided that, after the date, if any, upon which the Common Stock becomes a Listed Security, the Administrator may in its discretion grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the manner in which such Nonstatutory Stock Options are transferable and (ii) that any such transfer shall be subject to the Applicable Laws. The designation of a beneficiary by an Optionee will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the holder of Option or Stock Purchase Right, only by such holder or a transferee permitted by this Section 14. 15. Time of Granting Options and Stock Purchase Rights. The date of -------------------------------------------------- grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 16. Amendment and Termination of the Plan. ------------------------------------- (a) Authority to Amend or Terminate. The Board may at any time ------------------------------- amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made that would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with the Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. No amendment or termination ---------------------------------- of the Plan shall adversely affect Options already granted, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 17. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, 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. ORATEC INTERVENTIONS, INC. 1999 STOCK PLAN NOTICE OF STOCK OPTION GRANT ---------------------------- Optionee's Name and Address: ((Optionee)) ((OptioneeAddress1)) ((OptioneeAddress2)) You have been granted an option to purchase Common Stock of ORATEC Interventions, Inc., (the "Company") as follows: Board Approval Date: ________________________________ Date of Grant (Later of Board Approval Date or Commencement of Employment/Consulting): ((GrantDate)) Exercise Price Per Share: ((ExercisePrice)) Total Number of Shares Granted: ((SharesGranted)) Total Price of Shares Granted: ((TotalExercisePrice)) Type of Option: ((NoSharesISO)) Shares Incentive Stock Option ((NoSharesNSO)) Shares Nonstatutory Stock Option Term/Expiration Date: ((Term))/((ExpirDate)) Vesting Commencement Date: ((VestingStartDate)) Vesting Schedule: ((VestingSchedule)) Termination Period: This Option may be exercised for a period of three (3) months 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. 1999 Stock Plan and the Stock Option Agreement, all of which are attached and made a part of this document. OPTIONEE: ORATEC INTERVENTIONS, INC. By:__________________________ _________________________ Signature _________________________ Title:_______________________ Print Name ORATEC INTERVENTIONS, INC. STOCK OPTION AGREEMENT ---------------------- 1. Grant of Option. ORATEC Interventions, Inc., a Delaware corporation --------------- (the "Company"), hereby grants to the Optionee named in the Notice of Stock ------- Option Grant attached to this Agreement ("Optionee"), an option (the "Option") -------- ------ to purchase the total number of shares of Common Stock (the "Shares") set forth ------ in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms, -------------- definitions and provisions of the 1999 Stock Plan (the "Plan") adopted by the ---- Company, which is incorporated in this Agreement by reference. In the event of a conflict between the terms of the Plan and the terms of this Agreement, the terms of the Plan shall govern. Unless otherwise defined in this Agreement, the terms used in this Agreement shall have the meanings defined in the Plan. To the extent designated an Incentive Stock Option in the Notice of Stock Option Grant, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and, to the extent not so designated, this Option is ---- intended to be a Nonstatutory Stock Option. 2. Exercise of Option. This Option shall be exercisable during its term ------------------ in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and with the provisions of Sections 9 and 10 of the Plan as follows: (a) Right to Exercise. ----------------- (i) This Option may not be exercised for a fraction of a share. (ii) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitations contained in paragraphs (iii) and (iv) below. (iii) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Stock Option Grant. (iv) If designated an Incentive Stock Option in the Notice of Stock Option Grant, in the event that the Shares subject to this Option (and all other Incentive Stock Options granted to Optionee by the Company or any Parent or Subsidiary) that vest in any calendar year have an aggregate fair market value (determined for each Share as of the Date of Grant of the option covering such Share) in excess of $100,000, the Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option, in accordance with Section 5 of the Plan. (b) Method of Exercise. ------------------ (i) This Option shall be exercisable by delivering to the Company a written notice of exercise (in the form attached as Exhibit A or other --------- form provided by the Company) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. (ii) As a condition to the exercise of this Option, Optionee agrees to make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the exercise of the Option or disposition of Shares, whether by withholding, direct payment to the Company, or otherwise. (iii) No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares purchasable -------------------------- pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), at the time this -------------- Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in customary form, a copy of which is available for Optionee's review from the Company upon request. 4. Method of Payment. Payment of the Exercise Price shall be by any of ----------------- the following, or a combination of the following, at the election of Optionee: (a) cash; (b) check; (c) surrender of other Shares of Common Stock of the Company that (i) either have been owned by Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; or (d) if there is a public market for the Shares and they are registered under the Securities Act, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 5. Restrictions on Exercise. This Option may not be exercised until such ------------------------ time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as ------------ -2- 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 -3- 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 -4- 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. (d) Notice of Disqualifying Disposition. If the Option granted to ----------------------------------- Optionee in this Agreement is an Incentive Stock Option, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the Incentive Stock Option on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after transfer of such Shares to Optionee upon exercise of the Incentive Stock Option, Optionee shall notify the Company in writing within thirty (30) days after the date of any such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by Optionee from the early disposition by payment in cash or out of the current earnings paid to Optionee. 13. Acknowledgment. Optionee acknowledges receipt of a copy of the Plan -------------- and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Stock Option Agreement and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. 14. Signature. This Stock Option Agreement shall be deemed executed by --------- the Company and Optionee upon execution by such parties of the Notice of Stock Option Grant attached to this Stock Option Agreement. [Remainder of page left intentionally blank] -5- EXHIBIT A --------- NOTICE OF EXERCISE ------------------ To: ORATEC Interventions, Inc. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option -------------------------------------------- This is official notice that the undersigned ("Optionee") intends to -------- exercise Optionee's option to purchase __________ shares of ORATEC Interventions, Inc. Common Stock, under and pursuant to the Company's 1999 Stock Plan and the Stock Option Agreement dated ___________, as follows: Grant Number: _______________________________ Date of Purchase: _____________________________ Number of Shares: _____________________________ Purchase Price: ________________________________ Method of Payment of Purchase Price: _____________________________ Social Security No.: ________________________________ The shares should be issued as follows: Name: _____________________________ Address: _____________________________ _____________________________ _____________________________ Signed: _____________________________ Date: _____________________________ EX-10.9 3 dex109.txt 1999 DIRECTOR'S STOCK OPTION PLAN EXHIBIT 10.9 ORATEC INTERVENTIONS, INC. 1999 DIRECTORS' STOCK OPTION PLAN, AS AMENDED --------------------------------------------- 1. Purposes of the Plan. The purposes of this Directors' Stock Option -------------------- Plan are to attract and retain the best available individuals for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Board" means the Board of Directors of the Company. ----- (b) "Change of Control" means a sale of all or substantially all of ----------------- the Company's assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction. (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Common Stock" means the Common Stock of the Company. ------------ (e) "Company" means ORATEC Interventions, Inc., a Delaware corporation. ------- (f) "Continuous Status as a Director" means the absence of any ------------------------------- interruption or termination of service as a Director. (g) "Corporate Transaction" means a dissolution or liquidation of the --------------------- Company, a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (h) "Director" means a member of the Board. -------- (i) "Employee" means any person, including any officer or Director, -------- employed by the Company or any Parent or Subsidiary of the Company. The payment of a -1- 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 250,000 Shares of Common Stock (the "Pool"). The Shares ---- may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option, or any withholding taxes due with respect to such exercise, shall be treated as not issued and shall continue to be available under the Plan. If Shares that were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan. 4. Administration of and Grants of Options under the Plan. ------------------------------------------------------ (a) Administrator. Except as otherwise required herein, the Plan ------------- shall be administered by the Board. -2- (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: (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 30,000 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 10,000 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. (vi) The terms of each First Option granted hereunder shall be as follows: (1) each First 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 First Option, determined in accordance with Section 8 hereof; -3- (3) each First Option shall vest and become exercisable at the rate of 1/36 of the Shares subject to the First Option on each monthly anniversary following the date of grant. (vii) The terms of each Subsequent Option granted hereunder shall be as follows: (1) each Subsequent 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 Subsequent Option, determined in accordance with Section 8 hereof; (3) each Subsequent Option shall vest and become exercisable at the rate of 1/12 of the Shares subject to the Subsequent Option on each monthly anniversary following 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 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. -4- 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. 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. -5- 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 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. -6- (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 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 -7- 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 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. -8- 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. 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 ---------------- part, in accordance with the following schedule: [1/36 or 1/12] of the Option Shares shall vest and become exercisable on each monthly anniversary following 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. 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 -13- 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- -----END PRIVACY-ENHANCED MESSAGE-----