Document:

exv10w1

 

EXHIBIT 10.1

FIRST AMENDMENT TO

CREDIT AND SECURITY AGREEMENT

     This Amendment, dated as of January 31, 2005, is made by and between Kitty Hawk, Inc., a
Delaware corporation (the “Borrower”), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota
corporation (the “Lender”).

Recitals

     The Borrower and the Lender are parties to a Credit and Security Agreement dated as of March
22, 2004 (the “Credit Agreement”). Capitalized terms used in these recitals have the meanings
given to them in the Credit Agreement unless otherwise specified.

     The Borrower has requested that certain amendments be made to the Credit Agreement, which the
Lender is willing to make pursuant to the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements
herein contained, it is agreed as follows:

     1. Defined Terms.

     (a) Capitalized terms used in this Amendment which are defined in the Credit Agreement
shall have the same meanings as defined therein, unless otherwise defined herein.

     (b) In addition, Section 1.1 of the Credit Agreement is amended by adding or amending,
as the case may be, the following definitions:

     “Pre-Tax Net Income” means Net Income before the amount of additional taxes or tax
benefit that Borrower accrues according to GAAP.

     “Required Book Net Worth” means Book Net Worth as of December 31, 2004 as adjusted
appropriately for Net Income from time to time.

     2. Financial Covenants.

     (a) Section 6.2(a) of the Credit Agreement is amended and restated in its entirety to
read as follows:

     (a) Minimum Year-to-Date Net Income. The Borrower will achieve as at the end of each
period described below, Pre-Tax Net Income of not less than the amount set forth below:

     (i) From January 1, through the fiscal quarter ending March 31 of each year
during the term hereof, Pre-Tax Net Income of not less than a loss

 

 

    $5,800,000 (i.e., the Borrower may not lose more than $5,800,000 as at the end
of such period);

     (ii) From January 1, through the fiscal quarter ending June 30 of each year
during the term hereof, Pre-Tax Net Income of not less than a loss $5,800,000 (i.e.,
the Borrower may not lose more than $5,800,000 as at the end of such period);

     (iii) From January 1, through the fiscal quarter ending September 30 of each
year during the term hereof, Pre-Tax Net Income of not less than a loss $4,800,000
(i.e., the Borrower may not lose more than $4,800,000 as at the end of such period);
and

     (iv) From January 1, through the fiscal quarter ending December 31 of each year
during the term hereof, Pre-Tax Net Income of not less than a loss of $3,000,000
(i.e., the Borrower may not lose more than $3,000,000 as at the end of such period).

     (b) Section 6.2(b) of the Credit Agreement is amended and restated in its entirety to
read as follows:

“The Borrower will maintain the Required Book Net Worth.”

     (c) The Borrower and the Lender have agreed to eliminate the Monthly Loss Limit
covenant and substitute a minimum liquidity requirement therefor. Consequently, Section
6.2(c) of the Credit Agreement is amended and restated in its entirety to read as follows:

     (c) Minimum Liquidity Requirement. The Borrower will maintain $3,000,000 in
Liquid Assets at all times.

     3. No Other Changes. Except as explicitly amended by this Amendment, all of the terms
and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any
advance or letter of credit thereunder.

     4. Amendment
Fee. The Borrower shall pay the Lender on or before March 1, 2005 a fully
earned, non-refundable fee in the amount of $5,000 in consideration of the Lender’s execution and
delivery of this Amendment.

     5. Conditions Precedent. This Amendment shall be effective when the Lender shall have
received an executed original hereof, together with each of the following, each in substance and
form acceptable to the Lender in its sole discretion:

     (a) The Acknowledgment and Agreement of Guarantors set forth at the end of this
Amendment, duly executed by each Guarantor.

     (b) A Certificate of Authority of the Borrower certifying as to such matters as the
Lender may reasonably request.

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     (c) Such other matters as the Lender may require.

     6. Representations and Warranties. The Borrower hereby represents and warrants to the
Lender as follows:

     (a) The Borrower has all requisite power and authority to execute this Amendment and to
perform all of its obligations hereunder, and this Amendment has been duly executed and
delivered by the Borrower and constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms.

     (b) The execution, delivery and performance by the Borrower of this Amendment have been
duly authorized by all necessary corporate action and do not (i) require any authorization,
consent or approval by any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or
regulation or of any order, writ, injunction or decree presently in effect, having
applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower,
or (iii) result in a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which the Borrower is a party or by
which it or its properties may be bound or affected.

     (c) All of the representations and warranties contained in Article V of the Credit
Agreement are correct on and as of the date hereof as though made on and as of such date,
except to the extent that such representations and warranties relate solely to an earlier
date.

     7. References. All references in the Credit Agreement to “this Agreement” shall be
deemed to refer to the Credit Agreement as amended hereby; and any and all references in the
Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as
amended hereby.

     8. No Waiver. The execution of this Amendment and acceptance of any documents related
hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit
Agreement or breach, default or event of default under any Security Document or other document held
by the Lender, whether or not known to the Lender and whether or not existing on the date of this
Amendment.

     9. Release. The Borrower, and each Guarantor by signing the Acknowledgment and
Agreement of Guarantors set forth below, each hereby absolutely and unconditionally releases and
forever discharges the Lender, and any and all participants, parent corporations, subsidiary
corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof,
together with all of the present and former directors, officers, agents and employees of any of the
foregoing (each individually, an “Indemnitee” and collectively, “Indemnitees”), from any and all
claims, demands or causes of action of any kind, nature or description, whether arising in law or
equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower
or such Guarantor has had, now has or has made claim to have against any such person for or by
reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time

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to and including the date of this Amendment, whether such claims, demands and causes of action
are matured or unmatured or known or unknown, excluding, however, any actions taken by an
Indemnitee in bad faith, any willful misconduct by an Indemnitee and gross negligence of
Indemnitees.

     10. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit
Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the
Lender in connection with the Loan Documents, including without limitation all reasonable fees and
disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender for the services
performed by such counsel in connection with the preparation of this Amendment and the documents
and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or
from time to time in its sole discretion and without further authorization by the Borrower, make a
loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose
of paying any such fees, disbursements, costs and expenses and the fee required under Paragraph 4
hereof.

     11. Miscellaneous. This Amendment and the Acknowledgment and Agreement of Guarantors
may be executed in any number of counterparts, each of which when so executed and delivered shall
be deemed an original and all of which counterparts, taken together, shall constitute one and the
same instrument.

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     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of
the date first written above.

	 	 	 	 	 	 	 
	WELLS FARGO BUSINESS CREDIT, INC.
	 	KITTY HAWK, INC.
	 
	 	 	 	 	 	 
	By

	 	/s/ JOSEPH M. SAMMONS
	 	By
	 	/s/ RANDY LEISER
	

	 	 
	 	 	 	 
	

	 	Joseph M. Sammons
	 	 	 	Randy Leiser
	

	 	Its Vice President
	 	 	 	Vice President and
	

	 	 	 	 	 	Chief Financial Officer

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Exhibit 10.1

Employment Agreement between Uroplasty, Inc. and Sam B. Humphries dated January 1, 2005

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into by and between Uroplasty,
Inc., a Minnesota corporation (“the Company”), and Sam B. Humphries (the “Executive”) effective as
of the 1st day of January, 2005.

R E C I T A L S :

     WHEREAS, Uroplasty manufactures and currently markets outside of the United States a family of
injectable implant products used for soft-tissue augmentation for specific indications in urology,
urogynecology, colon and rectal, otolaryngology and plastic surgery markets; and

     WHEREAS, the Company and the Executive desire to set forth in this Agreement the terms under
which Executive will serve as President and Chief Executive Officer of the Company;

     NOW, THEREFORE, the parties hereto agree as follows:

1. Employment and Duties. The Company hereby agrees to employ the Executive, and the
Executive hereby accepts the Company’s offer to serve, as President and Chief Executive Officer of
the Company. As such, the Executive shall have responsibilities, duties and authority reasonably
accorded to and expected of such an officer of the Company and will report directly to the
Company’s Board of Directors. The Executive agrees to devote the Executive’s full business time,
attention and efforts to promote and further the business of the Company. The Executive will
faithfully adhere to, execute and fulfill all policies established by the Company’s Board of
Directors. The Executive also agrees to continue service as a director of the Company until the
Executive’s successor is duly elected and qualified or until the Executive’s earlier resignation,
removal or death.

     The Executive will not, during the Term of Executive’s employment hereunder, be engaged in any
other business activity pursued for gain, profit or other pecuniary advantage if such activity
interferes with the Executive’s duties and responsibilities hereunder. The foregoing limitations
will not be construed to prohibit the Executive from making personal investments in such form or
manner as will neither require the Executive’s services in the operation or affairs of the
companies or enterprises in which such investments are made nor violate the terms of Section 4
hereof. The Executive may also continue to serve as a board member for the three outside companies
on whose boards he currently serves.

2. Compensation. For all services rendered by the Executive on and after the date hereof,
the Company will compensate the Executive as follows:

     (a) Base Salary. Commencing on the date hereof, the base salary payable to the
Executive shall be $239,000 per year, payable on a regular basis in accordance with the Company’s
standard payroll procedures but not less than semi-monthly. Such base salary will be subject to
annual review and adjustment by the Company’s Compensation Committee.

     (b) Incentive Bonus Plan. During the Term, the Executive is entitled to quarterly
cash bonuses based on attainment of particular financial milestones (“Quarterly Bonuses”).
Quarterly Bonuses are computed as a percentage of the Executive’s base salary for the fiscal
quarter for which achievement of the financial milestones relate. Except for the Quarterly Bonus
described below relating to the Company’s quarter ending on March 31, 2005 (the “Special Fiscal
2005 Quarterly Bonus”), Quarterly Bonuses are predicated upon the Company’s achieving at least 90%
of its quarterly targeted net sales and/or quarterly targeted operating income (loss) levels, as
computed below. The Executive will independently earn the Quarterly Bonus amounts described in
subsections (i) and (ii) based on the separate achievement of the financial milestones to which
each such subsection relate. If during one or more quarters, the Executive does not earn any
Quarterly Bonus because the Company does not achieve at least 90% of the relevant quarterly target
level or levels, the Executive may make-up the Quarterly Bonus or Bonuses not earned (a “True-Up
Bonus”) in a single payment at the end of the fiscal year if the Company has achieved at least 90%
of the cumulative target level for the full fiscal year.

     The following is an example applying the Executive’s initial annual base salary and assuming
application of the chart in subsection (i) below (without consideration of the Special Fiscal 2005
Quarterly Bonus):

Page 1

 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Actual Net	 	 	 	Quarterly	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Sales As	 	 	 	Bonus As	 	 	 	 	 	 	 	 	Net Sales	 	 
	 	 Fiscal	 	 	Net Sales	 	 	 	Actual Net	 	 	 	Percentage	 	 	 	Percentage	 	 	 	Base Salary	 	 	 	Bonus	 	 
	 	 Quarter	 	 	Budget	 	 	 	Sales	 	 	 	Of Budget	 	 	 	Of Base	 	 	 	To Apply	 	 	 	Amount	 	 
	 	First
	 	 	$	1,000,000	 	 	 	$	1,100,000	 	 	 	110%	 	 	    42%	 	 	$	59,750	 	 	 	$	25,095	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Second
	 	 	$	2,000,000	 	 	 	$	1,600,000	 	 	 	  80%	 	 	—	 	 	$	59,750	 	 	 	 	—	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Third
	 	 	$	3,000,000	 	 	 	$	4,500,000	 	 	 	150%	 	 	    60%	 	 	$	59,750	 	 	 	$	35,850	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Fourth
	 	 	$	4,000,000	 	 	 	$	2,800,000	 	 	 	  70%	 	 	—	 	 	$	59,750	 	 	 	 	—	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Full Year
	 	 	$	10,000,000	 	 	 	$	10,000,000	 	 	 	100%	 	 	    36%	 	 	$	239,000	 	 	 	$	86,040	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Aggregate of
Quarters
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	(60,945	)	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	True-Up Bonus
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	25,095	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

     If the True-Up Bonus is zero or less, there is no True-Up Bonus, nor is the Executive obliged
to reimburse the Company for the shortfall against the aggregate of Quarterly Bonuses computed for
such fiscal year. No True-Up Bonus is due if the Executive earns a Quarterly Bonus for each fiscal
quarter during such fiscal year.

          (i) Net Sales Quarterly Bonus. A portion of the Executive’s total Quarterly Bonus is
based on the Company’s achievement during a fiscal quarter of particular net sales levels in the
chart below (the “Net Sales Quarterly Bonus”). For this purpose, “net sales” are the Company’s
consolidated net sales in U.S. dollars as computed in accordance with generally accepted accounting
principles, subject to the following. In applying foreign currency translation to non-U.S. dollar
denominated net sales, the Company shall make the computation using the same average exchange rates
used for creation of the annual budget referred to below. It is intended by this provision that
the Executive shall neither profit from, nor be penalized by, foreign currency translation
adjustments in determining whether the milestones for a Net Sales Quarterly Bonus are met.

          Example: Assume that the Company’s U.S. dollar-denominated consolidated net sales
budget for a particular fiscal quarter is $2.0 million,
consisting of €1,126,820 at an average
exchange rate of €1.00-to-$1.33118 (i.e., $1.5 million) and £260,050 at an average exchange rate
of £1.00-to-$1.92271. If actual net sales for that fiscal quarter are €1,300,000 and £200,000,
the U.S.-denominated “net sales” for purposes of determining whether a Quarterly Bonus is earned
would be $2,115,076 ($1,730,534 + $384,542) based on the above exchange rates, regardless of the
actual average exchange rates during the quarter.

     Except with respect to the Special Fiscal 2005 Quarterly Bonus, the net sales targets for the
relevant quarter will be set by the Board of Directors based on a annual budget (broken down by
fiscal quarter and currency and specifying the applicable foreign currency exchange rates used for
creating the budget) recommended by management. The net sales budget must be approved prior to the
beginning of the relevant fiscal year by (i) a majority of the members of the Board of Directors
and (ii) all non-employee members of the Board of Directors. If management does not timely receive
the required approvals of the annual net sales budget, then the net sales targets per quarter will
automatically increase by 20% over the prior year’s budget.

	 	 	 
	Net Sales Quarterly Bonus
	Percentage of	 	Percentage of Quarterly
	Quarterly Net Sales	 	Base
Compensation
	 Target Achieved	 	
Payable as Bonus
	90%
	 	30%
	100%
	 	36%
	110%
	 	42%
	120%
	 	48%
	130%
	 	54%
	140%
	 	60%

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     If the Company achieves a net sales goal between two specified percentages above, the related
Net Sales Quarterly Bonus will increase proportionally between the two percentage levels.

          Example: If the Company achieves 114% of the quarterly net sales target, the
Quarterly Bonus is 42.4% of quarterly base compensation (114% is 40% towards the 120% target level
over the 110% level; the 120% target level pays out at 6% over the 110% target level; so the 114%
target level pays out 2.4% (40% of 6%) over the 110% level).

          (ii) Operating Income (Loss) Quarterly Bonus. The other portion of the Executive’s
total Quarterly Bonus is based on the Company’s achievement during a fiscal quarter of particular
operating income (loss) levels in the chart below (the “Operating Income (Loss) Quarterly Bonus”).
For this purpose, “operating income (loss)” is the Company’s consolidated operating income or loss
as publicly reported for the relevant fiscal quarter in the Company’s quarterly or annual report on
Form 10-QSB or 10-KSB, as applicable (the “SEC Reports”). Except with respect to the Special
Fiscal 2005 Quarterly Bonus, the operating income (loss) targets for the relevant quarter will be
set by the Board of Directors based on an annual budget (broken down by fiscal quarter) recommended
by management. The operating income (loss) budget must be approved prior to the beginning of the
relevant fiscal year by (i) a majority of the members of the Board of Directors and (ii) all
non-employee members of the Board of Directors. If management does not timely receive the required
approvals of the annual operating income (loss) budget, then the operating income (loss) targets
per quarter will automatically increase by 20% over the prior year’s budget.

	 	 	 
	Operating Income (Loss)
	Quarterly Bonus
	Percentage of	 	 
	Quarterly Operating	 	Percentage of Quarterly 
	Income (Loss) 	 	Compensation Base
	 Target Achieved	 	Payable as Bonus
	  90%
	 	20%
	100%
	 	24%
	110%
	 	28%
	120%
	 	32%
	130%
	 	36%
	140%
	 	40%

     Similarly to the Net Sales Quarterly Bonus computation above, if the Company achieves an
operating income (loss) goal between two specified percentages above, the related Operating Income
(Loss) Quarterly Bonus will increase proportionally between the two percentage levels.

          (iii) Special Fiscal 2005 Quarterly Bonus. On a one-time basis, the Executive is
entitled to a Quarterly Bonus for the fiscal quarter ending March 31, 2005 of the greater of (a)
$29,875 or (b) the total Quarterly Bonus computed by applying subsections (i) and (ii) above. For
purposes of this subsection (iii), the net sales and operating income (loss) targets for the
quarter ending March 31, 2005 will be based on the Board-approved budget for such quarter in effect
immediately prior to the date of this Agreement.

          (iv) Special Excise Tax Reimbursement Bonus. In the event that the vesting of stock
options upon a “Change of Control” as described in Section 3(b) below results in the imposition of
a federal excise tax on the Executive pursuant to Section 4999 of the Internal Revenue Code of
1986, as amended (the “Code”), the Company will reimburse the Executive (the “Excise Tax Bonus”)
for the amount of the federal excise tax (but not any interest or penalties thereon) paid by the
Executive that is attributable to such stock option vesting.

          (v) Payment and Limitations. Each Quarterly Bonus amount (including the Special
Fiscal 2005 Quarterly Bonus) is payable within 15 days after the Company files the SEC Report for
the related fiscal quarter (the annual report, as to the fourth fiscal quarter). Any True-Up Bonus
is payable within 15 days after the Company files the annual SEC Report for the related fiscal
year. The Excise Tax Bonus is payable within 15 days after the Company’s receipt of written
evidence from the Executive as to the payment of the federal excise tax. However, no Quarterly
Bonus amount (including any Special Fiscal 2005 Quarterly Bonus), and no Excise Tax Bonus or
True-Up Bonus, is payable unless and until the Company raises a minimum of $5.0 million from the
sale of its equity securities after the date of this Agreement (the “Minimum Equity Sale”).

Page 3

 

     (c) Executive Perquisites, Benefits and Other Compensation. Commencing on the date
hereof, the Executive shall be entitled to receive additional benefits and compensation from the
Company in such form and to such extent as specified below:

          (i) Payment of premiums for coverage for the Executive and the Executive’s dependent family
members under health, hospitalization, disability, dental, life and other insurance plans that the
Company may have in effect from time to time, at the levels, and with the co-payments, as
established by the Company under such plans.

          (ii) Reimbursement for all business travel and other out-of-pocket expenses reasonably
incurred by the Executive in the performance of the Executive’s services pursuant to this
Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by the
Executive upon submission of any request for reimbursement, and in a format and manner consistent
with the Company’s expense reporting policy.

          (iii) Four weeks of paid vacation during each calendar year. If the Executive does not
utilize all vacation time during a year, it is forfeited.

3. Stock Options. The Company hereby grants to the Executive options (the “Options”), to
acquire 400,000 shares of the Company’s Common Stock, par value $.01 per share (the “Common
Stock”), at an exercise price per share (the “Exercise Price”) equal to the average of the closing
prices of the Company’s Common Stock on the OTC Bulletin Board as reported by bigcharts.com for the
30 trading days immediately preceding the date that the Company publicly files a report on Form 8-K
announcing the signing of this Agreement and the Executive’s employment hereunder. The Options are
not pursuant to the Company’s 1995, 1997 or 2002 Stock Option Plans. The Options will not be
treated as “incentive options” within the meaning of Section 422 of the Code.

     (a) Anti-Dilution Adjustments. The Options are subject to adjustment as provided in
this subsection (a).

          (i) Exercise Price Adjustments. The Exercise Price shall be adjusted from time to
time such that in case the Company shall hereafter:

               (A) pay any dividends on any class of stock of the Company payable in Common Stock or
securities convertible into Common Stock;

               (B) subdivide its then outstanding shares of Common Stock into a greater number of shares; or

               (C) combine outstanding shares of Common Stock, by reclassification or otherwise;

then, in any such event, the Exercise Price in effect immediately prior to such event shall (until
adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to
the nearest full cent) determined by dividing (A) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Exercise Price, by (B) the total
number of shares of Common Stock outstanding immediately after such event (including in each case
the maximum number of shares of Common Stock issuable in respect of any securities convertible into
Common Stock), and the resulting quotient shall be the adjusted Exercise Price per share. An
adjustment made pursuant to this subsection shall become effective immediately after the record
date in the case of a dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this subsection, the Executive shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive) shall determine the
allocation of the adjusted Exercise Price between or among shares of such classes of capital stock
or shares of Common Stock and other capital stock. All calculations under this subsection shall be
made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that
at any time as a result of an adjustment made pursuant to this subsection, the Executive shall
become entitled to receive any shares of the Company other than shares of Common Stock, thereafter
the Exercise Price of such other shares so receivable upon exercise of any Options shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in this subsection.

          (ii) Share Adjustments. Upon each adjustment of the Exercise Price pursuant to
subsection (a)(i) above, the Executive shall thereafter (until another such adjustment) be entitled
to purchase at the adjusted Exercise Price the number of shares, calculated to the nearest full
share, obtained by multiplying the number of shares covered by the Options

Page 4

 

(as adjusted as a result of all adjustments in the Exercise Price in effect prior to such
adjustment) by the Exercise Price in effect prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.

          (iii) Reorganization Events. In case of any consolidation or merger to which the
Company is a party other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of
securities with another corporation (including any exchange effected in connection with a merger of
a third corporation into the Company), there shall be no adjustment under subsection (a)(i) above;
but the Executive shall have the right thereafter to convert the Options into the kind and amount
of shares of stock and other securities and property which the Executive would have owned or have
been entitled to receive immediately after such consolidation, merger, statutory exchange, sale or
conveyance had the Options been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance and, in any such case, if necessary,
appropriate adjustment shall be made in the application of the provisions set forth in this
subsection with respect to the rights and interests thereafter of the Executive, to the end that
the provisions set forth in this subsection shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock and other securities and property
thereafter deliverable on the exercise of the Options. The provisions of this subsection shall
similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances.

          (iv) Notice of Adjustments. Upon any adjustment of the Exercise Price, then and in
each such case, the Company shall give written notice thereof, by first-class mail, postage
prepaid, addressed to the Executive, which notice shall state the Exercise Price resulting from
such adjustment and the increase or decrease, if any, in the number of shares of Common Stock
purchasable at such price upon the exercise of the Options, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.

     (b) Vesting; Change of Control. Notwithstanding anything else, the Executive may
exercise the Options only to the extent that the Executive is vested in them. Vested Options will
be exercisable for ten (10) years from the date hereof. The Options will vest in installments of
25% on each of the date hereof and the first, second and third anniversaries of the date hereof;
provided, however, that the Executive must continue in the employ of the Company through the
applicable anniversary date in order to vest in the Options for such anniversary date. Despite the
foregoing, the Options will fully vest upon a “Change of Control,” which will be deemed to occur as
of the first day after the date hereof that any one or more of the following conditions is
satisfied (the “Change of Control Date”):

          (i) any person or entity, or group of persons or entities acting together, other than the
Company or an employee benefit plan of the Company, acquires directly or indirectly the beneficial
ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended)
of any voting security of the Company and, immediately after such acquisition, such person, entity
or group is, directly or indirectly, the beneficial owner of voting securities representing a
majority of the total voting power of all of the then-outstanding voting securities of the Company
and has a larger percentage of voting securities of the Company than any other person, entity or
group holding voting securities of the Company;

          (ii) the following individuals no longer constitute a majority of the members of the Board:
(A) Daniel G. Holman, Joel R. Pitlor, Thomas E. Jamison, R. Patrick Maxwell and the Executive (the
“Original Directors”); (B) the individuals who thereafter are elected to the Company’s Board of
Directors and whose election, or nomination for election, to the Board of Directors was approved by
a vote of at least a majority of the Original Directors then still in office (such directors
becoming “Additional Original Directors” immediately following their election); and (C) the
individuals who are elected to the Board of Directors and whose election, or nomination for
election, to the Board of Directors was approved by a vote of at least a majority of the Original
Directors and Additional Original Directors then still in office (such directors also becoming
“Additional Original Directors” immediately following their election);

          (iii) the stockholders of the Company approve a merger, consolidation, recapitalization or
reorganization of the Company, or a reverse stock split of outstanding voting securities, other
than any such transaction which results in at least a majority of the total voting power
represented by the voting securities of the surviving entity outstanding immediately after such
transaction being beneficially owned by at least a majority of the holders of outstanding voting
securities of the Company immediately prior to the transaction, with the voting power of each such
continuing holder relative to other such continuing holders not substantially altered in the
transaction; or

          (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or
an agreement for the sale or disposition by the Company of all or a substantial portion of the
Company’s assets (i.e., 50% or more of the total assets of the Company).

Page 5

 

     However, no “Change in Control” will be deemed to have occurred with respect to Executive if
Executive is part of a purchasing group which consummates the Change in Control transaction. The
Executive will be deemed “part of a purchasing group” for purposes of the preceding sentence if the
Executive is an equity participant in the purchasing company or group except for (i) passive
ownership of less than three percent (3%) of the stock of the purchasing company or (ii) ownership
of an equity participation in the purchasing company or group which is otherwise not significant,
as determined prior to the Change in Control by a majority of the Original and Additional Original
Directors.

     (c) Payment of Exercise Price; Cashless Exercise. The Executive may exercise the
Options by cash payment (including by check or wire transfer). In the alternative, the Executive
may exercise the Options by instructing the Company to withhold from the shares of Common Stock
otherwise to be issued upon the exercise of the Options a number of whole or fractional shares of
Common Stock equal to the number of shares for which the Options are being exercised (including any
Options to be surrendered) multiplied by the Exercise Price per share, and then divided by the
“Market Price” (as defined below) of a share of Common Stock as of the close of business on the
date of exercise (a “Cashless Exercise”). The Company may condition the Cashless Exercise upon the
Executive’s payment of any required withholding taxes.

     The term “Market Price” with respect to shares of Common Stock of any class or series means
the last reported sale price or, if none, the average of the last reported closing bid and asked
prices on any national or regional securities exchange or quoted in the National Association of
Securities Dealers, Inc.’s Automated Quotations System (“Nasdaq”), or if not listed on a national
or regional securities exchange or quoted in Nasdaq, the closing price as reported by bigcharts.com
(or if this service is discontinued, such other reporting service acceptable to the Holder), or if
no quotations in such Common Stock are available, the fair market value of the shares as determined
in good faith by the Board of Directors of the Company.

     (d) Subscription Representations; Transfer Restrictions. The Executive understands
that the Options, and the shares of Common Stock issuable upon their exercise, are and will be
“restricted securities” within the meaning of the Securities Act of 1933, as amended (the “Act”).
Accordingly, even if the Executive is fully vested in the Options, the Executive may never be able
to resell the underlying shares for a profit, or at all. In any event, the Executive will be able
to resell or otherwise transfer the underlying shares only if the sale or other transfer is
registered under the Act and applicable state securities laws or there is an available exemption
from this registration. The Executive confirms that Executive can bear the loss of Executive’s
entire investment in the Company.

     The Executive agrees and acknowledges that (i) none of the Options may be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of
decent and distribution and then only to Executive’s spouse and/or children (or a trust for their
benefit) and (ii) the vested Options may be exercised during the Executive’s lifetime only by the
Executive or the Executive’s legal representative.

     (e) Lock-Up Agreement. The Executive agrees that, in the event of each future public
offering of the Company’s equity securities (an “Offering”), the Executive will agree to such
restrictions on the resale of any shares of the Company’s Common Stock (including the shares
underlying the Options) then beneficially owned by Executive as requested by the managing
underwriter or underwriters of the Offering; provided, however, that such restrictions run no
longer than the period of resale restriction imposed by such underwriters on the Company’s other
executive officers and directors. The Executive agrees not to sell or otherwise transfer
(including upon death) any of the shares underlying the Options, or any other shares beneficially
owned by the Executive, unless the purchaser or recipient agrees in writing to be bound by the
foregoing lock-up agreement.

     (f) Stock Certificate Restrictions. The Executive acknowledges that the Company will
place a restrictive legend on any certificate representing the shares underlying the Options, and a
“stop transfer order” with any transfer agent of the Company’s securities, barring the sale or
other transfer of such shares without registration under the Act or an exemption therefrom, and
noting the existence of the lock-up agreement above.

     (g) Registration of Shares Underlying the Options. Notwithstanding the above
provisions, the Company shall use its best efforts, at its expense, to register the issuance or
resale of the shares underlying the Options on Form S-8 under the Act and under applicable state
securities laws, and to maintain the effectiveness of the Form S-8 registration statement during
the Term of this Agreement and for two years thereafter.

4. Non-Competition and Non-Solicitation.

     (a) Basic Terms. The Executive will not, during the period of the Executive’s
employment with the Company and for a period of one (1) year immediately following the termination
of the Executive’s employment under this Agreement, for any reason whatsoever, directly or
indirectly, for the Executive or on behalf of or in conjunction with any other person,

Page 6

 

persons, entity, company, business, partnership, corporation, limited liability company or
limited liability partnership of whatever nature:

     (i) engage, as an officer, director, shareholder, owner, partner, joint venturer or in a
managerial capacity, whether as an employee, independent contractor, consultant or advisor or as a
sales representative, in any business in competition with the Company anywhere worldwide (the
“Territory”);

     (ii) call upon or solicit any person who is at that time within the Territory an employee of
the Company for the purpose or with the intent of enticing such employee away from or out of the
employ of the Company;

     (iii) call upon or solicit any person or entity which is, at that time, or which has been,
within one (1) year prior to that time, a customer or prospective customer (such prospective status
being determined by whether the Company within the prior year solicited such person or entity’s
business) of the Company within the Territory for the purpose of selling products or services in
competition with the Company within the Territory; or

     (iv) call upon or solicit any prospective acquisition candidate, on the Executive’s own behalf
or on behalf of any competitor, which candidate was, to the Executive’s actual knowledge after due
inquiry, either called upon by the Company or for which the Company made an acquisition analysis,
for the purpose of acquiring such entity or its assets.

     Notwithstanding the above, the Executive may acquire as a passive investment not more than two
percent (2%) of the capital stock of a competing business, whose stock is traded on a national
securities exchange or over-the-counter.

     (b) Equitable Relief. Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenants, and because of the immediate and
irreparable damage that could be caused to the Company for which it would have no other adequate
remedy, the Executive agrees that the foregoing covenants may be enforced by the Company in the
event of breach by the Executive by injunctions and restraining orders.

     (c) Severability and/or Reformation. The covenants in this Section 4 are severable
and separate, and the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction determines that the
scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the
parties that such restrictions be enforced to the fullest extent which the court deems reasonable,
and the Agreement shall be reformed in accordance therewith.

     (d) Independently Enforceable. All of the covenants in this Section 4 shall be
construed as an agreement independent of any other provision in this Agreement, and the existence
of any claim or cause of action of the Executive against the Company, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such
covenants. It is specifically agreed that the period of one (1) year following termination of
employment stated at the beginning of this Section 4, during which the agreements and covenants of
the Executive made in this Section 4 shall be effective, shall be computed by excluding from such
computation any time during which the Executive is in violation of any provision of this Section 4.

5. Term; Termination; Rights on Termination.

     The term of Executive’s employment under this Agreement begins on the date hereof and
continues for one (1) year, and, unless terminated sooner as herein provided, will continue
thereafter on a year-to-year basis on the same terms and conditions contained herein in effect as
of the time of renewal. As used herein, the word “Term” means (i) during the one-year period
referred to in the preceding sentence, such one-year period and (ii) during any one-year renewal
pursuant to the terms hereof, such one-year period. This Agreement and the Executive’s employment
may be terminated in any one of the following ways:

     (a) Death. The Executive’s death will immediately terminate this Agreement. The
Company will pay the Executive’s estate any of Executive’s accrued base salary and any earned, but
unpaid, Quarterly Bonuses (at the time otherwise payable under this Agreement) through the date of
termination and reimbursement of expenses.

     (b) Disability. If, as a result of incapacity due to physical or mental illness or
injury, as reasonably determined by the Executive’s physician, the Executive is absent from the
Executive’s full-time duties hereunder for four (4) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of such four (4) month
period, but which will not be effective earlier than the last day of such four (4) month period),
the Company may terminate the Executive’s employment hereunder; provided that the Executive is
unable to resume the Executive’s full-time

Page 7

 

duties at the conclusion of such notice period. The Company will pay the Executive any of the
Executive’s accrued base salary and any earned, but unpaid, Quarterly Bonuses (at the time
otherwise payable under this Agreement) through the date of termination and reimbursement of
expenses.

     (c) Good Cause. The Company may terminate this Agreement ten (10) days after
delivery of written notice to the Executive for “good cause,” which is (i) the Executive’s willful,
material and irreparable breach of this Agreement; (ii) the Executive’s gross negligence in the
performance or intentional nonperformance (continuing for thirty (30) days after receipt of written
notice of need to cure) of any of the Executive’s material duties and responsibilities under this
Agreement; (iii) the Executive’s willful dishonesty, fraud or misconduct with respect to the
business or affairs of the Company which materially and adversely affects the operations or
reputation of the Company; (iv) the Executive’s conviction of a felony crime which materially and
adversely affects the operations or reputation of the Company; (v) the Company’s failure to
complete the Minimum Equity Sale within two years from the date of this Agreement; or (vi) the
Company’s failure to achieve 100% of the budgeted targets for both net sales and operating income
(loss) for five consecutive fiscal quarters. Upon any termination for good cause described in
subsections (i) through (v) above, the Executive will receive no severance compensation other than
base salary accrued through the date of termination and reimbursement of expenses. Upon any
termination for good cause described in subsection (vi) above, and conditioned on the Executive’s
continuing compliance with the other provisions of this Agreement, including Section 4 above, the
Company shall pay the Executive, as severance pay, an aggregate amount equal to 50% of Executive’s
base salary in effect at the time of termination. These severance payments will be subject to
customary tax withholdings and will be payable in equal monthly installments on the first day of
each month over the first six months after the date of termination.

     (d) Without Good Cause. At any time, either the Executive or the Company may
terminate this Agreement and the Executive’s employment, effective thirty (30) days after written
notice is provided to the other. If (i) the Company terminates the Executive’s employment without
good cause during or at the end of any Term, (ii) this Agreement expires or otherwise terminates at
the end of a Term without renewal, (iii) the Executive voluntarily terminates employment with the
Company as a result of the Company’s imposition of material and adverse changes, without the
Executive’s consent, in the Executive’s principal duties or (iv) the Executive voluntarily
terminates employment after the Company moves its principal executive offices more than 100 miles
from its current location without the Executive’s consent, the Executive will receive from the
Company any base salary accrued through the date of termination and reimbursement of expenses. In
addition, in any of these four circumstances, and conditioned on the Executive’s continuing
compliance with the other provisions of this Agreement, including Section 4 above, the Company
shall pay the Executive, as severance pay, an aggregate amount equal to 160% of Executive’s base
salary in effect at the time of termination. The severance payments will be subject to customary
tax withholdings and will be payable in equal monthly installments on the first day of each month
over the first year after the date of termination.

6. Return of Company Property. All records, designs, tradenames and trademarks, service
names and service marks, patents, business plans, financial statements, manuals, memoranda,
customer and other lists and other property delivered to or compiled by the Executive by or on
behalf of the Company, or its representatives, vendors or customers which pertain to the business
of the Company are and will remain the property of the Company, and be subject at all times to its
discretion and control. Likewise, all correspondence, reports, records, charts, advertising and
marketing materials and other similar data pertaining to the business, activities or future plans
of the Company which is collected by or in the possession of the Executive shall be delivered
promptly to the Company without request by it upon termination of the Executive’s employment.

7. Inventions. The Executive will disclose promptly to the Company any and all significant
conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or
not, which are conceived or made by the Executive, solely or jointly with another, during the
period of employment, and which are directly related to the business or activities of the Company
and which the Executive conceives as a result of the Executive’s employment by the Company. The
Executive hereby assigns and agrees to assign all of the Executive’s interests therein to the
Company or its nominee. Whenever requested to do so by the Company, the Executive will execute any
and all applications, assignments or other instruments that the Company shall deem necessary to
apply for and obtain letters patent of the United States or any foreign country or to otherwise
protect the Company’s interest therein. Nothing in this Agreement shall apply to an invention for
which no equipment, supplies, facility or trade secret information of the Company was used and
which was developed entirely on the Executive’s own time and (i) which does not relate (a) directly
to the business of the Company or (b) to the Company’s actual or demonstrably anticipated research
or development or (ii) which does not result from any work performed by the Executive for the
Company.

8. Trade Secrets. The Executive will not, other than as required by court order, during or
after employment with the Company, disclose the confidential terms of the Company’s relationships
or agreements with its significant vendors or

Page 8

 

customers or any other significant and material trade secret of the Company to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever.

9. Complete Agreement. This Agreement supersedes any other agreements or understandings,
written or oral, between the Company and the Executive and the Executive’s affiliates, including
Executive Advisory Group (“EAG”), and the Executive has no oral representations, understandings or
agreements with the Company or any of its officers, directors, employees or representatives
covering the same subject matter as this Agreement; provided, however, that EAG may continue to
hold and exercise its 50,000 stock options granted under the Consulting Agreement dated April 1,
2003. This document is the final, complete and exclusive statement and expression of the agreement
between the Company and the Executive and of all the terms of this Agreement, and it cannot be
varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written
agreements. This document may not be later modified except by a written instrument signed by a
duly authorized officer of the Company and the Executive, and no term of this Agreement may be
waived except by a written instrument signed by the party waiving the benefit of such term.

10. Notice. Whenever any notice is required hereunder, it shall be given in writing
addressed as follows:

	 	 	 
	To the Company:

	 	Uroplasty, Inc.
	

	 	2718 Summer Street N.E.
	

	 	Minneapolis, Minnesota 55413
	

	 	Attention: Daniel G. Holman, Chairman
	 
	 	 
	To the Executive:

	 	Sam B. Humphries
	

	 	7913 Wyoming Court

	

	 	Bloomington, Minnesota 55438

Notice is given and effective three (3) days after the deposit in the U.S. mail of a writing
addressed as above and sent first class mail, certified, return receipt requested, or when actually
received. Either party may change the address for notice by notifying the other party of such
change in accordance with this Section 10.

11. Arbitration. Except as to matters of injunctive or equitable relief (over which the
parties agree that the federal and state courts located in Minneapolis, Minnesota will have
exclusive jurisdiction and are deemed to be of proper venue and convenience to the parties), any
unresolved dispute or controversy arising under or in connection with this Agreement will be
settled exclusively by arbitration, conducted before a panel of three (3) arbitrators in
Minneapolis, Minnesota, in accordance with the rules of the American Arbitration Association then
in effect. The arbitrators will not have the authority to add to, detract from or modify any
provision hereof nor to award punitive damages to any injured party. A decision by a majority of
the arbitration panel will be final and binding. Judgment may be entered on the arbitrators’ award
in any court having jurisdiction. The direct expense of any arbitration proceeding will be borne
by the Company.

12. Binding Effect; Governing Law. This Agreement will inure to the benefit of
the successors or assigns of the Company. The Company agrees that, as a condition of any merger of
the Company into or with, or the sale of all or substantially all of the Company’s assets to,
another person, firm or entity, it will require the successor expressly to assume the Company’s
obligations hereunder. This Agreement shall be governed by and construed in accordance with the
laws of the State of Minnesota, exclusive of its conflicts of laws rules.

     IN WITNESS WHEREOF, the undersigned have hereunto affixed their signatures.

	 	 	 	 	 
	UROPLASTY, INC.	 	EXECUTIVE
	 
	 	 	 	 
	By
	 	 	 	 
	

	 	

	 	

	       Daniel G. Holman, Chairman	 	Sam B. Humphries

Page 9

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