<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SOMNUS MEDICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3841 77-0423465
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
285 N. WOLFE ROAD
SUNNYVALE, CALIFORNIA 94086
(408) 773-9121
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STUART D. EDWARDS
CHIEF EXECUTIVE OFFICER
SOMNUS MEDICAL TECHNOLOGIES, INC.
285 N. WOLFE ROAD
SUNNYVALE, CALIFORNIA 94086
(408) 773-9121
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
J. CASEY MCGLYNN, ESQ. GERALD S. TANENBAUM, ESQ.
JOHN T. SHERIDAN, ESQ. CAHILL GORDON & REINDEL
WILSON SONSINI GOODRICH & ROSATI EIGHTY PINE STREET
PROFESSIONAL CORPORATION NEW YORK, NY 10005-1702
650 PAGE MILL ROAD (212) 701-3000
PALO ALTO, CA 94304
(650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
PROPOSED
MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value........................ $46,000,000 $13,940
================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) promulgated under the Securities
Act of 1933, as amended.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
September 11, 1997
PROSPECTUS
Shares
[SOMNUS LOGO]
SOMNUS MEDICAL TECHNOLOGIES, INC.
Common Stock
(par value $0.001 per share)
All of the shares of Common Stock (the "Common Stock") offered hereby (the "Of-
fering") are being offered by Somnus Medical Technologies, Inc., a Delaware
corporation ("Somnus" or the "Company").
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price of the Common
Stock will be between $ and $ per share. See "Under writing" for
information relating to the factors to be considered in determining the initial
public offering price of the Common Stock. Application has been made to have
the Common Stock quoted on the Nasdaq National Market under the symbol "SOMN."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------
Total (3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain lia-
bilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
shares of Common Stock on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total Price
to Public, Under writing Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are being offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Cahill
Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of
the shares of Common Stock offered hereby will be made against payment therefor
on or about , 1997 at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO.
UBS SECURITIES
SMITH BARNEY INC.
, 1997
<PAGE>
[Illustration of the Somnoplasty System,
including the models 615, 115 and 215
Radiofrequency Generators, and the
SP 1000, SP 1100, SP 3000 and SP 2000
Somnoplasty electrodes.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFI-
CALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY
BID FOR, AND PURCHASE, THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[Illustration of unobstructed upper airway anatomy]
[Illustration of obstructed upper airway anatomy]
Somnus Medical Technologies, Inc. designs, develops, manufactures and markets
innovative medical devices to treat obstructions in the upper airway.
Obstructed breathing can result from enlarged tissues in the turbinates, soft
palate, uvula, tonsils and base of the tongue. The Somnoplasty System is cur-
rently cleared by the FDA for tissue volume reduction of the soft palate and
uvula for the treatment of snoring. Devices to treat other upper airway indica-
tions are in clinical trials and in development.
<PAGE>
THE SOMNOPLASTY PROCEDURE FOR THE TREATMENT OF SNORING
Somnoplasty is an outpatient, office-based
procedure. The physician first applies a local
anesthetic to the uvula and soft palate. After a
few minutes, the Somnus disposable device, which
is connected to a radiofrequency generator, is
placed into the mouth. A small electrode located
at the end of the device is inserted into the
soft palate.
[PICTURE #1]
Radiofrequency energy is applied through the
electrode. Energy is delivered for 1 1/2 to 5
minutes, heating the tissue in a limited area
around the electrode. Part of the electrode is
insulated to protect the delicate surface of the
tissue. The patient experiences only minimal
discomfort during the procedure.
[PICTURE #2]
The Somnoplasty procedure creates a submucosal
lesion in the soft palate. The patient may
experience some minor swelling and may have a
mild sore throat. Following the Somnoplasty
procedure, most patients take an over the
counter analgesic for one to three days.
[PICTURE #3]
Over a period of three to six weeks, the lesion
is naturally resorbed by the body, leading to
tissue volume reduction. By reducing and tight-
ening the obstructive tissue, the procedure is
designed to reduce snoring.
[PICTURE #4]
<PAGE>
No person has been authorized to give any information or to make any represen-
tations not contained in this Prospectus and, if given or made, such informa-
tion or representations must not be relied upon as having been authorized by
the Company or any Underwriter. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the Common Stock in any jurisdic-
tion to any person to whom it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstances create any implication that there has been no change in the
affairs of the Company subsequent to the date hereof.
No action has been or will be taken in any jurisdiction by the Company or by
any Underwriter that would permit a public offering of the Common Stock or pos-
session or distribution of this Prospectus in any jurisdiction where action for
the purpose is required, other than in the United States. Persons into whose
possession this Prospectus comes are required by the Company and the Under-
writers to inform themselves about and to observe any restrictions as to the
offering of the Common Stock and the distribution of this Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Prospectus Summary.................... 4 Business......................... 24
Risk Factors.......................... 7 Management....................... 37
The Company........................... 17 Certain Transactions............. 43
Use of Proceeds....................... 17 Principal Stockholders........... 44
Dividend Policy....................... 17 Description of Capital Stock..... 45
Capitalization........................ 18 Shares Eligible for Future Sale.. 47
Dilution.............................. 19 Underwriting..................... 48
Selected Consolidated Financial Data.. 20 Legal Matters.................... 50
Management's Discussion and Analysis Experts.......................... 50
of Financial Condition and Results Additional Information........... 50
of Operations........................ 21 Index to Consolidated Financial
Statements...................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDER-
WRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Company intends to furnish its stockholders with annual reports containing
audited financial statements examined by its independent auditors and quarterly
reports containing interim unaudited financial statements for each of the first
three quarters of each fiscal year.
Somnus and Somnoplasty are a trademark and a servicemark, respectively, of the
Company. This Prospectus also contains trademarks and tradenames of other com-
panies.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The discussion in this Prospectus
contains forward looking statements that involve risks and uncertainties
including, but not limited to, those specifically identified herein. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes (i) the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock to be
effected upon the consummation of the Offering (the "Preferred Stock
Conversion") and (ii) no exercise of the Underwriters' over-allotment option.
Selective data presented in this Prospectus is based on interviews conducted by
the Company with various industry sources.
THE COMPANY
Somnus Medical Technologies, Inc. ("Somnus" or the "Company") designs,
develops, manufactures and markets innovative medical devices that utilize its
proprietary radiofrequency ("RF") technology for the treatment of upper airway
disorders. The Company's Somnoplasty System provides physicians with a suite of
products designed to offer minimally-invasive, curative treatment alternatives
for disorders of the upper airway, including snoring, obstructive sleep apnea
("OSA") and enlarged turbinates. The Somnoplasty System shrinks tissue in the
upper airway by utilizing automated RF generators and a suite of disposable,
single-use, needle electrode devices which deliver controlled thermal energy to
obstructed areas, while protecting the delicate mucosal lining of the tissue.
The Company received U.S. Food and Drug Administration ("FDA") 510(k) premarket
clearance ("510(k) clearance") in July 1997 for the use of the Somnoplasty
System in the treatment of snoring. The Company has also received the European
Union CE Mark (the "CE Mark") for use of the Somnoplasty System in the
treatment of upper airway disorders. The Company believes that the clinical and
patient benefits of the Somnoplasty System include its effectiveness, quick
procedure time, outpatient setting, use of local anesthesia and low post-
procedural pain. These benefits represent a significant advancement to
physicians and patients over existing treatment options, which, depending upon
the disorder, are highly-invasive, non-curative and/or expensive. To date, the
Somnoplasty procedure has been performed for the treatment of snoring on over
85 patients.
The Company is developing a direct sales force to market its products in the
United States and Canada. The Company intends to market the Somnoplasty System
primarily to ear, nose and throat physicians, oral and maxillofacial surgeons,
pulmonologists, sleep medicine specialists and other physicians who treat upper
airway disorders. There are approximately 9,000 ear, nose and throat
physicians, 5,000 oral and maxillofacial surgeons, 7,000 pulmonologists and
1,500 sleep disorder medical centers in the United States. In April 1997, the
Company entered into a three-year distribution arrangement with Medtronic, Inc.
("Medtronic") for the exclusive distribution of the Somnoplasty System in the
European Union, Australia, Southeast Asia and certain other areas. The Company
will seek to enter into additional agreements for product distribution in Japan
and other international markets. The Company also intends to establish a
marketing program directed at consumers to further establish awareness of the
Somnoplasty procedure.
Currently, Somnus has commercially available or in development three models of
RF generators and five disposable devices designed to treat a variety of upper
airway disorders. In the United States, the Company currently has three issued
patents, three allowed patents and an additional 30 pending patent applica-
tions. The Company also has one issued foreign patent and 18 pending foreign
patent applications.
MARKET OPPORTUNITIES
Habitual snoring. The Company estimates that there are more than 40 million
habitual snorers in the United States. Traditional treatment alternatives for
habitual snoring range from laser surgery to the use of non-surgical devices
such as nasal tapes and oral appliances. The surgical alternatives, including
laser-assisted uvulopalatoplasty ("LAUP"), are invasive procedures which result
in significant post-operative pain, swelling and recovery periods. Despite
these drawbacks, the Company estimates that there were approximately 45,000 to
50,000 LAUP procedures performed in 1996 in the United States. In contrast to
traditional treatments, the Company's Somnoplasty System is designed to be a
minimally-invasive, curative outpatient procedure which can be performed in one
or more sessions of less than 30 minutes each, and causes minimal pain and
swelling and requires only a brief recovery period. The Company's treatment for
snoring uses the SP 1000 single needle electrode or SP 2000 dual needle
electrode to reduce tissue in the uvula and soft palate.
4
<PAGE>
Obstructive sleep apnea. According to a 1993 report to Congress, the National
Commission on Sleep Disorders Research estimated that approximately 20 million
people in the United States were afflicted with OSA, of whom an estimated 6.4
million experienced the disorder at a moderate to severe level. OSA is a
serious disorder which occurs when enlarged anatomical structures block the
upper airway during sleep. Currently, the most common approach to the manage-
ment of OSA is Continuous Positive Airway Pressure ("CPAP"), which requires the
sleeping patient to wear a mask over the nose, and sometimes the mouth, while
pressure from a compressor forces air through the upper airway to keep excess
tissue from collapsing. While CPAP is successful in managing OSA, it is not a
cure and must be used on a nightly basis for life. CPAP can also result in a
variety of adverse side effects. These side effects and the inconvenience of
the device result in low patient compliance which was estimated by the American
Sleep Disorders Association ("ASDA") at only 46% in 1993. Despite these draw-
backs, the Company estimates that the market for CPAP will be approximately
$140 million in 1997, representing an approximate 25% growth rate from the pre-
vious year. Other existing treatments for OSA include uvulopalatopharyngoplasty
("UPPP") (the surgical resection of the uvula, part of the soft palate, tonsils
and excess tissue in the throat), tracheostomies (surgical openings in the neck
which bypass the obstruction) and other highly-invasive surgical procedures. In
contrast, the Somnoplasty System is intended to treat, in a minimally-invasive
manner, the causes of OSA, not the symptoms, by reducing the tissues which
cause the obstruction. The Company's suite of disposable devices, including the
SP 1000, SP 1100, SP 2000 and SP 3000, are designed to allow physicians to
treat any combination of the uvula, soft palate, turbinates and tongue to
enlarge the upper airway passage.
Enlarged turbinates. Chronic nasal obstructions are most frequently caused by
enlarged turbinates. Turbinates, the soft tissue in the nasal cavity, can
become chronically enlarged as a reaction to diseases, such as chronic and
drug-induced rhinitis, and allergy-causing substances. Existing treatments
include prescription and over-the-counter drugs, as well as surgical procedures
which generally entail using a scalpel or an electrocautery or laser device to
resect the turbinates. These surgical procedures are generally effective, but
can lead to discomfort in the form of occasional post- operative bleeding and
frequent crusting. In 1995, there were an estimated 129,000 turbinate resection
procedures performed in the United States, nearly all of which were performed
in an outpatient setting. The Company's SP 1100 single needle electrode device
is intended to offer a minimally-invasive, curative treatment for sufferers of
enlarged turbinates.
BUSINESS STRATEGY
The Company's strategy is to establish the Somnoplasty System, which utilizes
its proprietary RF technology, as the standard of care for the treatment of a
variety of upper airway disorders. Key elements of the Company's strategy
include: (i) providing physicians with a suite of products designed to offer
minimally-invasive, curative treatment alternatives for upper airway disorders;
(ii) pursuing clearance or approval for additional indications to achieve the
broadest possible application of the Somnoplasty System; (iii) creating global
distribution through a direct sales force in the United States and strategic
and distributor relationships internationally; and (iv) acquiring and licensing
complementary technologies and products to broaden the Company's product line,
leverage its distribution network and help accelerate the market acceptance and
penetration of the Somnoplasty System.
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative and
involves a high degree of risk. The principal risks of the Offering include
uncertainties related to the Company's early stage of development and the
limited revenues that the Company has generated from the sale of the
Somnoplasty System, a system comprised of recently developed products, not yet
proven to result in a long-term curative treatment for snoring and other upper
airway disorders, as well as the lack of clinical and market acceptance for the
Somnoplasty System. The Company believes that its future success will depend
largely on the receipt of regulatory clearances and/or approvals for the use of
the Somnoplasty System to treat OSA and the successful commercialization and
market acceptance thereof. See "Risk Factors."
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED............. shares
COMMON STOCK OUTSTANDING AFTER
THE OFFERING(1)................. shares(1)
USE OF PROCEEDS.................. Research and development, clinical trials,
regulatory matters, development of sales and
marketing capabilities and other general
corporate purposes. See "Use of Proceeds."
PROPOSED NASDAQ NATIONAL MARKET
SYMBOL.......................... "SOMN"
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
-------------------------------------
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 19, (JANUARY SIX MONTHS
1996) TO 19, 1996) ENDED
DECEMBER 31, TO JUNE 30, JUNE 30,
1996 1996 1997
In thousands, except share data ------------ ----------- ----------
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
<S> <C> <C> <C>
Total revenues........................... $ -- $ -- $ 231
Manufacturing start-up costs and costs of
revenues................................ 403 60 959
--------- --------- ---------
Gross loss............................... (403) (60) (728)
Operating expenses:
Research and development............... 1,303 306 2,051
Sales and marketing.................... 237 62 593
General and administrative............. 1,252 363 1,347
--------- --------- ---------
Total operating expenses................. 2,792 731 3,991
--------- --------- ---------
Loss from operations..................... (3,195) (791) (4,719)
Other income, net........................ 98 5 172
--------- --------- ---------
Net loss................................. $ (3,097) $ (786) $ (4,547)
========= ========= =========
Pro forma net loss per share(2).......... $ (0.37) $ (0.11) $ (0.48)
========= ========= =========
Shares used in computing pro forma net
loss per share(3)....................... 8,451,565 7,445,186 9,457,944
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
-----------------------
AS OF JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED(3)
In thousands ------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 9,211 $
Working capital........................................ 8,359
Total assets........................................... 11,974
Long-term obligations under lease line of credit....... 1,738 1,738
Accumulated deficit.................................... (7,644) (7,644)
Total stockholders' equity ............................ 8,974
</TABLE>
- -------
(1) Based upon shares outstanding as of June 30, 1997. Excludes as of June 30,
1997: (i) 1,891,700 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $0.29 per
share, (ii) 504,845 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Plan and (iii) 62,500 shares of Common Stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of $1.80
per share. Subsequent to June 30, 1997, the Company granted options to purchase
745,000 shares of Common Stock at a weighted average exercise price of $4.21.
See "Management-- Stock Plans," "Description of Capital Stock" and Note 8 of
Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(3) As adjusted to reflect the sale of shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share and the receipt of the estimated net proceeds therefrom. See "Use of Pro-
ceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative and
involves a high degree of risk. Prospective investors should carefully con-
sider, in addition to the other information contained in this Prospectus, the
following risk factors in evaluating the Company and the Common Stock offered
hereby. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
LIMITED OPERATING HISTORY; ABSENCE OF PROFITABILITY
The Company was incorporated in January 1996 and has a limited history of
operations that, to date, has consisted primarily of research and development,
product engineering, seeking clearance of its products from the FDA, initial
development of a direct sales force in the United States and training Medtronic
employees for distribution of the Somnoplasty System in the European Union,
Australia, Southeast Asia and certain other areas. The Company commercially
introduced the Somnoplasty System internationally, through Medtronic, beginning
in June 1997. One month later, after receiving 510(k) clearance for the use of
the Somnoplasty System to treat snoring, the Company began direct sales of the
Somnoplasty System in the United States. The Company has generated only limited
revenues from sales of the Somnoplasty System and does not have experience in
manufacturing, selling or marketing its products in large, commercial
quantities. There can be no assurance that the Somnoplasty System will be
successfully commercialized or that the Company will achieve significant
revenues. From its inception in 1996 through June 30, 1997, the Company had
total revenues of approximately $231,000 and incurred cumulative losses of
approximately $7.6 million. The Company expects to significantly increase its
spending over the next several years with respect to research and development
efforts, clinical trials, manufacturing and sales and marketing and expects to
incur significant additional losses for the foreseeable future. Whether the
Company can successfully manage the transition to a larger-scale commercial
enterprise will depend upon a number of factors, including obtaining additional
regulatory approvals and increasing its commercial manufacturing, sales and
marketing capabilities, as well as establishing relationships with
international distributors. The Company's inability to establish such
capabilities and relationships would have a material adverse effect on its
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LIMITED REGULATORY CLEARANCE; DEPENDENCE UPON AND LIMITED HISTORY OF
THE SOMNOPLASTY SYSTEM
The Company's future success will depend upon the successful commercialization
and market acceptance of the Somnoplasty System for the treatment of snoring
and the successful development, regulatory clearances and/or approvals, commer-
cialization and market acceptance of the Somnoplasty System for additional
anticipated indications. In the United States, the Company has begun producing
and selling the Somnoplasty System for use in the reduction of tissue in the
uvula and soft palate to treat snoring, but the Company has not received FDA
clearance or approval to market its products for other indications, such as
reduction of tissue in the turbinates, base of the tongue or tonsils, or for
use in the treatment of OSA, which may require reduction of tissue in several
upper airway locations. The Company believes that its future success will
depend upon the ability of physicians to use one or more of the Company's
devices to treat individual or multiple indications, depending upon the
patient's needs. Consequently, if regulatory clearance or approval is not
obtained for the Somnoplasty System with respect to any one of these indica-
tions, it could materially adversely affect the Company's business, financial
condition and results of operations. Internationally, the Company received a CE
Mark in June 1997 and the Therapeutic Goods Administration ("TGA") of Australia
listing in July 1997, permitting the Company to commercialize the Somnoplasty
System in those markets for the treatment of upper airway disorders. Although
such approvals permit the Company to market its products for the treatment of
snoring, enlarged turbinates, enlarged tonsils and OSA, the Company must con-
tinue to pass annual ISO 9001/EN 46001 quality system audits ("ISO 9001") in
order to retain these international approvals. Failure to retain these
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. Other international markets,
such as Japan, have their own regulatory approval processes, and there can be
no assurance that these approvals will be obtained. Failure to obtain regula-
tory approval in other international markets could have a material adverse
effect on the Company's business, financial condition and results of opera-
tions.
The Somnoplasty System is in the early stage of commercialization and the Com-
pany has only a limited history of its use in the treatment of snoring. There
can be no assurance that the procedure, which involves the RF ablation of
tissue in the upper airways, will provide a permanent, curative treatment for
patients. Independent factors, such as aging and weight gain, may, over time,
lead to the enlargement of tissue in areas previously treated by the Company's
procedure. Such
7
<PAGE>
regrowth of tissue could require further treatments, making the procedure a
potentially less attractive alternative to existing surgical and non-surgical
procedures, which could have a material adverse effect upon the Company's busi-
ness, financial condition and results of operations.
NO ASSURANCE OF MARKET ACCEPTANCE
The Somnoplasty System utilizes the Company's proprietary RF ablation
technology for the treatment of upper airway disorders. RF ablation in the
upper airway is a new and novel development. Although the Company has received
510(k) clearance for use of the Somnoplasty System to treat snoring, as well as
a CE Mark and TGA listing for treatment of upper airway obstructions, market
acceptance for these indications could be adversely affected by numerous
factors, including the lack of availability of third-party reimbursement, cost
of the procedure, clinical acceptance or effective physician training. The
Company does not anticipate that patients will receive third-party
reimbursement for use of the Somnoplasty System in the treatment of snoring. In
addition, should the Company receive regulatory clearance or approval for use
of the Somnoplasty System to treat additional indications, market acceptance
will depend, in large part, upon the availability of third-party reimbursement
for each of those indications, which is not assured. Market acceptance will
also depend upon the Company's ability to demonstrate that the Somnoplasty
System is an attractive alternative to existing procedures, which will depend
upon physicians' evaluations of the clinical safety and efficacy, ease-of-use,
reliability and cost-effectiveness of the Somnoplasty System in a clinical
setting. There can be no assurance that these products will adequately
demonstrate these characteristics or that they will receive market acceptance
among physicians. The Company believes that recommendations and endorsements by
influential physicians will be essential to market acceptance of its products.
There can be no assurance that such recommendations or endorsements will be
obtained. Broad use of the Somnoplasty System will require training for
physicians on how to perform the Somnoplasty procedure and educating physicians
regarding the advantages of the Somnoplasty System over currently available
surgical and non-surgical approaches. The time required to complete such
training and education could extend the sales cycle for the Company's products
and delay or preclude commercial sales and market acceptance. If the Company is
unable to achieve broad market acceptance of the Somnoplasty System for its
current and anticipated indications, the Company's business, financial
condition and results of operations would be materially adversely affected.
Patient acceptance may be affected by numerous factors, including the
possibility that the Somnoplasty procedure will require treatments on multiple
occasions. The clinical data submitted by the Company to the FDA with its
510(k) notification for the uvula and soft palate indicated that patients may
require anywhere from one to six treatments to significantly reduce snoring.
While the Company anticipates that most patients will only require one to three
treatments, factors such as poor training of the treating physician or improper
use of the Somnoplasty System by the treating physician could require more
treatments. The need for multiple treatments and the associated increased cost
of the procedure could have a significant adverse effect on patient acceptance
and on the Company's business, financial condition and results of operations.
Patient acceptance of the Somnoplasty System for the treatment of snoring and
other potential indications will also depend in part upon physician
recommendations as well as other factors, including the effectiveness and
reliability of the procedure as compared to existing surgical and non-surgical
procedures. There can be no assurance that the Somnoplasty System will be
accepted by the patient community or that market demand for such system will be
sufficient to allow the Company to achieve profitable operations. In addition,
publicity arising from any adverse outcome or other problem occurring in the
treatment of a Somnoplasty patient for any reason, particularly during the
early phase of the commercialization of the Somnoplasty System, could
materially adversely affect patient demand for the procedure. Failure of the
Somnoplasty System, for whatever reason, to achieve significant patient
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON STRATEGIC AND DISTRIBUTOR RELATIONSHIPS
The Company's future success will depend, in part, on its ability to enter into
and successfully develop strategic and distributor relationships with other
parties with respect to the marketing and distribution of its products. For
instance, in April 1997, the Company and Medtronic entered into a three-year
agreement pursuant to which the Somnoplasty System will be distributed
exclusively by Medtronic in the European Union, Australia, Southeast Asia and
certain other areas. The Company is currently seeking to enter into strategic
or distributor relationships in other markets, such as Japan. The success of
the Company's current relationship with Medtronic, and prospects for future
strategic or distributor relationships, will depend on the other parties'
interests in the specific products involved and their willingness and ability
to perform the role contemplated by the Company. The Company may have limited
or no control over the resources that any particular strategic party or
distributor devotes to its relationship with the Company. To date, the Company
has not generated material revenue from its relationship with Medtronic, and
there can be no assurance that its relationship with Medtronic will be
successful. Moreover, there can be no assurance that the Company will be
successful in locating
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qualified parties with whom to enter into additional strategic or distributor
relationships or that any such relationships can be maintained or will
ultimately prove beneficial to the Company. In the event the Company is not
successful in developing such additional relationships, or if such
relationships or the Medtronic relationship were not to prove successful, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business--Sales, Marketing and
Distribution."
LIMITED SALES AND MARKETING EXPERIENCE; RELIANCE ON INTERNATIONAL SALES
The Company has only limited experience selling and marketing the Somnoplasty
System for the treatment of snoring and does not have any experience selling
and marketing its products in commercial quantities. The Company intends to
sell the Somnoplasty System in the United States to private practices, clinics,
hospitals and sleep centers through a direct sales force. The Company currently
has a small direct sales force that covers certain regions of the United States
and intends to increase its sales and marketing force in the near future to
accelerate commercialization of the Somnoplasty System throughout the United
States. There can be no assurance that the Company will be successful in
building an effective sales and marketing force, that it will be cost-effective
or that it will ultimately prove successful in selling the Somnoplasty System
on a direct basis in the United States. Market acceptance of the Somnoplasty
Systems will also require the Company to demonstrate that the cost of its
products and procedures are competitive with currently available alternatives.
The use of the Somnoplasty System requires the healthcare provider to make an
up-front investment in an RF generator. There can be no assurance that the
Company will successfully generate sufficient demand for the Somnoplasty System
at the prices at which it currently offers its generators and disposable
devices. In the event the required investment were to preclude the Company from
placing sufficient quantities of generators, the Company's ability to sell
disposable devices would be limited, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company anticipates that a significant portion of its future revenues will
relate to international sales of the Somnoplasty System through strategic and
distributor relationships. International sales of the Somnoplasty System are
subject to numerous risks. Distribution, pricing and marketing structures, as
well as regulatory requirements, vary significantly from country to country.
Additionally, such sales can be adversely affected by limitations or
disruptions caused by the imposition of government controls, export licenses,
political instability, trade restrictions, changes in foreign tax laws or
tariffs or other trade regulations, difficulties coordinating communications
among and managing international operations, the risk that distributors will
fail to effectively promote the Company's products and the risk of financial
instability of distributors. Additionally, the Company's business, financial
condition and results of operations may be adversely effected by fluctuations
in overseas economic conditions and international currency exchange rates, as
well as by increases in duty rates, difficulty in obtaining export licenses,
constraints on its ability to maintain or increase prices and competition.
There can be no assurance that the Company will be able to successfully
commercialize the Somnoplasty System or any of its future products in any
international market, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Uncertainty of FDA or Other Regulatory Clearances or Approvals; Government
Regulation;" "Business--Sales, Marketing and Distribution."
UNCERTAINTY OF FDA OR OTHER REGULATORY CLEARANCES OR APPROVALS; GOVERNMENT
REGULATION
The preclinical and clinical testing, manufacturing, labeling, distribution and
promotion of the Company's products are subject to extensive and rigorous gov-
ernment regulation in the United States and other countries. Noncompliance with
applicable requirements can result in enforcement action by the FDA or compa-
rable foreign regulatory bodies including, among other things, fines, injunc-
tions, civil penalties, recall or seizure of products, refusal to grant
premarket clearances or approvals, withdrawal of marketing approvals and crim-
inal prosecution.
United States
The Company is prohibited from marketing its products in the United States
unless it obtains 510(k) clearance or premarket approval ("PMA") from the FDA.
The Company believes that it usually takes from four to 12 months from submis-
sion to obtain 510(k) clearance, but can take longer. The process of obtaining
PMA approval is much more costly, lengthy and uncertain. In any event, there
can be no assurance that 510(k) clearance or PMA approval will ever be
obtained.
The Somnoplasty System received 510(k) clearance on July 17, 1997 for the
intended use of coagulation (thermal ablation, tissue volume reduction) of soft
tissue, including the uvula and soft palate, and reduction in the severity of
snoring in some individuals. The Company intends to seek 510(k) clearance of
the Somnoplasty System for other indications, including
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reduction of enlarged turbinates, treatment of OSA associated with blockage
caused by the tongue and treatment of other upper airway obstructions, some of
which are associated with OSA. These future submissions likely will need to
include clinical trial data. There can be no assurance, however, that these new
indications will receive 510(k) clearance in a timely fashion, or at all.
Delays in market introduction resulting from the 510(k) clearance process could
materially adversely effect the Company's business, financial condition and
results of operations. If the FDA determines that any of the new indications is
not eligible for 510(k) clearance, the Company will need to seek PMA approval,
which is a much more complex, expensive and lengthy process. There can be no
assurance that the Company will submit a PMA application for any such indica-
tions or that, once submitted, the PMA application will be accepted for filing,
found approvable, or, if found approvable will not include unfavorable restric-
tions.
A clinical trial in support of a 501(k) submission or PMA application generally
requires an Investigational Device Exemption ("IDE") application approved in
advance by the FDA for a limited number of patients. If a device presents a
"nonsignificant risk" to the patient, a sponsor may begin the clinical trial
after obtaining approval for the study by one or more appropriate institutional
review boards ("IRBs") without the need for FDA approval. The Company is
sponsoring several clinical trials which have been determined by the IRBs at
the participating institutions to be nonsignificant risk studies. There can be
no assurance, however, that the FDA would agree with these determinations and
not require the Company to obtain FDA approval of IDEs before continuing the
studies. Submission of an IDE application does not give assurance that the FDA
will approve the IDE application and, if it is approved, there can be no
assurance that the FDA will determine that the data derived from these studies
support the substantial equivalence or the safety and efficacy of the device or
warrant the continuation of clinical studies. The Company's failure to adhere
to regulatory requirements generally applicable to clinical trials could have a
material adverse effect on the Company's business, financial condition and
results of operations, including an inability to obtain marketing clearance or
approval for its products.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals will be subject to pervasive and continuing regulation
by the FDA and certain state agencies. The Company will be subject to routine
inspection by the FDA and the California Department of Health Services ("CDHS")
and will have to comply with the host of regulatory requirements that usually
apply to medical devices marketed in the United States, including labeling
regulations, the Quality System Regulation ("QS Reg.")(which includes elaborate
testing, control, documentation and other quality assurance procedures), the
Medical Device Reporting ("MDR") regulation (which requires a manufacturer to
report to the FDA certain types of adverse events involving its products) and
the FDA's prohibitions against promoting products for unapproved or "off-label"
uses. The Company's failure to comply with applicable regulatory requirements
could result in enforcement action by the FDA, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company also is subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
hazardous substance disposal. There can be no assurance the Company will not be
required to incur significant costs to comply with such laws and regulations in
the future or that such laws or regulations will not have a material adverse
effect upon the Company's business, financial condition and results of
operations.
European Union
The Company will be required to comply with the applicable quality system stan-
dards and directives in order to produce its products for sale in the European
Union. The Company's future success will depend in part on its ability to manu-
facture its products in a timely, cost-effective manner and in compliance with
ISO 9001 and other regulatory requirements. The Company's manufacturing facili-
ties are subject to ongoing periodic inspection by regulatory authorities.
Sales of medical device products outside the United States are subject to for-
eign regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Failure to comply with foreign regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government Regu-
lation."
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UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND RELATED MATTERS
The Company believes that its products will generally be purchased by private
practices, clinics, hospitals and sleep centers. In the United States, the
purchasers of medical devices generally rely on Medicare, Medicaid, private
health insurance plans, health maintenance organizations and other sources of
reimbursement for health care costs ("Third-Party Payors") to reimburse all or
part of the cost of the procedure in which the medical device is being used.
Certain Third Party Payors are moving toward a managed-care system in which
they contract to provide comprehensive health care for a fixed cost per person.
The fixed cost per person established by these Third-Party Payors may be
independent of the practice's cost incurred for the specific case and the
specific devices used. Medicare and other Third-Party Payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products.
In the United States, the Company does not anticipate that the Somnoplasty
System will be subject to reimbursement for the treatment of snoring. Tradi-
tionally, sufferers of snoring have paid for surgical and non-surgical treat-
ment and devices directly. However, the treatment of OSA and outpatient sur-
gical procedures for the uvula, soft palate and turbinates are commonly reim-
bursed by most carriers and resection of the tongue is reimbursed as an inpa-
tient procedure.
The Company's strategy is to pursue reimbursement for the Somnoplasty System
for treatment of enlarged turbinates, tonsils and base of the tongue and OSA,
if it is cleared for such indications by the FDA, based on physician endorse-
ment and the demonstration of improved quality of life for specific patient
groups. Quality of life issues will be included in the Company's clinical
trials to provide data in support of this reimbursement strategy. There can be
no assurance that the Company will be able to demonstrate improvement in
quality of life or that reimbursement will ever be available for the Company's
products. The Company's clinical sites do not reimburse the Company for
Somnoplasty System generators or disposable devices.
Because the Company's devices are currently under development for treatment of
enlarged turbinates, tonsils and base of the tongue and OSA and have not been
submitted for FDA clearance or approval for such indications, uncertainty
exists regarding the availability of third-party reimbursement for procedures
that would use the Company's devices for such purposes. Failure by private
practices, clinics, hospitals, sleep centers and other potential users of the
Company's devices to obtain sufficient reimbursement from Third-Party Payors
for the procedures in which the Company's devices are intended to be used could
have a material adverse effect on the Company's business, financial condition
and results of operations.
International market acceptance of the Company's products currently being
commercialized and those under development may be dependent, in part, upon the
availability of reimbursement within prevailing health care payment systems.
Reimbursement and health care payment systems in international markets vary
significantly by country, and include both government sponsored health care and
private insurance. The Company does not anticipate that use of the Somnoplasty
System for treatment of snoring may be a reimbursable expense. The Company does
believe that various levels of reimbursement will be available in international
markets for treatment of enlarged turbinates, tonsils and the base of the
tongue and OSA; however, there can be no assurance that any international
reimbursement approvals will be obtained in a timely manner, if at all. Failure
to receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.
The Company believes that in the future, reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both domestic and international, to reduce the cost of products and
services, including the Company's existing products and products currently
under development by it. There can be no assurance that third-party
reimbursement and coverage will be available or adequate in either the United
States or international markets or that future legislation, regulation or
reimbursement policies of Third-Party Payors will not otherwise adversely
affect the demand for the Company's existing products or products currently
under development by it or its ability to sell its products on a profitable
basis. The unavailability of Third-Party Payor coverage or the inadequacy of
reimbursement could have a material adverse effect on the Company's business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE AND RISK OF TECHNOLOGICAL OBSOLESCENCE
The medical device industry is characterized by rapid and significant
technological change. The Company's future success will depend in large part on
the Company's ability to continue to respond to such changes. There can be no
assurance that the Company will be able to respond to such changes or that new
or improved competing products will not be developed that render the
Somnoplasty System non-competitive. Product research and development will
require substantial
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<PAGE>
expenditures and will be subject to inherent risks, and there can be no
assurance that the Company will be successful in developing or improving
products that have the characteristics necessary to effectively treat
particular upper airway obstructions or that any new products introduced will
receive regulatory clearance or approval or will be successfully
commercialized. See "Business--Research and Development."
HIGHLY COMPETITIVE MARKET; RISK OF COMPETING TREATMENT APPROACHES
The medical device industry is subject to intense competition. The market for
products designed to treat upper airway disorders is highly competitive, and
the Company expects competition to increase. Accordingly, the Company's future
success will depend in part on its ability to respond quickly to medical and
technological change and user preference through the development and introduc-
tion of new products that are of high quality and that address patient and sur-
geon requirements. In the treatment of snoring, the Somnoplasty System is sub-
ject to intense competition from existing products, such as nasal dilators and
oral appliances, and surgical procedures, such as LAUP. The U.S. market for the
treatment of enlarged turbinates, a market which the Company intends to enter
in the near future, is dominated by over-the-counter treatments, such as nasal
sprays, and surgical procedures, such as turbinectomies. The U.S. market for
products for the treatment of OSA, a market which the Company hopes to enter in
the future, is currently dominated by CPAP products produced by Healthdyne
Technologies Inc., Nellcor Puritan Bennett, Inc., a wholly owned subsidiary of
Mallinckrodt Inc., ResMed Inc. and Respironics, Inc. There can be no assurance
that the Somnoplasty System will successfully compete with or replace any
existing products for these or other indications. Most of the Company's compet-
itors and potential competitors have greater financial, research and develop-
ment, manufacturing and sales and marketing resources than the Company. In
addition, some of the Company's competitors and potential competitors sell
additional lines of products, and therefore can bundle products to offer higher
discounts or offer rebates or other incentive programs to gain a competitive
advantage. The Company's inability to compete effectively against existing or
future competitors would have a material adverse effect on its business, finan-
cial condition and results of operations. See "Business--Competition."
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
The Company currently manufactures its devices in limited quantities for sales
and clinical trials. Each device is assembled and tested by the Company prior
to sterilization. The manufacturing process consists primarily of assembly of
internally manufactured and purchased components and subassemblies, and certain
processes are performed in a clean room environment. The Company has no
experience manufacturing its products in the volumes or with the yields that
will be necessary for the Company to achieve significant commercial sales, and
there can be no assurance that the Company can establish high-volume
manufacturing capacity or, if established, that the Company will be able to
manufacture its products in high volumes with commercially acceptable yields.
While the Company believes that its current facility will be adequate to
support its commercial manufacturing activities in the near term, the Company
may be required to expand its manufacturing facilities to commence large-scale
manufacturing. The Company's inability to successfully manufacture or
commercialize its devices in a timely matter could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Raw materials, components and subassemblies are purchased from various
qualified suppliers and are subject to stringent quality specifications and
inspections. The Company conducts quality audits of its key suppliers, several
of which are experienced in the supply of components to manufacturers of
medical devices. None of the Company's suppliers of components for its
disposable devices is contractually obligated to continue to supply the
Company, nor is the Company contractually obligated to purchase such devices
from a particular supplier. For certain of these components and subassemblies,
there are relatively few alternative sources of supply, and establishing
additional or replacement suppliers for such components and subassemblies could
not be accomplished quickly.
The Company has created manufacturing policies and procedures to accommodate
United States and international inspection requirements. The Company is
required to comply with QSR Reg. standards in order to produce products for
sale in the United States. The QSR Reg. requires, among other things, pre-
production design controls, purchasing controls and maintenance of service
records for medical device companies. The QSR Reg. is expected to increase the
cost of complying with GMP and related requirements. The Company anticipates an
inspection by the CDHS in the near future, and if the Company fails to pass
such inspection, the Company may not receive a Device Manufacturing License
from the CDHS. Somnus has been certified under the ISO 9001 by TUV Essen, a
German Notified Body, which requires that the Company pass annual inspections
to maintain such certification and produce products for sale within the
European Union. Any failure of the Company to comply with applicable
regulations, standards and directives may result in the Company being required
to take corrective actions, such as modification of its policies and
procedures. Pending such corrective actions, the Company could be unable to
manufacture or ship any products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
See "Business--Facilities."
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DEPENDENCE ON SINGLE-SOURCE SUPPLIER
The Company purchases its 215 RF Generator, currently its only commercially
available generator, as a finished assembly from a single-source supplier. The
Company is in the process of developing two additional generators, one of which
will be assembled by the Company, with the same single-source supplier acting
as the vendor for the RF subassembly, and the other of which will be
manufactured entirely by the Company. However, the Company expects to continue
to purchase the 215 RF Generator from the single-source supplier through at
least mid-1998. There can be no assurance that the generator obtained from the
single-source supplier will continue to be available in adequate quantities or,
if required, that the Company will be able to locate alternative sources of
generators on a timely and cost-effective basis. To date, the Company has not
experienced significant adverse effects resulting from any shortage of
generators. However, there can be no assurance that the single-source supplier
will meet the Company's future requirements for timely delivery of generators
of sufficient quality and in sufficient quantity. The 215 RF Generator
currently takes several months to procure, and a significant increase of orders
could lead to significant delays and generator shortages. Such delays or
shortages, particularly as the Company scales up its manufacturing activities
in support of direct U.S. sales and international distributor orders, would
have a material adverse effect on its business, financial condition and results
of operations. See "Business--Manufacturing."
DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
In the United States, the Company has three issued patents, three allowed pat-
ents and an additional 30 pending patent applications. The Company also has one
issued foreign patent and 18 pending foreign patent applications. These patents
and patent applications relate to the Company's RF devices and methods for
reduction of tissue in the uvula, soft palate, tongue and tonsils, and design
of its generators and disposable devices. In addition, the Company may also
selectively license patents owned by others which it believes will complement
the technology and increase the value and strength of its intellectual property
portfolio, although it has not done so to date. The Company's strategy has been
to actively pursue patent protection in the United States and foreign jurisdic-
tions for all upper airway disorders that can benefit from use of the
Somnoplasty System.
The patent and trade secret positions of medical device companies, including
those of the Company, are uncertain and involve complex and evolving legal and
factual questions. The coverage sought in a patent application either can be
denied or significantly reduced before or after the patent is issued.
Consequently, there can be no assurance that any patents from pending
applications or from any future patent application will be issued, that the
scope of the patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Since patent
applications are secret until patents are issued in the United States, or
corresponding applications are published in other countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to file patent applications for such inventions. In addition, there can be no
assurance that competitors, many of which have substantial resources, will not
seek to apply for and obtain patents that will prevent, limit or interfere with
the Company's ability to make, use or sell its products either in the United
States or in international markets. Further, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States. Litigation or regulatory
proceedings, which could result in substantial cost and uncertainty to the
Company, may also be necessary to enforce patent or other intellectual property
rights of the Company or to determine the scope and validity of other parties'
proprietary rights. There can be no assurance that the Company will have the
financial resources to defend its patents from infringement or claims of
invalidity.
The Company also relies upon unpatented proprietary technology, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
or disclose the Company's proprietary technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology. The
Company's policy is to require each of its employees, consultants,
investigators and advisors to execute a confidentiality agreement upon the
commencement of an employment or consulting relationship with the Company.
These agreements generally provide that all inventions conceived by the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not be disclosed to third
parties except in specified circumstances. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information.
Recently, Public Law 104-208 was signed into law in the United States and
limits the enforcement of patents relating to the performance of surgical or
medical procedures on a body. This law precludes medical practitioners and
health care
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<PAGE>
entities, who practice these procedures, from being sued for patent infringe-
ment. Therefore, depending upon how these limitations are interpreted by the
courts, they could have a material adverse effect on the Company's ability to
enforce any of its proprietary methods or procedures deemed to be surgical or
medical procedures on a body.
In addition, patent applications in the United States and foreign jurisdictions
are maintained in secrecy for a period after filing. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries
and the filing of related patent applications. Although the Company has
conducted searches of certain patents issued to other companies, research and
academic institutions and others, patents issued and patent applications filed
in the United States or internationally relating to medical devices are
numerous, and there can be no assurance that current and potential competitors
and other third parties have not filed, or in the future will not file
applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. In the event any pending
applications provide proprietary rights to third parties relating to products
or processes used or proposed to be used by the Company, the Company may be
required to obtain licenses to patents or proprietary rights of others.
The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property rights,
whether with or without merit, could be time-consuming and expensive and could
divert the Company's technical and management personnel. The Company may be
involved in litigation to defend against claims of infringement by the Company,
to enforce patents issued to the Company or to protect trade secrets of the
Company. If any relevant claims of third-party patents are held as infringed
and not invalid in any litigation or administrative proceeding, the Company
could be prevented from practicing the subject matter claimed in such patents
or would be required to obtain licenses from the patent owners of each such
patent or to redesign its products or processes to avoid infringement. In
addition, in the event of any possible infringement, there can be no assurance
that the Company would be successful in any attempt to redesign its products or
processes to avoid such infringement or in obtaining licenses on terms
acceptable to the Company, if at all. Accordingly, an adverse determination in
a judicial or administrative proceeding or failure by the Company to redesign
its products or processes or to obtain necessary licenses could prevent the
Company from manufacturing and selling the Somnoplasty System, which would have
a material adverse effect on the Company's business, financial condition and
results of operations. Although, to date, the Company has not been involved in
any litigation, in the future, costly and time-consuming litigation brought by
the Company may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others.
ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company has expended and will continue to expend substantial funds for
research and development, clinical testing, planned clinical investigations,
capital expenditures, manufacturing and marketing of its products. The timing
and amount of spending of such capital resources is difficult to predict
accurately and will depend upon several factors, including the progress of its
research and development efforts and planned clinical investigations, competing
technological and market developments, the receipt of regulatory clearances or
approvals, commercialization of products currently under development and market
acceptance and demand for the Company's products. To the extent required, the
Company may seek to obtain additional funds through equity or debt financing,
through collaborative or other arrangements with other companies and from other
sources. If additional funds are raised by issuing equity securities, further
dilution to stockholders could occur. There can be no assurance that additional
financing will be available when needed or on terms acceptable to the Company.
If adequate funds are not available, the Company could be required to delay
development or commercialization of the Somnoplasty System for certain
indications, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to commercialize
for itself or to reduce the marketing, customer support or other resources
devoted to certain of its products, each of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds," "Dilution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
MANAGEMENT OF GROWTH
Significant future growth in the Company's sales and expansion in the scope of
its operations, should they occur, may place considerable strain on the
Company's management, financial, manufacturing and other capabilities,
procedures and controls. In particular, the Company will be required in the
near term to improve and expand its financial capabilities through the addition
of qualified personnel and the enhancement of its financial reporting systems.
The Company hired a Chief Financial Officer in August 1997 and expects to hire
additional financial, accounting and other personnel in 1997. There can be no
assurance that any existing or additional capabilities, procedures or controls
will be adequate to support
14
<PAGE>
the Company's operations or that its capabilities, procedures or controls will
be designed, implemented or improved in a timely and cost-effective manner.
Failure to implement, improve and expand such capabilities, procedures and
controls in an efficient manner could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends in significant part upon the continued
service of certain key scientific, technical and management personnel and its
continuing ability to attract and retain highly qualified scientific, technical
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain its key scientific, technical
and managerial personnel or that it can attract, assimilate or retain other
highly qualified scientific, technical and managerial personnel in the future.
The loss of key personnel, especially if without advanced notice, or the
inability to hire or retain qualified personnel could have a material adverse
effect upon the Company's business, results of operations and financial
condition.
PRODUCT LIABILITY RISK; POSSIBLE INSUFFICIENCY OF INSURANCE
The Company's business may involve the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have a material adverse effect on the Company. The
Company maintains product liability insurance at coverage levels which it deems
commercially reasonable; however, there can be no assurance that product
liability or other claims will not exceed such insurance coverage limits or
that such insurance will continue to be available on commercially acceptable
terms, or at all. The Company intends to periodically evaluate, depending on
changing circumstances, whether or not to obtain any additional product
liability insurance coverage prior to the time that the Company engages in any
extensive marketing of the Somnoplasty System. Even if the Company obtains
additional product liability insurance, there can be no assurance that it would
prove adequate or that a product liability claim, insured or uninsured, would
not have a material adverse effect on the Company's business, financial
condition and results of operations. Even if a product liability claim is not
successful, the time and expense of defending against such a claim may
adversely affect the Company's business, financial condition and results of
operations.
CONTROL BY EXISTING STOCKHOLDERS
After the consummation of the Offering, current stockholders, including certain
executive officers and directors of the Company and their affiliates, will own
approximately % of the Company's outstanding Common Stock. As a result, these
stockholders will, to the extent they act together, continue to have the
ability to control matters requiring the approval of the Company's stockhold-
ers, including the election of the Company's Board of Directors. See "Principal
Stockholders."
BROAD DISCRETION AS TO USE OF PROCEEDS
Of the approximately $ million net proceeds from the Offering, approximately
$ million, or %, has not currently been allocated for specific uses by the
Company. In addition, the amounts allocated for specific uses may vary signifi-
cantly depending on numerous factors, including the progress of the Company's
clinical trials and actions relating to regulatory matters, and the costs and
timing of expansion of sales and marketing and manufacturing activities, and
hence the Company's management will retain broad discretion in the allocation
of the net proceeds. See "Use of Proceeds."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Upon consummation of the Offering, certain provisions of the Company's Amended
and Restated Certificate of Incorporation and Bylaws may have the effect of
making it difficult for a third party to acquire, or of discouraging a third
party from attempting to acquire, control of the Company. Such provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. Certain of these provisions will
allow the Company to issue Preferred Stock without any vote or further action
by the stockholders, provide for a classified board of directors, eliminate the
right of stockholders to call special meetings of stockholders or to act by
written consent without a meeting and eliminate cumulative voting in the
election of directors. These provisions may make it difficult for stockholders
to take certain corporate actions and could have the effect of delaying or
preventing a change in control of the Company. See "Management" and
"Description of Capital Stock."
15
<PAGE>
POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock (including shares
issuable upon the exercise of outstanding options or warrants) in the public
market after the Offering could materially and adversely affect the market
price of the Common Stock. Such sales might also make it more difficult for the
Company to sell equity securities or equity-related securities in the future at
a time and price that the Company deems appropriate. Of the shares
of Common Stock the Company will have outstanding upon the consummation of the
Offering, the shares offered hereby will be freely tradeable as of
the date of this Prospectus by persons other than "affiliates" of the Company
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"). The remaining 8,749,297 shares (the
"Restricted Shares") of Common Stock are "restricted securities" within the
meaning of the Securities Act. The holders of the Restricted Shares have
entered into lock-up agreements (the "Lock-up Agreements") under which such
holders have agreed not to sell, directly or indirectly, or otherwise dispose
of any of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent of J.P. Morgan Securities Inc.
J.P. Morgan Securities Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to the Lock-up
Agreements. As a result of the Lock-up Agreements and the provisions of Rules
144 and 701 promulgated under the Securities Act, upon consummation of the
Offering, the Restricted Shares will be available for sale in the public market
as follows: (i) no Restricted Shares will be eligible for immediate sale on the
date of this Prospectus, (ii) 7,965,351 Restricted Shares will be eligible for
sale 180 days after the date of the Prospectus upon expiration of the Lock-up
Agreements and (iii) the remaining 783,946 Restricted Shares will be eligible
for sale at various times over a period less than one year following the
completion of the Offering, subject to volume limitations pursuant to Rule 144.
As of August 31, 1997, 2,242,971 shares were issuable upon exercise of
currently outstanding options, all of which are subject to 180 day lock-up
agreements. Of these shares, 712,517 will be vested 180 days after the date of
the Prospectus. As of August 31, 1997, 62,500 shares were issuable upon
exercise of currently outstanding warrants, all of which are subject to the
Lock-up Agreements. All of these shares will become eligible for sale in the
public market 180 days after the date of this Prospectus upon expiration of the
Lock-up Agreements. After the Offering, the holders of approximately 5,944,858
shares of Common Stock (including up to 62,500 shares of Common Stock issuable
upon exercise of outstanding warrants as of the date of this Prospectus) will
be entitled to certain demand and piggyback rights with respect to registration
of such shares under the Securities Act upon termination of the Lock-up
Agreements. If such holders, by exercising their demand registration rights,
cause a large number of securities to be registered and sold in the public
market, such sales could have an adverse effect on the market price for the
Company's Common Stock. In addition, the Company intends to file a Registration
Statement on Form S-8 to register shares of Common Stock issuable upon exercise
of options granted under the 1996 Stock Plan and 1997 Director Option Plan and
sold pursuant to the 1997 Employee Stock Purchase Plan. Following the filing of
the S-8, shares of Common Stock issued under such plans will be available for
sale in the public market, subject to the Rule 144 volume limitations as
applicable to affiliates. See "Description of Capital Stock--Registration
Rights of Certain Holders," "Shares Eligible for Future Sale" and
"Underwriting."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK; DILUTION
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop and be
sustained upon the completion of the Offering, or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock has been determined by
negotiations between the Company and the Underwriters. As such, the initial
public offering price is not necessarily related to the Company's net worth or
any other established criteria of value and may not bear any relationship to
the market price of the Common Stock following the completion of the Offering.
The market prices for securities of medical device companies have historically
been highly volatile. Announcements of technological innovations or new
products by the Company or its competitors, developments concerning proprietary
rights, including patents and litigation matters, publicity regarding actual or
potential results with respect to products under development by the Company or
others, regulatory developments in both the United States and foreign countries
and public concern as to the safety of new technologies, changes in financial
estimates by securities analysts or failure of the Company to meet such
estimates and other factors may have a significant impact on the market price
of the Common Stock. In addition, the Company believes that fluctuations in its
operating results may cause the market price of its Common Stock to fluctuate,
perhaps substantially. Purchasers of shares of Common Stock offered hereby will
experience an immediate dilution of $ in the net tangible book value per
share of their Common Stock from the assumed initial public offering price of
$ per share. See "Dilution" and "Underwriting."
16
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in January 1996. References in this
Prospectus to "Somnus" and the "Company" refer to Somnus Medical Technologies,
Inc., a Delaware corporation. The Company's principal executive offices are
located at 285 N. Wolfe Road, Sunnyvale, California 94086, and its telephone
number at that address is (408) 773-9121.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be approxi-
mately $ million ($ million if the Underwriters' over-allotment option is
exercised in full), after deducting the underwriting discount and offering
expenses payable by the Company.
The Company anticipates that it will use approximately $ million of the net
proceeds for research and development, clinical trials and regulatory matters
and approximately $ million to develop the Company's sales and marketing
capabilities. The Company intends to use the balance of the net proceeds,
approximately $ million ($ million if the Underwriters' over-allotment
option is exercised in full), for other general corporate purposes, including
for acquisitions or licenses of technologies or products that complement the
business of the Company. As of the date of this Prospectus, the Company has no
agreements, arrangements or understandings with any third parties for any such
acquisitions or licenses. Pending such uses, the Company intends to invest the
net proceeds of the Offering in interest bearing, investment grade financial
instruments.
The foregoing represents the Company's best estimate of its allocation of the
net proceeds of the Offering based upon the current state of its business oper-
ations, its current plans and current economic and industry conditions and is
subject to reallocation among the categories listed above or to new categories.
The amounts actually expended for each purpose may vary significantly depending
upon numerous factors, including the progress of the Company's clinical trials
and actions relating to regulatory matters, and the costs and timing of expan-
sion of sales, marketing and manufacturing activities, and hence the Company's
management will retain broad discretion in the allocation of the net proceeds.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its inception.
The Company intends to retain any earnings to fund development of its business
and does not intend to pay any cash dividends in the foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June 30,
1997, (i) on a pro forma basis, after giving effect to the Preferred Stock
Conversion and the amendment of the Company's Restated Certificate of
Incorporation to provide for authorized capital stock consisting of 50,000,000
shares of Common Stock and 5,000,000 shares of undesignated Preferred Stock,
and (ii) on an as adjusted basis to give effect to the receipt by the Company
of the estimated net proceeds from the sale of shares of Common Stock
offered hereby at an assumed initial public offering price of $ per share,
after deducting the underwriting discount and estimated offering expenses
payable by the Company:
<TABLE>
<CAPTION>
======================
AS OF JUNE 30, 1997
----------------------
PRO FORMA AS ADJUSTED
In thousands, except share data --------- -----------
(UNAUDITED)
<S> <C> <C>
Current obligations under lease line of credit........... $ 373 $ 373
======= =======
Long-term obligations under lease line of credit......... $ 1,738 $ 1,738
------- -------
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding, pro forma and
as adjusted........................................... -- --
Common Stock, $0.001 par value; 50,000,000 shares
authorized; 8,566,901 shares issued and outstanding,
pro forma; shares issued and outstanding, as
adjusted(1)........................................... 8
Additional paid-in capital............................... 18,173
Deferred stock compensation.............................. (1,563) (1,563)
Accumulated deficit...................................... (7,644) (7,644)
------- -------
Total stockholders' equity........................... 8,974
------- -------
Total capitalization............................... $10,712 $
======= =======
</TABLE>
- -------
(1) Excludes as of June 30, 1997: (i) 1,891,700 shares of Common Stock issuable
upon exercise of outstanding stock options at a weighted average exercise price
of $0.29 per share, (ii) 504,845 shares of Common Stock available for future
grant under the 1996 Stock Plan and (iii) 62,500 shares of Common Stock issu-
able upon exercise of outstanding warrants at a weighted average exercise price
of $1.80 per share. Subsequent to June 30, 1997, the Company granted options to
purchase 745,000 shares of Common Stock at a weighted average exercise price of
$4.21. See "Management--Stock Plans," "Description of Capital Stock" and Note 8
of Notes to Consolidated Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997 was
approximately $8,974,000 or $1.05 per share of Common Stock. Pro forma net
tangible book value per share represents the Company's total tangible assets
less total liabilities, divided by the pro forma number of outstanding shares
of Common Stock (after giving effect to the Preferred Stock Conversion).
Dilution per share represents the difference between the amount per share paid
by investors in the Offering and the pro forma net tangible book value per
share after the Offering. After giving effect to the sale of shares in the
Offering at an assumed initial public offering price of $ per share and after
deducting the underwriting discount and estimated offering expenses, the pro
forma net tangible book value of the Company as of June 30, 1997 would have
been $ or $ per share. This represents an immediate increase in net tangible
book value of $ per share to existing stockholders and an immediate dilution in
net tangible book value of $ per share to new investors purchasing shares at
the assumed initial public offering price. The following table illustrates this
per share dilution:
<TABLE>
<CAPTION>
----------
<S> <C> <C>
Assumed initial public offering price............................ $
Pro forma net tangible book value before the Offering............ $1.05
Increase attributable to new investors...........................
-----
Pro forma net tangible book value after the Offering.............
----
Dilution to new investors........................................ $
====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997, the
difference between existing stockholders and new investors with respect to the
number of shares of Common Stock purchased from the Company, the total consid-
eration paid and the average price per share paid:
<TABLE>
<CAPTION>
-------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 8,566,901 % $17,323,000 % $2.02
New investors.................
--------- ------- ----------- -------
Total....................... 100.0% $ 100.0%
========= ======= =========== =======
</TABLE>
The foregoing computations assume no exercise of outstanding stock options or
warrants. Such computations exclude as of June 30, 1997: (i) 1,891,700 shares
of Common Stock issuable upon exercise of outstanding stock options at a
weighted average exercise price of $0.29 per share and (ii) 62,500 shares of
Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $1.80 per share. Subsequent to June 30, 1997, the
Company granted options to purchase 745,000 shares of Common Stock at a
weighted average exercise price of $4.21. To the extent outstanding options and
warrants are exercised, there will be further dilution to new investors. If all
options and warrants outstanding at and issued subsequent to June 30, 1997 were
exercised for cash, the pro forma net tangible book value per share immediately
after consummation of the Offering would be $ . See "Management--Stock
Plans."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for, and as of the end
of, the period ended December 31, 1996 are derived from the consolidated
financial statements of Somnus Medical Technologies, Inc. and its subsidiary,
which financial statements have been audited by Ernst & Young LLP, independent
auditors. These consolidated financial statements, and the report thereon, are
included elsewhere in this Prospectus. The selected consolidated financial data
set forth below as of June 30, 1997 and for the periods ended June 30, 1996 and
1997 were derived from unaudited consolidated financial statements of the
Company, which are included elsewhere in this Prospectus, and include, in the
opinion of the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position at that date and results of operations for those periods. The results
for the six months ended June 30, 1997 are not necessarily indicative of the
results for any future period. The selected consolidated financial data set
forth below is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
--------------------------------------
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 19, (JANUARY 19, SIX MONTHS
1996) TO 1996) TO ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
In thousands, except share data ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Total revenues.......................... $ -- $ -- $ 231
Manufacturing start-up costs and costs
of revenues............................ 403 60 959
---------- ---------- ----------
Gross loss.............................. (403) (60) (728)
Operating expenses:
Research and development.............. 1,303 306 2,051
Sales and marketing................... 237 62 593
General and administrative............ 1,252 363 1,347
---------- ---------- ----------
Total operating expenses................ 2,792 731 3,991
---------- ---------- ----------
Loss from operations.................... (3,195) (791) (4,719)
Other income, net....................... 98 5 172
---------- ---------- ----------
Net loss................................ $ (3,097) $ (786) $ (4,547)
========== ========== ==========
Pro forma net loss per share(1)......... $ (0.37) $ (0.11) $ (0.48)
========== ========== ==========
Shares used in computing pro forma net
loss per share(1)...................... 8,451,565 7,445,186 9,457,944
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
-------------------------
AS OF AS OF
DECEMBER 31, JUNE 30,
1996 1997
In thousands ------------ -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 8,829 $ 9,211
Working capital..................................... 7,982 8,359
Total assets........................................ 10,031 11,974
Long-term obligations under lease line of credit.... 773 1,738
Accumulated deficit................................. (3,097) (7,644)
Total stockholders' equity(2)....................... 8,353 8,974
</TABLE>
- -------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(2) No cash dividends have been declared with respect to the Company's Common
or Preferred Stock.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
Somnus designs, develops, manufactures and markets innovative medical devices
that utilize its proprietary RF technology for the treatment of upper airway
disorders. The Company's Somnoplasty System provides physicians with a suite of
products designed to offer minimally-invasive, curative treatment alternatives
for disorders of the upper airway, including snoring, OSA and enlarged
turbinates.
The Company has a limited history of operations that, to date, has consisted
primarily of research and development, product engineering, seeking clearance
of its products from the FDA, initial development of a direct sales force in
the United States and training Medtronic employees for distribution of the
Somnoplasty System in the European Union, Australia, Southeast Asia and certain
other areas. The Company commercially introduced the Somnoplasty System
internationally, through Medtronic, beginning in June 1997. One month later,
after receiving 510(k) clearance for the use of the Somnoplasty System to treat
snoring, the Company began direct sales of the Somnoplasty System in the United
States.
The Company is in the initial stages of building a direct sales force to cover
the United States and Canada. Presently the sales force consists of a Vice
President, Worldwide Sales, three regional sales managers and three sales
representatives. The Company anticipates significant short-term expenditures in
the development of its direct sales infrastructure. In addition to its
agreement with Medtronic, the Company will seek to enter into agreements for
product distribution in Japan and other international markets.
As of June 30, 1997, the Company has incurred cumulative losses from inception
of approximately $7.6 million. Moreover, the Company expects to incur signifi-
cant additional operating losses over the next several years due to expanded
research and development efforts, preclinical studies and clinical trials and
the development of its manufacturing and sales and marketing capabilities. The
Company's limited operating history makes accurate prediction of future oper-
ating results difficult or impossible.
Future revenues and results of operations may fluctuate significantly from
quarter to quarter or year to year and will depend upon numerous factors,
including the timing of regulatory clearances or approvals, the extent to which
the Company's products gain market acceptance, the scale-up of manufacturing
capabilities, the expansion of sales and marketing activities, competition, the
timing and success of new product introductions by the Company or its
competitors and the ability of the Company and its agents to market its
products in the United States and internationally. Accordingly, interim period
comparisons of the Company's operating results are not necessarily meaningful
and should not be relied upon as indicators of likely future performance or
annual operating results.
In the near term, a large portion of the Company's revenues is anticipated to
come from international sales to Medtronic. The Company's business and
financial results could be materially adversely affected in the event that
Medtronic was unable to market the Somnoplasty System effectively, anticipate
customer demand accurately or effectively manage international pricing and cost
containment pressures in health care. The Company's operations and financial
results could also be significantly affected by international factors,
including oversight by numerous regulatory agencies, changes in foreign
currency exchange rates and foreign economic and political conditions.
RESULTS OF OPERATIONS
Total revenues. The Company's revenues are currently derived from sales of its
Somnoplasty System, consisting of the 215 RF Generator and SP 1000 and SP 2000
disposable devices, to private practices, hospitals, clinics and sleep centers.
No revenues were recorded for the period from inception (January 19, 1996) to
December 31, 1996 ("fiscal 1996"). For the six months ended June 30, 1997, all
revenues, totaling $231,000, were attributable to sales to Medtronic. The Com-
pany expects that the sale of generators will constitute a significant per-
centage of the Company's total revenues in the near term as it builds an
installed base of users.
21
<PAGE>
Manufacturing start-up costs and costs of revenues. Manufacturing start-up
costs and costs of revenues were $403,000 in fiscal 1996 and $60,000 and
$959,000 for the periods ended June 30, 1996 and 1997, respectively. Manufac-
turing start-up costs and costs of revenues consists of raw materials, subas-
semblies and completed electronics, burdened labor, quality assurance and war-
ranty costs. The Company believes that manufacturing start-up costs and costs
of revenues will increase in absolute dollars but may fluctuate as a percentage
of revenues.
Research and development expenses. Research and development expenses were $1.3
million in fiscal 1996 and $306,000 and $2.1 million for the periods ended June
30, 1996 and 1997, respectively. Research and development expenses are com-
prised of salaries, prototype development costs and clinical trial and regula-
tory approval expenses. The increases between the comparison periods reflect
the increased expenditures incurred in the development of the Somnoplasty Sys-
tem, new development efforts for the generators and the disposable devices,
initiation and expansion of clinical trials and expenses associated with regu-
latory approvals in the United States, the European Union and Australia. The
1997 expenses include approximately $148,000 of non-cash stock compensation
charges resulting from stock option grants.
Sales and marketing expenses. Sales and marketing expenses were $237,000 in
fiscal 1996 and $62,000 and $592,000 for the periods ended June 30, 1996 and
1997, respectively. Sales and marketing expenses consist of salaries,
commissions, product training courses, advertising, promotional and sales
events expenses. The increase between the comparison periods reflects the
hiring of additional personnel, development of marketing literature and
campaigns, an extensive public relations effort to promote the Somnoplasty
System in conjunction with the product launch in June 1997 and additional
market research into new product areas. The 1997 expenses include $32,000 of
non-cash stock compensation charges resulting from stock option grants.
General and administrative expenses. General and administrative expenses were
$1.3 million for fiscal 1996 and $363,000 and $1.3 million for the periods
ended June 30, 1996 and 1997, respectively. General and administrative expenses
include executive salaries, professional fees, facilities overhead, accounting
and human resources and general office administration expenses such as rent and
facility costs. The increase between the comparison periods reflects the hiring
of additional personnel and the relocation of the Company to a 20,000 square
foot facility in March 1997 which required build-out, furnishing and an
enlarged support staff. The 1997 expenses include $25,000 of non-cash stock
compensation charges resulting from non-cash stock option grants.
Other income, net. Other income, net was $98,000 in fiscal 1996 and $5,000 and
$172,000 for the periods ended June 30, 1996 and 1997, respectively. The
increases were attributable to interest income earned by the Company on its
outstanding balance of cash and cash equivalents, invested from the proceeds of
the issuance of Preferred Stock, net of interest expense on the Company's lease
line of credit obligations.
Net loss. The net loss was $3.1 million for fiscal 1996 and $786,000 and $4.5
million for the periods ended June 30, 1996 and 1997, respectively. The Company
expects that its operating losses will continue for at least the next several
years, as the Company continues to invest substantial resources in product
development, manufacturing and sales and marketing.
INCOME TAXES
As of December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $3.0 million and $1.6 million, respectively. The
net operating loss carryforwards will expire in 2004, if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended (the "Code"), and similar
state provisions. The annual limitation may result in the expiration of the net
operating loss carryforwards before becoming available to reduce the Company's
federal income tax liabilities. As of December 31, 1996, the Company had
deferred tax assets of approximately $1.2 million, which have been fully offset
by a valuation allowance. Deferred tax assets relate primarily to the net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through June 30, 1997, the Company has financed its operations
primarily through the private placement of equity securities, bank loans, lease
lines of credit and stockholder loans. From inception, the Company has raised
approximately $16.4 million in net proceeds from private equity financings.
22
<PAGE>
Cash and cash equivalents at December 31, 1996 were $8.8 million compared to
$9.2 million at June 30, 1997. The increase was due to the proceeds raised from
the Company's issuance of Preferred Stock in April 1997, offset by net cash
used by operations in the period.
Net cash used in operating activities was approximately $2.3 million for fiscal
1996 and $195,000 and $4.3 million for the periods ended June 30, 1996 and
1997, respectively, resulting primarily from losses incurred during such peri-
ods. Net cash used in investing activities was approximately $1.3 million for
fiscal 1996 and $643,000 and $1.4 million for the periods ended June 30, 1996
and 1997, respectively, and was attributable to capital expenditures during
these periods. Net cash provided by financing activities was approximately
$12.4 million for fiscal 1996 and $2.1 million and $6.1 million for the periods
ended June 30, 1996 and 1997, respectively, attributable primarily to the sale
of equity securities in private placement transactions and drawings under the
lease line of credit.
The Company has recorded deferred stock compensation expense for the difference
between the exercise price and the deemed fair value for financial statement
presentation purposes of the Company's Common Stock, as determined by the Board
of Directors, for certain options granted during 1996 and 1997. The total
recorded deferred stock compensation through June 30, 1997 is $1.8 million. In
July and August 1997, additional options were granted which resulted in approx-
imately $2.7 million of additional deferred compensation. The Company amortized
deferred compensation expenses of approximately $22,000 for fiscal 1996 and
$205,000 for the six months ended June 30, 1997. The remainder of the deferred
stock compensation will be amortized over the corresponding vesting period of
each respective option, which is generally four years.
Long-term obligations consist of capital lease arrangements and secured
borrowings used to acquire capital equipment. Through June 30, 1997, the Com-
pany has entered into borrowings totaling $3.0 million under an equipment lease
line of credit, of which $861,000 remains available at June 30, 1997. The
borrowings bore interest at a weighted average interest rate of approximately
10% as of June 30, 1997 and are secured by substantially all of the assets of
the Company.
The Company anticipates that its existing resources, including the net proceeds
of the Offering, will enable the Company to maintain its current and planned
operations through fiscal 1999. However, there can be no assurance that the
Company will not require additional funding prior to such time. The Company's
future capital requirements will depend on many factors, including the ability
of the Company to establish and maintain strategic and distributor relation-
ships, the time and cost in obtaining regulatory approvals, competing techno-
logical and market developments, the cost of manufacturing and other factors.
There can be no assurance that additional financing to meet the Company's
funding requirements will be available as needed. If additional funds are
raised by issuing equity securities, substantial dilution to existing stock-
holders may result. Insufficient funds may require the Company to delay, scale
back or eliminate some or all of its research or development programs or to
relinquish rights to products at an earlier stage of development or on less
favorable terms than the Company would otherwise seek to obtain. The failure of
the Company to raise capital when needed would have a material adverse effect
on the Company's business, financial condition and results of operations.
23
<PAGE>
BUSINESS
COMPANY OVERVIEW
Somnus designs, develops, manufactures and markets innovative medical devices
that utilize its proprietary RF technology for the treatment of upper airway
disorders. The Company's Somnoplasty System provides physicians with a suite of
products designed to offer minimally-invasive, curative treatment alternatives
for disorders of the upper airway, including snoring, OSA and enlarged
turbinates. The Somnoplasty System shrinks tissue in the upper airway by
utilizing automated RF generators and a suite of disposable, single-use, needle
electrode devices which deliver controlled thermal energy to obstructed areas,
while protecting the delicate mucosal lining of the tissue. The Company
received 510(k) clearance in July 1997 for the use of the Somnoplasty System in
the treatment of snoring. The Company has also received the CE Mark for use of
the Somnoplasty System in the treatment of upper airway disorders. The Company
believes that the clinical and patient benefits of the Somnoplasty System
include its effectiveness, quick procedure time, outpatient setting, use of
local anesthesia and low post-procedural pain. These benefits represent a
significant advancement to physicians and patients over existing treatment
options, which, depending upon the disorder, are highly-invasive, non-curative
and/or expensive. To date, the Somnoplasty procedure has been performed for the
treatment of snoring on over 85 patients.
The Company is developing a direct sales force to market its products in the
United States and Canada. The Company intends to market the Somnoplasty System
primarily to ear, nose and throat physicians, oral and maxillofacial surgeons,
pulmonologists, sleep medicine specialists and other physicians who treat upper
airway disorders. There are approximately 9,000 ear, nose and throat
physicians, 5,000 oral and maxillofacial surgeons, 7,000 pulmonologists and
1,500 sleep disorder medical centers in the United States. In April 1997, the
Company entered into a three-year distribution arrangement with Medtronic for
the exclusive distribution of the Somnoplasty System in the European Union,
Australia, Southeast Asia and certain other areas. The Company will seek to
enter into additional agreements for product distribution in Japan and other
international markets. The Company also intends to establish a marketing
program directed at consumers to further establish awareness of the Somnoplasty
procedure.
Currently, Somnus has commercially available or in development three models of
RF generators and five disposable devices designed to treat a variety of upper
airway disorders. In the United States, the Company currently has three issued
patents, three allowed patents and an additional 30 pending patent applica-
tions. The Company also has one issued foreign patent and 18 pending foreign
patent applications.
BUSINESS STRATEGY
The Company's strategy is to establish the Somnoplasty System, which utilizes
its proprietary RF technology, as the standard of care for the treatment of a
variety of upper airway disorders.The following are key elements of the
Company's strategy:
Provide Minimally-Invasive, Curative Treatments for Upper Airway Disorders. The
Somnoplasty System provides physicians with a suite of products designed to
offer minimally-invasive, curative treatment alternatives for a number of upper
airway disorders. The Company believes that the clinical and patient benefits
of the Somnoplasty System include its effectiveness, quick procedure time, out-
patient setting, use of local anesthesia and low post-procedural pain. These
benefits represent a significant advancement to physicians and patients over
existing treatment options, which, depending upon the disorder, are highly-
invasive, non-curative and/or expensive.
Pursue Additional Indications for the Somnoplasty System. Somnus received
510(k) clearance in July 1997 for the use of the Somnoplasty System for reduc-
tion of soft tissue, including the uvula and soft palate, for the treatment of
snoring. The Company received the CE Mark for treatment of upper airway disor-
ders in June 1997. The Company intends to seek 510(k) clearance of the
Somnoplasty System for new indications, including reduction of enlarged
turbinates, treatment of OSA associated with blockage caused by the tongue and
the treatment of other upper airway obstructions, some of which are associated
with OSA. The Company currently expects to file a 510(k) application for tissue
reduction in the turbinates in 1997 and has recently begun clinical trials for
use of the Somnoplasty System in the treatment of blockage caused by the
tongue.
Create Global Distribution through Direct Sales Force and Collaborative
Relationships. Somnus intends to create a direct sales and distribution capa-
bility in the United States, initially targeting the estimated 9,000 ear, nose
and throat physicians and 5,000 oral and maxillofacial surgeons. In markets
outside the United States, the Company initially intends to establish relation-
ships with leading medical device distributors that can provide the Company
with access to an established network
24
<PAGE>
for the marketing and distribution of the Somnoplasty System. As part of this
strategy, Somnus has an agreement with Medtronic to distribute its products in
the European Union, Southeast Asia, Australia and certain other areas and will
seek to enter into additional agreements for product distribution in Japan and
other international markets.
Acquire and License Complementary Technologies and Products. Somnus intends to
pursue the acquisition and license of technologies and products in an effort to
complement its core business and technological platform. The Company believes
acquisitions may allow it to broaden its product line, leverage its distribu-
tion network and help accelerate the market acceptance and penetration of the
Somnoplasty System.
UPPER AIRWAY DISORDERS
The upper airway comprises the passages in the back of the mouth, the nose and
the throat and allows breathing, swallowing and speech vocalization. The
breathing function requires the upper airway tissue and musculature to be stiff
enough to prevent collapse during respiration, while swallowing and speech
require compliance and flexibility. The upper airway is susceptible to a
variety of ailments, including tissue obstructions. A common cause of
obstruction found in the upper airway is excess tissue in one or more
locations, including the uvula (the small conical fleshy tissue hanging from
the center of the soft palate), soft palate, base of the tongue, turbinates
(soft tissue in the nasal cavity) and tonsils. Obstructed breathing impedes the
normal flow of air to the respiratory system.
Certain upper airway disorders, such as snoring and OSA, are present only
during sleep, when normal neurologic stimulation and upper airway muscle tone
are diminished. Such upper airway disorders are classified as sleep disorders
and can have an adverse impact on a person's everyday life. The consequences of
sleep disorders and sleep deprivation include reduced productivity, decreased
quality of life and increased risk of serious illness. Other disorders, such as
nasal congestion due to enlarged turbinates (for instance, as a consequence of
allergies, such as hay fever) or enlarged tonsils, are independent of the
wake/sleep cycle and affect people throughout the day as well as during sleep.
Snoring
Snoring occurs when throat muscles relax during sleep and tissues in the back
of the mouth and in the throat, unsupported by nearby bone structure, collapse
and partially block the upper airway. This partial obstruction causes the
sleeping person to inhale more deeply, creating a vacuum in the collapsible
part of the airway and pulling floppy tissue into the airway. Snoring is the
sound of these structures vibrating during breathing.
Habitual snorers are individuals who snore almost every night at a noise level
that would be considered disturbing to others in the same room. The Company
estimates that there are more than 40 million habitual snorers in the United
States. Factors contributing to habitual snoring include male gender, obesity,
alcohol consumption, use of tranquilizers or muscle relaxants and smoking.
Research has shown that the frequent arousals from sleep caused by snoring may
affect a person's health and productivity during the day. The disruption of
normal sleep can lead to excessive daytime sleepiness, fatigue and loss of
memory and concentration in both the individual suffering from snoring and in
his or her companion. Moreover, snoring is often associated with, and may be a
precursor to, OSA.
Obstructive Sleep Apnea
OSA occurs when tissues in the back of the mouth and in the throat completely
block the upper airway, resulting in an inability to breathe. The brain,
sensing that the body is suffocating from a lack of oxygen, arouses the person
to a light sleep, causing the throat muscles to contract, thus allowing a small
passage of air and producing a gasping sound. The person falls back into deeper
sleep until the muscles relax again, blocking the upper airway and repeating
the cycle of arousal.
The cycle of complete or partial upper airway closure with subconscious arousal
to lighter levels of sleep can be repeated as many as several hundred times
during six to eight hours of sleep. Sufferers of OSA typically experience ten
or more such cycles per hour and experience two or more clinical symptoms of
OSA, such as excessive daytime sleepiness, reduced cognitive function (in-
cluding memory loss and lack of concentration) and irritability. Several
reports indicate that the oxygen desaturation, increased heart rate and ele-
vated blood pressure caused by OSA may be associated with increased risk of
cardiovascular morbidity and mortality due to angina, stroke and heart attack.
According to a 1993 report to Congress, the National Commission on Sleep
Disorders Research estimated that approximately 20 million people in the United
States were afflicted with OSA, of whom an estimated 6.4 million experienced
the disorder at a moderate to severe level. The Company believes that only a
small percentage of those persons afflicted by OSA are aware that they suffer
from this condition and that it is the cause of their fatigue or other symptoms
of OSA.
25
<PAGE>
Enlarged Turbinates
Chronic obstruction of the nasal cavity can impact a person's health and
quality of life. Chronic nasal obstructions are most frequently caused by
enlarged turbinates. Turbinates can become chronically enlarged as a reaction
to diseases, such as chronic and drug-induced rhinitis, and allergy-causing
substances. Enlarged turbinates can partially obstruct or completely block the
nasal passages, resulting in an inefficient or non-existent nasal function.
During the day, enlarged turbinates can cause breathing through the nose to be
difficult and uncomfortable, and at night can contribute to snoring and OSA.
CURRENT TREATMENTS FOR UPPER AIRWAY DISORDERS
Currently, no standard modality dominates the treatment of upper airway
disorders. Traditional treatment methods for upper airway disorders range from
behavioral changes to highly invasive surgery. More recently, treatments such
as Continuous Positive Airway Pressure and laser surgery have emerged for OSA
and snoring, respectively. Current treatments often result in lengthy recovery
periods, significant patient discomfort, poor compliance by the user and/or
high medical expenses.
Treatment of Snoring
There are both nonsurgical and surgical methods for treating snoring.
Nonsurgical devices and appliances used to treat snoring include nasal dila-
tors, such as adhesive nasal tapes which widen the nostrils to create a larger
passage and improve airflow, and oral appliances, which adjust the position of
a patient's jaw or tongue during sleep to prevent collapse of the upper airway.
Surgical treatment for snoring is available today with LAUP. Published studies
indicate a success rate for this procedure in the treatment of snoring of 75%
and greater. LAUP is the surgical resection of the uvula and soft palate
through the use of a surgical laser that operates at temperatures in excess of
700(degrees)C (1,292(degrees)F). A LAUP procedure does not require an overnight
stay in the hospital; however, it does present a risk of significant swelling,
scarring and post-operative pain, requiring a short period of close monitoring.
Third-party reimbursement is not available for the treatment of snoring.
Snoring sufferers most often seek treatment for quality of life rather than
medical reasons. Despite the lack of reimbursement and the significant post-
operative discomfort associated with LAUP procedures, the Company estimates
that in 1996 there were an estimated 45,000 to 50,000 LAUP procedures performed
in the United States. The Company believes that the average cost of a laser
required to perform a LAUP procedure is in excess of $60,000. LAUP, which typi-
cally requires two procedures to be effective, is typically charged at $1,600
to $2,200 for a full course of treatment.
Treatment of OSA
The most common treatment for OSA is CPAP. In CPAP, the sleeping patient wears
a mask over the nose, and sometimes the mouth, while pressure from a compressor
forces air through the upper airway to keep excess tissues from collapsing and
obstructing the airway. CPAP machines range from compressors which deliver an
unchanging, steady flow of air, to compressors which adjust pressure during
inspiration and expiration and even more sophisticated systems. Third-party
reimbursement is generally available for CPAP.
While CPAP is successful in addressing the symptoms of OSA, its use has a
number of disadvantages, including facial skin irritation, abdominal bloating,
mask leaks, sore eyes and headaches. Additionally, CPAP is not a cure for OSA
and, therefore, must be used on a nightly basis for life. The discomfort of the
mask, the inconvenience of use and the unsightly nature of the application
cause many patients to stop using CPAP machines. The ASDA estimated CPAP com-
pliance at only 46% in 1993. The cost for a basic CPAP machine is approximately
$500, with the cost for more sophisticated systems approaching $3,000. Addi-
tional CPAP costs include costs for certain disposable components and titration
studies. Despite the discomfort to patients, an industry source estimates that
the market for CPAP machines will be approximately $140 million in 1997, repre-
senting an approximate 25% increase over the prior year.
For patients with severe OSA, surgical treatments exist such as UPPP, the sur-
gical resection of the uvula, part of the soft palate, tonsils and excess
tissue in the throat; maxillofacial surgery, a highly invasive procedure
requiring the resection of the tongue or reconstruction of the jaw bones; and
tracheostomies, surgical openings through the neck which bypass the obstruc-
tion.
UPPP and the other surgical alternatives have been successful in treating OSA
in certain patients. However, possibly due to the fact that UPPP does not
address obstructions at the base of tongue or in the turbinates, it has proven
effective in
26
<PAGE>
only about half the patients treated. The most significant drawbacks of UPPP,
maxillofacial surgery and tracheostomies are that they are highly-invasive,
involve significant post-operative morbidity, including a painful and lengthy
recovery, and are expensive. The estimated cost of the existing surgical proce-
dures for OSA range from $6,000 for UPPP to $40,000 or more for maxillofacial
reconstruction.
Treatment of Enlarged Turbinates
Enlarged turbinates are associated with a variety of forms of rhinitis, and
optimal treatment varies accordingly. The first line of treatment typically
involves the use of a variety of drugs. While antihistamines, corticosteroids
and sympathomimetic drugs are often effective for acute presentations of
enlarged turbinates, this method of treatment suffers from side-effects on
other physiologic functions such as decreased effectiveness over time, rebound
congestion and even drug-induced rhinitis.
Various surgical techniques exist to treat enlarged turbinates, with different
instrumentation and degrees of invasiveness. Scalpels and electrocautery and
laser devices are the more common instruments. Resection can be limited to the
soft tissue of the turbinate or extend to part of the underlying bone
structure. These procedures are generally effective, but lead to significant
discomfort in the form of occasional post-operative bleeding and frequent
crusting. This requires time consuming post-operative management of the patient
on the part of the physician. In 1995, there were an estimated 129,000
turbinate resection procedures in the United States, nearly all of which were
performed in an outpatient setting. Surgical treatment of the turbinates is
generally reimbursed by Third-Party Payors. Medicare charges for this procedure
averaged $856 in 1995.
THE SOMNUS SOLUTION: SOMNOPLASTY
Somnus' proprietary Somnoplasty System is designed to use RF energy to provide
a minimally-invasive, curative and relatively painless treatment of upper
airway disorders. The Somnoplasty System includes an automated RF generator
with temperature monitoring and a suite of proprietary, single-use, disposable
needle electrode devices which deliver controlled thermal energy into the
uvula, soft palate, tongue and turbinates to reduce tissue volume and stiffen
overly-compliant soft tissue. The Somnoplasty System allows physicians to per-
form a safe, minimally-invasive surgical procedure in less than 30 minutes in
an outpatient setting. The use of RF energy to reduce tissue volume treats the
causes of upper airway disorders enlarging the airway passages and eliminates
the need for treatments such as CPAP, thereby obviating patient compliance
issues. The Somnoplasty System received 510(k) clearance in July 1997 for the
reduction of tissue, including the uvula and soft palate, for the treatment of
snoring. In June 1997, the Company received the CE Mark for use of the
Somnoplasty System for tissue reduction in the upper airway.
The procedure creates finely controlled coagulative lesions at precise loca-
tions underneath the mucosal layer of tissue in the upper airway. An insulating
sleeve at the base of the needle electrode protects the mucosa from thermal
damage which prevents tissue sloughing, mucosal scarring, swelling, bleeding
and excessive post-operative pain. Thermocouples in the insulation and at the
tip of the needle electrode assist in the accurate monitoring of tissue temper-
ature, which reaches only approximately 85(degrees)C (185(degrees)F), ensuring
optimal ablation and protecting the mucosa. The lesions created by the proce-
dure are naturally resorbed in approximately three to six weeks, reducing
excess tissue volume.
The Company believes that the primary advantages of the Somnoplasty System
include:
Minimal Discomfort and Reduced Recovery Time. The use of RF energy causes
significantly less swelling and post procedural pain than traditional and
laser-assisted surgery. Patients who undergo the Somnoplasty procedure
typically require only over-the-counter pain medication to treat the post-
operative pain and typically can return to work and resume their normal
activities the same day.
Clinical Effectiveness. Unlike treatments such as CPAP for OSA and over-the-
counter remedies for snoring, the Somnoplasty System is designed to be a cura-
tive treatment directly addressing the obstructive tissues in the upper airway.
The Company believes the treatment outcomes from the Somnoplasty System will be
equivalent to traditional surgical procedures without the deleterious side
effects of standard and laser-assisted operations.
Rapid Procedure Time. The Somnoplasty System, including patient preparation
and administration of local anesthesia, takes less than 30 minutes, with typi-
cally less than five minutes necessary for the RF ablation itself. Treatment
requires, on average, one to three visits to a trained physician and can be
performed in an outpatient setting using local anesthesia.
Ease of Use. The Somnoplasty System is designed to be easy for physicians to
use, thereby minimizing physician training requirements. The Somnoplasty proce-
dure is less complicated than many minor surgical procedures performed by den-
tists in their offices.
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<PAGE>
PRODUCT DESCRIPTION
The Company has developed devices for treatment of the soft palate and uvula,
the turbinates, the tongue and the tonsils.
SOMNOPLASTY PRODUCT LINE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRODUCT NAME DESCRIPTION STATUS
- ------------------- --------------------------------------- ---------------------------------------
<S> <C> <C>
Disposable Devices:
SP 1000 Single needle deployable electrode Commercially available; 510(k)
designed for the soft palate and uvula clearance and CE Mark approval
SP 2000 Dual needle deployable electrode Commercially available; 510(k)
designed for the soft palate and uvula clearance and CE Mark approval
SP 1100 Single needle electrode designed for In development; 510(k) submission
the turbinates expected in 1997; CE Mark approval
SP 3000 Multiple needle deployable electrode In clinical trials; anticipated 510(k)
designed for the tongue submission in 1998; CE Mark approval
SP 1900 Single needle electrode designed for In development; clinical trials
the tonsils expected to commence in 1998
Generators:
215 RF Dual channel generator Commercially available; 510(k)
clearance and CE Mark approval
615 RF Two, four or six channel generator with 510(k) clearance; commercial
data collection availability expected in the first half
of 1998
115 RF Single channel generator In development
</TABLE>
Disposable Devices
SP 1000. The SP 1000 is a single needle deployable electrode device designed
for the delivery of controlled RF energy into tissue in the soft palate and
uvula. The device delivers the RF energy through a coagulating needle electrode
which can be positioned using direct vision. The angle of deployment may be
adjusted prior to the procedure, allowing the physician to adapt the instrument
to individual patient requirements. The SP 1000 is commercially available and
the United States list price is $425.
SP 2000. The SP 2000 is a dual needle deployable electrode device for use in
the soft palate and uvula. By using two needles simultaneously, the physician
creates a wider lesion, reducing the amount of time required to reach the
appropriate level of energy. Like the SP 1000, the SP 2000 may be adjusted to
deploy both needles at different angles to accommodate individual anatomies.
The electrodes may be placed using direct vision or a light source. The SP 2000
is commercially available and the United States list price is $500.
SP 1100. The SP 1100 is a single needle electrode device designed for use in
enlarged turbinates. It delivers the RF energy through a coagulating single
needle electrode which can be positioned using direct vision. The angle of
deployment is fixed.
SP 3000. The SP 3000 is a multiple needle deployable electrode device designed
for the application of controlled thermal energy for patients suffering from
base of tongue airway obstruction. The SP 3000 delivers the RF energy through
one, two or three coagulating needle electrodes which are positioned using
direct vision.
SP 1900. The SP 1900 is a single needle electrode device designed for use in
enlarged tonsils.
Generators
The Company's RF generators are intended to be used for the treatment of tissue
obstructions in the upper airway by allowing the physician to efficiently con-
trol and monitor the delivery of energy needed for the RF ablation of tissue.
In automatic mode, the physician determines the maximum amount of power to
deliver, the length of time for the ablation and the target temperature to
maintain at the center of the lesion or, in the 615 and 115 RF Generators, the
total energy applied. The user interface of each generator is designed to
require minimal interaction, allowing the surgeon to focus on
28
<PAGE>
the patient. Each generator contains proprietary software that modulates the
delivery of power based on information transmitted from the disposable needle
electrode devices.
215 RF Generator. The 215 RF Generator is designed for use with the SP 1000, SP
1100, SP 2000 and SP 1900 needle electrode devices. The real-time display
allows the physician to monitor delivered power, energy and temperatures in up
to two independent channels for as many as six thermocouples. The Company has
obtained 510(k) clearance and the CE Mark for the 215 RF Generator for use with
all of the Company's single and dual needle electrode devices. The 215 RF Gen-
erator is commercially available and the United States list price is $25,000.
615 RF Generator. The 615 RF Generator is being designed to be compatible with
all of the Company's needle electrode devices while being incompatible with
needle electrode devices supplied by other companies. A high-quality color
screen displays delivered power, energy and temperatures in up to six indepen-
dent channels for up to sixteen thermocouples. An integral disk drive captures
procedure data and is also used for software upgrades as new products are
introduced. The Company has obtained 510(k) clearance for the 615 RF Generator
for use with all of the Company's needle electrode devices.
115 RF Generator. The 115 RF Generator is being developed for use with the SP
1000, SP 1100 and SP 1900 needle electrode devices. An LCD display will show
real-time display of all relevant settings. Like the 615 RF Generator, the 115
RF Generator is being designed to be compatible with only those needle elec-
trode devices supplied by the Company.
CLINICAL AND REGULATORY STATUS
United States. In July 1997, the Company received 510(k) clearance for use of
the Somnoplasty System for coagulation of soft tissue, including the uvula and
soft palate, which may reduce the severity of snoring in some individuals. The
510(k) clearance was based on the results of a 24 patient, single-center clin-
ical trial completed in June 1997. The data from this trial indicated that
patients may require anywhere from one to six treatments to significantly
reduce snoring. While the Company anticipates that most patients will only
require one to three treatments, factors such as the severity of the patient's
upper airway obstruction or improper use of the Somnoplasty System by the
treating physician could require more treatments. To date, over 85 patients
have been treated with the Somnoplasty System for this indication in six cen-
ters.
The Company is conducting a trial for use of the Somnoplasty System in the
reduction of enlarged turbinates typically associated with chronic rhinitis. To
date, over 40 patients at two centers have been treated in this trial. The Com-
pany expects to file a 510(k) application with the FDA for this indication in
1997.
In addition, the Company plans to conduct a three-center trial with a total of
45 patients for use of the Somnoplasty System in the treatment of OSA associ-
ated with an airway obstruction at the base of the tongue. A safety trial with
five patients was successfully completed in July 1997. The Company expects to
file a 510(k) application with the FDA for this indication in 1998.
Following the clinical evaluation of the turbinate and tongue indications men-
tioned above, the Company intends to pursue FDA clearance for the treatment of
additional upper airway obstructions, some of which may strengthen the claim
for the treatment of OSA. The Company expects its 510(k) submissions for these
supplemental indications will require additional clinical trials.
The Company has obtained 510(k) clearance from the FDA for the use of the SP
1000 and SP 2000 disposable electrodes for the treatment of snoring. The 215
and 615 RF Generators and SP 3000 disposable electrode have received 510(k)
clearance for a general claim of tissue coagulation. Other clearances are being
pursued for various product enhancements. All Somnus products cleared are Class
II products.
International. In June 1997, the Company received authorization from the Euro-
pean Union (through a duly appointed Notified Body) to affix the CE Mark to its
commercially available products for treatment of upper airway obstructions. The
Company has been certified under the ISO 9001 QS Reg. by TUV Essen, a German
Notified Body. The Company has also received a TGA listing for Australia.
RESEARCH AND DEVELOPMENT
Somnus believes that it has a strong base of proprietary design, engineering,
manufacturing and prototype development capabilities. The Company has
particular expertise in the core research and development areas relevant to the
production of new disposable needle electrode devices for use in conjunction
with its current RF generators. Primarily through internal research and
development efforts, the Company plans to continue to develop new proprietary
products, often in
29
<PAGE>
collaboration with leading surgeons and sleep medicine professionals, that
allow surgeons to perform their current or future procedures in a less-
traumatic manner with more precision, less surgical time and greater
simplicity. Specifically, the Company is developing new disposable devices
which are intended to address additional upper airway obstructions such as
enlarged tonsils and bronchial growths. The Company believes that its
experience in designing, developing and manufacturing its current suite of
disposable needle electrode devices gives it a competitive advantage in
implementing this strategy. The Company also from time to time may evaluate
acquisitions and licensing of third-party technology and products to further
expand and enhance its product line.
The Company's research and development expenditures for the period from
inception to December 31, 1996 and for the six months ended June 30, 1997 were
approximately $1,303,000 and $2,051,000, respectively. As of August 31, 1997,
the Company's research and development staff consisted of 13 persons. The
Company performs its research and development activities at its offices in
Sunnyvale, California. No assurance can be given that the Company will be able
to complete the development of or successfully introduce any or all of its
devices under development or contemplated for future development on a timely
basis, if at all.
SALES, MARKETING AND DISTRIBUTION
In the United States, the Company is building a direct sales force to target
ear, nose and throat surgeons, oral and maxillofacial surgeons, sleep centers
and other physicians who treat sleep disorders. The Company has hired three
regional sales managers with medical device sales experience and three sales
representatives to implement its direct sales strategy in the United States.
The Company intends to add approximately 25 additional sales representatives by
the end of 1998.
The primary customers in the United States for the Somnoplasty System are
expected to be the approximately 9,000 ear, nose and throat physicians and the
approximately 5,000 oral and maxillofacial surgeons. The Company also intends
to market to pulmonologists and sleep medicine specialists. Certain products,
such as the SP 1100 for the treatment of the enlarged turbinates, are expected
to appeal to a larger target market, including allergists and primary care phy-
sicians. An important additional target for the Company's sales efforts will be
the approximately 1,500 sleep centers in the United States. These sleep centers
are multi-specialty practices dedicated to sleep disorders, include specialists
such as ear, nose and throat and oral and maxillofacial surgeons,
pulmonologists and psychiatrists and are typically chaired by physicians who
are board certified in sleep medicine. The centers include facilities for over-
night monitoring and have access to sophisticated diagnostic equipment to
determine the type and characteristics of sleep apnea. To date, over 350 of
these centers have been accredited by the ASDA. Sleep centers are important not
only as potential customers, but also for their role in referring diagnosed
patients for treatment.
For physicians not served by the Company's direct sales organization, such as
allergists and primary care physicians treating the enlarged turbinates in
patients suffering from chronic allergies, the Company will consider other dis-
tribution channels, such as partnerships with established medical device compa-
nies.
The Company intends to initially assign, on an exclusive basis, international
distribution rights for therapeutic products to distributors. In April 1997,
the Company entered into a three-year distribution agreement with Medtronic for
the European Union, Australia, Southeast Asia and certain other areas.
Medtronic commenced distribution of the Company's products in June 1997 when
the Company was awarded the CE Mark, the principal regulatory requirement for
medical device sales in Europe.
The Company's marketing and education efforts are currently focused on early
adopters with emphasis on leading surgeons and sleep centers. As its products
mature, the Company's marketing and education will focus increasingly on the
mainstream medical market and, ultimately, on consumers so as to create patient
demand for the Somnoplasty procedure.
MANUFACTURING
The Company currently manufactures its devices in limited quantities for its
United States, European and Australian sales and clinical trials. Each device
is assembled and tested by the Company prior to sterilization. The manufac-
turing process consists primarily of assembly of internally manufactured and
purchased components and subassemblies, and certain processes are performed in
a clean room environment. The Company has no experience manufacturing its prod-
ucts in the volumes or with the yields that will be necessary for the Company
to achieve significant commercial sales, and there can be no assurance that the
Company can establish high-volume manufacturing capacity or, if established,
that the Company will be able to manufacture its products in high volumes with
commercially acceptable yields. The Company intends to use a portion of the
proceeds from the Offering to develop manufacturing expertise and to establish
large-scale manufacturing capabilities.
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Raw materials, components and subassemblies are purchased from various
qualified suppliers and are subject to stringent quality specifications and
inspections. The Company conducts quality audits of its key suppliers, several
of whom are experienced in the supply of components to manufacturers of medical
devices. None of the Company's suppliers of components for its disposable
devices is contractually obligated to continue to supply the Company nor is the
Company contractually obligated to purchase such devices from a particular
supplier. For certain of these components and subassemblies, there are
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components and subassemblies could not be
accomplished quickly.
The Company has designed its 215 RF Generator in concert with a single-source
supplier, Apical Instruments, a developer of RF medical devices. The generator
is purchased as a finished assembly from Apical. The Company is in the process
of developing the 615 RF Generator which will be assembled at the Company's
facility, with Apical Instruments acting as a supplier for the RF subassembly.
The 115 RF Generator currently in development will be manufactured entirely by
the Company. The Company has not experienced any significant adverse effects
resulting from shortages of components. Delays associated with any future part
shortages, particularly as the Company scales up its manufacturing activities
in support of international distributor orders and commercial introduction in
the United States, would have a material adverse effect on its business, finan-
cial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities, and its operations must undergo compliance inspections
conducted by the FDA and corresponding state agencies.
DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
In the United States, the Company has three issued patents, three allowed pat-
ents and an additional 30 pending patent applications. The Company also has one
issued foreign patent and 18 pending foreign patent applications. These patents
and patent applications relate to the Company's RF devices and methods for
reduction of tissue in the uvula, soft palate, tongue and tonsils, and design
of its generators and disposable devices. In addition, the Company may also
selectively license patents owned by others which it believes will complement
the technology and increase the value and strength of its intellectual property
portfolio, although it has not done so to date. The Company's strategy has been
to actively pursue patent protection in the United States and foreign jurisdic-
tions for all upper airway disorders that can benefit from use of the
Somnoplasty System.
The patent and trade secret positions of medical device companies, including
those of the Company, are uncertain and involve complex and evolving legal and
factual questions. The coverage sought in a patent application either can be
denied or significantly reduced before or after the patent is issued.
Consequently, there can be no assurance that any patents from pending
applications or from any future patent application will be issued, that the
scope of the patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Since patent
applications are secret until patents are issued in the United States, or
corresponding applications are published in other countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to file patent applications for such inventions. In addition, there can be no
assurance that competitors, many of which have substantial resources, will not
seek to apply for and obtain patents that will prevent, limit or interfere with
the Company's ability to make, use or sell its products either in the United
States or in international markets. Further, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States. Litigation or regulatory
proceedings, which could result in substantial cost and uncertainty to the
Company, may also be necessary to enforce patent or other intellectual property
rights of the Company or to determine the scope and validity of other parties'
proprietary rights. There can be no assurance that the Company will have the
financial resources to defend its patents from infringement or claims of
invalidity.
The Company also relies upon unpatented proprietary technology, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
or disclose the Company's proprietary technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology. The
Company's policy is to require each of its employees, consultants,
investigators and advisors to execute a confidentiality agreement upon the
commencement of an employment or consulting relationship with the Company.
These agreements generally provide that all inventions conceived by the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not be disclosed to third
parties except in specified circumstances. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information.
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Recently, Public Law 104-208 was signed into law in the United States and
limits the enforcement of patents relating to the performance of surgical or
medical procedures on a body. This law precludes medical practitioners and
health care entities, who practice these procedures, from being sued for patent
infringement. Therefore, depending upon how these limitations are interpreted
by the courts, they could have a material adverse effect on the Company's
ability to enforce any of its proprietary methods or procedures deemed to be
surgical or medical procedures on a body.
In addition, patent applications in the United States and foreign jurisdictions
are maintained in secrecy for a period after filing. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries
and the filing of related patent applications. Although the Company has
conducted searches of certain patents issued to other companies, research and
academic institutions and others, patents issued and patent applications filed
in the United States or internationally relating to medical devices are
numerous, and there can be no assurance that current and potential competitors
and other third parties have not filed, or in the future will not file
applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. In the event any pending
applications provide proprietary rights to third parties relating to products
or processes used or proposed to be used by the Company, the Company may be
required to obtain licenses to patents or proprietary rights of others.
The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property rights,
whether with or without merit, could be time-consuming and expensive and could
divert the Company's technical and management personnel. The Company may be
involved in litigation to defend against claims of infringement by the Company,
to enforce patents issued to the Company or to protect trade secrets of the
Company. If any relevant claims of third-party patents are held as infringed
and not invalid in any litigation or administrative proceeding, the Company
could be prevented from practicing the subject matter claimed in such patents
or would be required to obtain licenses from the patent owners of each such
patent or to redesign its products or processes to avoid infringement. In
addition, in the event of any possible infringement, there can be no assurance
that the Company would be successful in any attempt to redesign its products or
processes to avoid such infringement or in obtaining licenses on terms
acceptable to the Company, if at all. Accordingly, an adverse determination in
a judicial or administrative proceeding or failure by the Company to redesign
its products or processes or to obtain necessary licenses could prevent the
Company from manufacturing and selling the Somnoplasty System, which would have
a material adverse effect on the Company's business, financial condition and
results of operations. Although, to date, the Company has not been involved in
any litigation, in the future, costly and time-consuming litigation brought by
the Company may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others.
COMPETITION
The medical device industry is subject to intense competition. The market for
products designed to treat upper airway disorders is highly competitive, and
the Company expects competition to increase. Accordingly, the Company's future
success will depend in part on its ability to respond quickly to medical and
technological change and user preference through the development and introduc-
tion of new products that are of high quality and that address patient and sur-
geon requirements. In the treatment of snoring, the Somnoplasty System is sub-
ject to intense competition from existing products, such as nasal dilators and
oral appliances, and surgical procedures, such as LAUP. The U.S. market for the
treatment of enlarged turbinates, a market which the Company intends to enter
in the near future, is dominated by over-the-counter treatments, such as nasal
sprays, and surgical procedures, such as turbinectomies. The U.S. market for
products for the treatment of OSA, a market which the Company hopes to enter in
the future, is currently dominated by CPAP products produced by Healthdyne
Technologies Inc., Nellcor Puritan Bennett, Inc., a wholly owned subsidiary of
Mallinckrodt Inc., ResMed Inc. and Respironics, Inc. There can be no assurance
that the Somnoplasty System will successfully compete with or replace any
existing products for these or other indications. Most of the Company's compet-
itors and potential competitors have greater financial, research and develop-
ment, manufacturing and sales and marketing resources than the Company. In
addition, some of the Company's competitors and potential competitors sell
additional lines of products, and therefore can bundle products to offer higher
discounts or offer rebates or other incentive programs to gain a competitive
advantage. The Company's inability to compete effectively against existing or
future competitors would have a material adverse effect on its business, finan-
cial condition and results of operations.
The Company believes that the primary competitive factors in the market for
treatment of upper airway disorders include regulatory approvals, clinical and
patient acceptance, post-operative discomfort, ease of use, product perfor-
mance, product price, product supply, marketing and sales capability and the
enforceability of patent and other proprietary rights. The Company believes
that it is or will be competitive with respect to these factors. Nonetheless,
because the Company's
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products have recently been introduced or are still under development, the rel-
ative competitive position of the Company in the future is difficult to pre-
dict.
GOVERNMENT REGULATION
The preclinical and clinical testing, manufacturing, labeling, distribution and
promotion of the Company's products are subject to extensive and rigorous gov-
ernment regulation in the United States and other countries. Noncompliance with
applicable requirements can result in enforcement action by the FDA or compa-
rable foreign regulatory bodies including, among other things, fines, injunc-
tions, civil penalties, recall or seizures of products, refusal to grant
premarket clearances or approvals, withdrawal of marketing approvals and crim-
inal prosecution.
United States
A medical device may be marketed in the United States only with the FDA's prior
authorization. Devices classified by the FDA as posing less risk are placed in
either in Class I or II and require the manufacturer to seek 510(k) clearance
from the FDA. Such clearance generally is granted when submitted information
establishes that a proposed device is "substantially equivalent" in intended
use and safety and effectiveness to a "predicate device," which is either Class
I or II device already legally on the market or a "preamendment" Class III
device (i.e., one that has been in commercial distribution since before May 28,
1996) for which the FDA has not called for PMA applications. The Company
believes that it usually takes from four to 12 months from the date of
submission to obtain 510(k) clearance, but it may take longer, and there can be
no assurance that 510(k) clearance will ever be obtained. During this process,
the FDA may determine that it needs additional information or that a proposed
device is precluded from receiving clearance because it is not substantially
equivalent to a predicate device. After a device receives clearance, any
modification that could significantly affect its safety or effectiveness, or
would constitute a major change in the intended use of the device, will require
a new 510(k) submission.
The Somnoplasty System received 510(k) clearance on July 17, 1997 for the
intended use of coagulation (thermal ablation, tissue volume reduction) of soft
tissue, including the uvula and soft palate, and reduction in the severity of
snoring in some individuals. The clearance for the Somnoplasty System includes
the 215 and 615 RF Generators and the SP 1000 and 2000 disposable electrode
devices.
A device that does not qualify for 510(k) clearance is placed in Class III,
which is reserved for devices classified by FDA as posing the greatest risk
(e.g., life-sustaining, life-supporting or implantable devices, or devices that
are not substantially equivalent to a predicate device). A Class III device
generally must obtain PMA, which requires the manufacturer to establish the
safety and effectiveness of the device to the FDA's satisfaction. A PMA
application must provide extensive preclinical and clinical trial data and also
information about the device and its components regarding, among other things,
manufacturing, labeling and promotion. As part of the PMA review, the FDA will
inspect the manufacturer's facilities for compliance with the QS Reg, which
includes elaborate testing, control, documentation and other quality assurance
procedures.
Upon submission, the FDA determines if the PMA application is sufficiently com-
plete to permit a substantive review, and if so, the application is accepted
for filing. The FDA then commences an in-depth review of the PMA application,
which the Company believes typically takes one to three years, but may take
longer. The review time is often significantly extended as a result of the FDA
asking for more information or clarification of information already provided.
The FDA also may respond with a "not approvable" determination based on defi-
ciencies in the application and require additional clinical trials that are
often expensive and time consuming and can delay approval for months or even
years. During the review period, an FDA advisory committee, typically a panel
of clinicians, likely will be convened to review the application and recommend
to the FDA whether, or upon what conditions, the device should be approved.
Although the FDA is not bound by the advisory panel decision, the panel's rec-
ommendation is important to the FDA's overall decision making process.
If the FDA's evaluation of the PMA application is favorable, the FDA typically
issues an "approvable letter" requiring the applicant's agreement to specific
conditions (e.g., changes in labeling) or specific additional information
(e.g., submission of final labeling) in order to secure final approval of the
PMA application. Once the approvable letter is satisfied, the FDA will issue a
PMA for approved indications, which can be more limited than those originally
sought by the manufacturer. The PMA can include postapproval conditions that
the FDA believes necessary to ensure the safety and effectiveness of the device
including, among other things restrictions on labeling, promotion, sale and
distribution. Failure to comply with the conditions of approval can result in
material adverse enforcement action, including the loss or withdrawal of the
approval. The PMA process can be expensive and lengthy, and no assurance can be
given that any PMA application will ever be approved for marketing. Even after
approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing process.
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<PAGE>
The Company intends to seek 510(k) clearance of the Somnoplasty System for new
indications, including reduction of enlarged turbinates, treatment of OSA asso-
ciated with blockage caused by the tongue, and the treatment of other upper
airway obstructions, some of which are associated with OSA. These future sub-
missions likely will need to include supporting clinical trial data. There can
be no assurance, however, that these new indications will receive 510(k) clear-
ance in a timely fashion, or at all. Delays in market introduction resulting
from the 510(k) clearance process could have a material adverse effect on the
Company's business, financial condition and results of operations. If the FDA
determines that any of the new indications are not eligible for 510(k) clear-
ance, the Company will need to seek PMA. There can be no assurance that the
Company will submit a PMA application for any such indications or that once
submitted, the PMA application will be accepted for filing, found approvable
or, if found approvable, will not or include unfavorable restrictions.
A clinical trial in support of a 510(k) submission or PMA application generally
requires an IDE application approved in advance by the FDA for a limited number
of patients. The IDE application must be supported by appropriate data, such as
animal and laboratory testing results. Clinical trials may begin if the IDE
application is approved by the FDA and the appropriate IRBs at the clinical
trial sites. Submission of an IDE application does not give assurance that the
FDA will approve the IDE application and, if it is approved, there can be no
assurance that the FDA will determine that the data derived from these studies
support the safety and efficacy of the device or warrant the continuation of
clinical studies. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for
the study by one or more appropriate IRBs without the need for FDA approval.
The Company is sponsoring several clinical trials which have been determined by
the IRBs at the participating institutions to be nonsignificant risk studies.
There can be no assurance however, that the FDA would agree with these determi-
nations and not require the Company to obtain such approval before continuing
the studies. During a clinical trial, the Company is permitted to sell products
used for the study for an amount that does not exceed recovery of the costs of
manufacture, research, development and handling. The Company's failure to
adhere to regulatory requirements generally applicable to clinical trials or to
the conditions of an IDE approval could have a material adverse effect on the
Company's business, financial conditions and results of operations, including
an inability to obtain marketing clearance or approval for its products.
Any devices manufactured or distributed by the Company pursuant to FDA clear-
ances or approvals will be subject to pervasive and continuing regulation by
the FDA and certain state agencies. The Company will be subject to routine
inspection by the FDA and the CDHS and will have to comply with the host of
regulatory requirements that usually apply to medical devices marketed in the
United States, including labeling regulations, the QS Reg., the MDR and the
FDA's prohibitions against promoting products for unapproved or "off-label"
uses. In addition, Class II devices, such as the Company's Somnoplasty System,
can be subject to additional special controls (e.g., performance standards,
postmarket surveillance, patient registries, and FDA guidelines) that do not
apply to Class I devices. The Company's failure to comply with applicable regu-
latory requirements could result in enforcement action by the FDA, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial conditions
and results of operations. The Company also is subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
hazardous substance disposal. There can be no assurance the Company will not be
required to incur significant costs to comply with such laws and regulations in
the future or that such laws or regulations will not have a material adverse
effect upon the Company's business, financial condition and results of
operations.
European Union
The primary regulatory environment in Europe is that of the European Union
which consists of 15 countries encompassing most of the major countries in
Europe. Certain other countries, such as Switzerland, have voluntarily adopted
laws and regulations that mirror those of the European Union with respect to
medical devices. The European Union has adopted numerous directives and stan-
dards regulating the design, manufacture, clinical trial, labeling, and adverse
event reporting for medical devices. The principal directives prescribing the
laws and regulations pertaining to medical devices in the EU are the Medical
Devices Directive, 93/42/EEC.
Devices that comply with the requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms
with the essential requirements of the applicable directive and, accordingly,
can be commercially distributed throughout the European Union. The method of
assessing conformity varies depending on the class of the product, but normally
involves a combination of self-assessment by the manufacturer and a third-party
assessment by a Notified Body. This third-party assessment may consist of an
audit of the manufacturer's quality system and specific testing of the
manufacturer's product. An assessment by a Notified Body in one country within
the European Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union. The Company's Somnoplasty
System received the CE Mark in June 1997.
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While no additional premarket approvals or individual EU countries are
required, prior to the marketing of a device bearing the CE Mark, practical
complications with respect to market introduction may occur. For example, dif-
ferences among countries have arisen with regard to labeling requirements.
THIRD-PARTY REIMBURSEMENT
The Company believes that its products will generally be purchased by private
practices, clinics, hospitals and sleep centers. In the United States, the pur-
chasers of medical devices generally rely on Third-Party Payors to reimburse
all or part of the cost of the procedure in which the medical device is being
used. Certain Third-Party Payors are moving toward a managed-care system in
which they contract to provide comprehensive health care for a fixed cost per
person. The fixed cost per person established by these Third-Party Payors may
be independent of the practice's cost incurred for the specific case and the
specific devices used. Medicare and other Third-Party Payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products.
In the United States, the Company does not anticipate that the Somnoplasty
System will be subject to reimbursement for the treatment of snoring. Tradi-
tionally, sufferers of snoring have paid for surgical and non-surgical treat-
ment and devices directly. However, the treatment of OSA and outpatient sur-
gical procedures for the uvula, soft palate and turbinates are commonly reim-
bursed by most carriers and resection of the tongue is reimbursed as an inpa-
tient procedure.
The Company's strategy is to pursue reimbursement for the Somnoplasty System
for treatment of enlarged turbinates, tonsils and base of the tongue and OSA,
if it is cleared for such indications by the FDA, based on physician endorse-
ment and the demonstration of improved quality of life for specific patient
groups. Quality of life issues will be included in the Company's clinical
trials to provide data in support of this reimbursement strategy. There can be
no assurance that the Company will be able to demonstrate improvement in
quality of life or that reimbursement will ever be available for the Company's
products. The Company's clinical sites do not reimburse the Company for
Somnoplasty System generators or disposable devices.
Because the Company's devices are currently under development for treatment of
enlarged turbinates, tonsils and base of the tongue and OSA and have not been
submitted for FDA clearance or approval for such indications, uncertainty
exists regarding the availability of third-party reimbursement for procedures
that would use the Company's devices for such purposes. Failure by private
practices, clinics, hospitals, sleep centers and other potential users of the
Company's devices to obtain sufficient reimbursement from Third-Party Payors
for the procedures in which the Company's devices are intended to be used could
have a material adverse effect on the Company's business, financial condition
and results of operations.
International market acceptance of the Company's products currently being
commercialized and those under development may be dependent, in part, upon the
availability of reimbursement within prevailing health care payment systems.
Reimbursement and health care payment systems in international markets vary
significantly by country, and include both government sponsored health care and
private insurance. The Company does not anticipate that use of the Somnoplasty
System for treatment of snoring may be a reimbursable expense. The Company does
believe that various levels of reimbursement will be available in international
markets for treatment of enlarged turbinates, tonsils and the base of the
tongue and OSA; however, there can be no assurance that any international
reimbursement approvals will be obtained in a timely manner, if at all. Failure
to receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.
The Company believes that in the future, reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care indus-
try, both domestic and international, to reduce the cost of products and serv-
ices, including the Company's existing products and products currently under
development by it. There can be no assurance that third-party reimbursement and
coverage will be available or adequate in either the United States or interna-
tional markets or that future legislation, regulation or reimbursement policies
of Third-Party Payors will not otherwise adversely affect the demand for the
Company's existing products or products currently under development by it or
its ability to sell its products on a profitable basis. The unavailability of
Third-Party Payor coverage or the inadequacy of reimbursement could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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PRODUCT LIABILITY AND INSURANCE
The Company's business may involve the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have a material adverse impact on the Company. The Com-
pany maintains product liability insurance at coverage levels which it deems
commercially reasonable; however, there can be no assurance that product lia-
bility or other claims will not exceed such insurance coverage limits or that
such insurance will continue to be available on commercially acceptable terms,
or at all. The Company intends to periodically evaluate, depending on changing
circumstances, whether or not to obtain any additional product liability insur-
ance coverage prior to the time that the Company engages in any extensive mar-
keting of the Somnoplasty System. Even if the Company obtains additional
product liability insurance, there can be no assurance that it would prove ade-
quate or that a product liability claim, insured or uninsured, would not have a
material adverse effect on the Company's business, financial condition and
results of operations. Even if a product liability claim is not successful, the
time and expense of defending against such a claim may adversely affect the
Company's business, financial condition and results of operations.
EMPLOYEES
As of August 31, 1997, the Company employed 51 individuals full time. Of the
Company's total work force, 12 employees are engaged in manufacturing, 19
employees are engaged in research and development activities, 9 employees are
engaged in sales and marketing activities and 11 employees are engaged in
finance and administrative activities. The Company's employees are not repre-
sented by a collective bargaining agreement. The Company believes its relations
with its employees are good.
FACILITIES
The Company leases an approximately 20,000 square foot light industrial
facility in Sunnyvale, California, under a lease which terminates in 2002, with
an option to extend to 2007. The Company believes that its facility is adequate
to meet its current and reasonably anticipated future requirements.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of August 31, 1997 with
respect to the executive officers and directors of the Company:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
NAME AGE POSITION
- ------------------------ --- ----------------------------------------------------
<S> <C> <C>
Stuart D. 52 Chairman of the Board of Directors, Chief Executive
Edwards(1)(2).......... Officer and President
Robert E. McNamara...... 40 Executive Vice President, Chief Financial Officer
Eric N. Doelling........ 38 Executive Vice President, Chief Operating Officer
and Director
Stephen M. Rudy......... 39 Senior Vice President, Marketing and Business
Development
Donald R. Bruce......... 47 Vice President, Worldwide Sales
Eve A. Conner, Ph.D. ... 52 Vice President, Clinical and Regulatory Affairs
Kirti P. Kamdar......... 36 Vice President, Research and Development
David L. Douglass(2).... 45 Director
David Illingworth(1).... 43 Director
Ronald G. Lax........... 64 Director
David B. Musket (1)..... 39 Director
Woodrow A. Myers(2)..... 43 Director
</TABLE>
- -------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
STUART D. EDWARDS is the founder of the Company and has served as Chairman of
the Board, Chief Executive Officer and President of the Company since its
founding in January 1996. From July 1992 to May 1995, Mr. Edwards served as
President, Chief Executive Officer and Chairman of the Board of VidaMed, Inc.,
a medical device company co-founded by Mr. Edwards which develops minimally-
invasive surgical systems. He continued to serve as President and Chief
Executive Officer of VidaMed, Inc. until December 1995 and continues to serve
as a board member of such company. From December 1989 until October 1992, Mr.
Edwards was Vice President and Chief Technical Officer of EP Technologies,
Inc., a developer and manufacturer of electrophysiology catheters. Mr. Edwards
previously held positions with Applied Immune Sciences, Inc., a subsidiary of
Rhone-Poulenc Rorer Inc., Control Data Systems, Inc., AVI Corporation, UFE
Corporation, Abbott Laboratories, Ideal Toy Corporation and Baxter Healthcare
Corporation. Mr. Edwards holds a Certificate in Mechanical Engineering from the
Union of Educational Institutions in England.
ROBERT E. MCNAMARA has served as Chief Financial Officer of the Company since
August 1997. From April 1995 until August 1997, Mr. McNamara served as Vice
President of Finance and Administration and Chief Financial Officer of Target
Therapeutics, Inc., a medical device manufacturer. From August 1994 until April
1995, Mr. McNamara served as Chief Financial Officer of Guittard Chocolate Co.
From 1987 until August 1994, Mr. McNamara held various financial management
positions at Tandem Computers, Inc. He holds a B.S. from the University of San
Francisco and an M.B.A. from the University of Pennsylvania's Wharton School.
ERIC N. DOELLING has served as Executive Vice President, Chief Operating
Officer of the Company since July 1996 and as a Director since November 1996.
From April 1993 until July 1996, Mr. Doelling was Vice President, Manufacturing
of Cardiac Pathways Corporation, a medical device company. From January 1990 to
March 1993, he was Vice President of Operations for Spectranetics, Inc. Mr.
Doelling holds both a B.S. and an M.B.A. from Rensselaer Polytechnic Institute.
STEPHEN M. RUDY has served as Senior Vice President, Marketing and Business
Development of the Company since April 1996. From May 1995 until June 1996, Mr.
Rudy was a Principal for Cowper Consulting, a consulting firm specializing in
business development and marketing for medical device companies. From September
1992 until May 1995, he served as Vice President of Marketing and Sales for
VidaMed, Inc. Mr. Rudy holds a B.A. in Political Science from Johns Hopkins
University and an M.B.A. from Stanford University.
DONALD R. BRUCE has served as Vice President, Worldwide Sales of the Company
since March 1997. From June 1996 until March 1997, he was a Principal of Orb
International, a sales consulting firm to medical device companies. From 1977
until June 1996, Mr. Bruce worked for Xomed, Inc., an otolaryngology device
company, in several capacities, including,
37
<PAGE>
most recently, Vice President of International Sales and Marketing. Mr. Bruce
holds a B.S. in Biology from the University of Minnesota where he served as the
manager of the ear, nose and throat research laboratory.
EVE A. CONNER, PH.D. has served as Vice President, Clinical and Regulatory
Affairs of the Company since August 1996. From October 1991 to June 1996, she
served as Vice President, Regulatory/Clinical Affairs and Quality Assurance for
Baxter Healthcare Corporation's Novacor Division. Dr. Conner holds a B.A. in
Biology and Chemistry from Keuka College and a Ph.D. in Pharmacology/Toxicology
from the University of Minnesota.
KIRTI P. KAMDAR has served as Vice President, Research and Development of the
Company since August 1997 and previously served as Vice President,
Manufacturing from August 1996 to July 1997. From May 1995 until August 1996,
he was Vice President of Research and Development, developing new
cardiovascular devices, at Guided Medical Systems, a medical device company.
From October 1994 until May 1995, he was a Project Manager in Research and
Development with Cardiac Pathways Corporation. From April 1991 to October 1994,
Mr. Kamdar held several engineering and managerial positions for Mallinckrodt
Inc. Mr. Kamdar holds a B.S. from Gujarat University (India), a M.S. from New
Jersey Institute of Technology and an M.B.A. from the University of Houston.
DAVID L. DOUGLASS has served as a director of the Company since March 1996.
Since June 1990, Mr. Douglass has been a General Partner of Delphi Ventures, a
venture capital firm. Since February 1986, he has also been a General Partner
of Matrix Partners II, L.P., a venture capital firm. Mr. Douglass serves on the
board of several private medical technology companies and VidaMed, Inc., a
public company. He holds a B.A. in Political Science from Amherst College and
an M.A. in Administration and Policy Analysis and an M.B.A. from Stanford Uni-
versity.
DAVID ILLINGWORTH has served as a Director of the Company since February 1997.
Since January 1993, Mr. Illingworth has held positions with Nellcor Puritan
Bennett, Inc., a wholly owned subsidiary of Mallinckrodt Inc., most recently
serving as Executive Vice President and President, Alternative Care Business.
From September 1991 until December 1992, he served as General Manager of G.E.
Medical Systems. He holds a B.S. in Engineering from Texas A&M University.
RONALD G. LAX has served as a Director of the Company since March 1996 and as a
Consultant for the Company since June 1996. Mr. Lax has experience with several
medical device companies. Since January 1996, he has served as President of
Prodesearch Corp. From 1975 to December 1995, Mr. Lax served as founder and
President of Gant Western, Inc. From June 1994 to April 1995, Mr. Lax served as
Vice President Engineering and Development of RITA Medical Systems, Inc.
(formerly ZoMed, Inc.). From July 1992 until June 1994, he served as a
consultant to VidaMed, Inc.
DAVID B. MUSKET has served as a Director of the Company since November 1996 as
a designated representative of INVESCO Trust Company, an investor in the Com-
pany. Since August 1991, he has been President of Musket Research Associates,
Inc., an investment banking firm specializing in healthcare, and of DBM Corpo-
rate Consulting Group. Since June 1996, he has also been a managing Member of
ProMed Management, LLC, a money management company focusing on both public and
private healthcare companies.
WOODROW A. MYERS, JR., M.D. has served as a Director of the Company since
August 1997. Since November 1995, Dr. Myers has served as the Director,
Healthcare Management, of Ford Motor Company. From August 1991 to October 1995,
Dr. Myers served as Senior Vice President and Corporate Medical Director of The
Associated Group. From January 1990 to July 1991, he served as the Commissioner
of Health of New York City and as an Assistant Professor of Medicine at Cornell
Medical College. Dr. Myers holds a B.S. in Biological Science from Stanford
University, an M.D. from Harvard Medical School and an M.B.A. from Stanford
University.
EMPLOYMENT AGREEMENTS
The Company has entered into an agreement relating to the employment of Robert
E. McNamara whereby the Company has agreed to provide Mr. McNamara with
severance benefits during the first two years of employment in the event of
termination without cause consisting of 12 months continued salary, insurance
benefits, bonus plan and option vesting. The agreement also provides that, upon
a change in control of the Company, Mr. McNamara will receive six months
continued salary, insurance benefits and bonus, and all of his outstanding
stock options will fully and immediately vest.
The Company has entered into an agreement relating to the employment of Eric N.
Doelling whereby the Company has agreed to provide Mr. Doelling with severance
benefits in the event of termination consisting of six months salary, insurance
benefits and vesting of stock options which would otherwise have vested in the
year following his termination. The agreement also provides that, upon a change
in control of the Company, all of Mr. Doelling's outstanding stock options will
fully and immediately vest.
38
<PAGE>
The Company has entered into an agreement relating to the employment of Stephen
M. Rudy which provides for, in the event of termination, the vesting of all
stock options which would otherwise have vested in the year of his termination.
The agreement also provides that, in the event of a change of control of the
Company, Mr. Rudy's outstanding options will fully and immediately vest.
BOARD COMPOSITION
The Company currently has authorized seven directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, effective upon
the consummation of the Offering, the terms of office of the Board of Directors
will be divided into three classes: Class I, whose term will expire at the
annual meeting of stockholders to be held in 1998; Class II, whose term will
expire at the annual meeting of stockholders to be held in 1999; and Class III,
whose term will expire at the annual meeting of stockholders to be held in
2000. The Class I directors are David L. Douglass and David B. Musket, the
Class II directors are Eric N. Doelling, David Illingworth and Ronald G. Lax,
and the Class III directors are Stuart D. Edwards and Woodrow A. Myers. At each
annual meeting of stockholders after the initial classification, the successors
to directors whose term will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following
election. In addition, the Company's Restated Certificate of Incorporation
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the authorized number of directors. This classification of the Board of
Directors may have the effect of delaying or preventing changes in control or
management of the Company.
Each officer of the Company is elected by and serves at the discretion of the
Board of Directors. Each of the Company's officers and directors, other than
nonemployee directors, devotes substantially full time to the affairs of the
Company. The Company's nonemployee directors devote such time to the affairs of
the Company as is necessary to discharge their duties. There are no family
relationships among any of the directors or executive officers of the Company.
Pursuant to a voting agreement dated September 11, 1996 between the Company and
certain stockholders of the Company, INVESCO Trust Company, an investor in the
Company, was granted the right to designate a representative to serve as
director of the Company. David B. Musket serves on the Board as the designated
representative of INVESCO Trust Company. Upon the consummation of the Offering,
this voting agreement will terminate by its terms.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews the internal accounting
procedures of the Company and consults with and reviews the services provided
by the Company's independent accountants. The members of the Audit Committee
are Messrs. Edwards, Illingworth and Musket. The Compensation Committee of the
Board of Directors reviews and recommends to the Board the compensation and
benefits of all officers, employees and consultants of the Company and
establishes and reviews general policies relating to compensation and benefits
of employees of the Company. The members of the Compensation Committee are
Messrs. Edwards, Douglass and Myers.
DIRECTOR COMPENSATION
The Company's directors do not receive cash compensation for services on the
Board of Directors or any committee thereof, but directors may be reimbursed
for reasonable expenses in connection with attendance at Board and committee
meetings. Following consummation of the Offering, non-employee directors may
receive stock option grants pursuant to the Company's 1997 Director Option
Plan. See "Stock Plans--1997 Director Option Plan."
39
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the information for the year ended December 31,
1996 regarding the compensation of the Company's Chief Executive Officer. None
of the Company's executive officers received total compensation for such fiscal
years in excess of $100,000.
1996 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
---------------------------------------------------------------
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION SALARY($) BONUS COMPENSATION($) OPTIONS COMPENSATION($)
- ------------------ --------- ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Stuart D. Edwards 61,538(1) -- -- -- 1,846(2)
Chief Executive Officer
</TABLE>
- -------
(1) Mr. Edwards began receiving a salary from the Company in September 1996.
(2) Reflects amount for automobile allowance.
OPTION GRANTS IN LAST FISCAL YEAR
The Company made no stock option grants to its Chief Executive Officer during
the year ended December 31, 1996.
STOCK PLANS
1996 Stock Plan
The Company's 1996 Stock Plan (the "1996 Plan") was approved by the Board of
Directors in March 1996 and by the stockholders in July 1996. The 1996 Plan was
amended and restated in August 1997. A total of 3,350,000 shares of Common
Stock have been reserved for issuance under the 1996 Plan. As of August 31,
1997, 385,851 shares had been issued upon exercise of stock options granted,
2,342,971 shares were subject to outstanding options and 621,178 shares
remained available for future issuance under the 1996 Plan.
The 1996 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Code, to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and stock
purchase rights ("SPRs") to employees, directors and consultants. The 1996 Plan
provides for an increase of 750,000 shares on the date of the stockholder's
annual meeting to be held in 1998 and additional increases on the date of each
subsequent stockholders' annual meeting equal to the lesser of (i) 2.5% of the
outstanding shares or (ii) a lesser amount determined by the Board. Unless ter-
minated sooner, the 1996 Plan will terminate automatically in March 2006.
The 1996 Plan may be administered by the Board of Directors or a committee of
the Board (as applicable, the "Administrator"). The Administrator has the power
to determine the terms of the options or SPRs granted, including the exercise
price of the option or SPR, the number of shares subject to each option or SPR,
the exercisability thereof, and the form of consideration payable upon such
exercise. In addition, the Administrator has the authority to amend, suspend or
terminate the 1996 Plan, provided that no such action may affect any share of
Common Stock previously issued and sold or any option previously granted under
the 1996 Plan.
Options and SPRs granted under the 1996 Plan are not generally transferable by
the optionee, and each option and SPR is exercisable during the lifetime of the
optionee only by such optionee. Options granted under the 1996 Plan must gener-
ally be exercised within ninety days after the end of optionee's status as an
employee, director or consultant of the Company, or within twelve months after
such optionee's termination by death or disability, but in no event later than
the expiration of the option's ten year term.
In the case of SPRs, unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason (including death or disability). The
purchase price for shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repur-
chase option shall lapse at a rate determined by the Administrator.
40
<PAGE>
The exercise price of all incentive stock options granted under the 1996 Plan
must be at least equal to the fair market value of the Common Stock on the date
of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1996 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based compensa-
tion" within the meaning of Section 162(m) of the Code, the exercise price must
at least be equal to the fair market value of the Common Stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any incentive stock option granted must equal at least
110% of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options granted
under the 1996 Plan may not exceed ten years.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option shall be assumed or an equivalent option substituted for by
the successor corporation. If the outstanding options are not assumed or sub-
stituted for by the successor corporation, the Administrator shall provide for
the optionee to have the right to exercise the option or SPR as to all of the
optioned stock, including shares as to which it would not otherwise be exercis-
able. If the Administrator makes an option or SPR exercisable in full in the
event of a merger or sale of assets, the Administrator shall notify the
optionee that the option or SPR shall be fully exercisable for a period of 15
days from the date of such notice, and the option or SPR will terminate upon
the expiration of such period.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was
adopted by the Board of Directors in September 1997 subject to stockholder
approval. A total of 50,000 shares of Common Stock has been reserved for issu-
ance under the 1997 Purchase Plan, plus annual increases equal to the lesser of
(i) 175,000 shares, (ii) 1% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board.
The 1997 Purchase Plan, which is intended to qualify under Section 423 of the
Code, contains consecutive, overlapping, 24 month offering periods. Each
offering period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of the Offering and ends on
the last trading day on or before October 31, 1999.
Employees are eligible to participate if they are customarily employed by the
Company or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, any employee who (i) immedi-
ately after grant owns stock possessing 5% or more of the total combined voting
power or value of all classes of the capital stock of the Company, or (ii)
whose rights to purchase stock under all employee stock purchase plans of the
Company accrues at a rate which exceeds $25,000 worth of stock for each cal-
endar year may be not be granted an option to purchase stock under the 1997
Purchase Plan. The 1997 Purchase Plan permits participants to purchase Common
Stock through payroll deductions of up to 10% of the participant's "compensa-
tion." Compensation is defined as the participant's base straight time gross
earnings, overtime and commissions but excludes payments for shift premium,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single purchase
period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase shares
of Common Stock at the end of each purchase period. The price of stock pur-
chased under the 1997 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock at the beginning of the offering period or at the end
of the purchase period. In the event the fair market value at the end of a pur-
chase period is less than the fair market value at the beginning of the
offering period, the participants will be withdrawn from the current offering
period following exercise and automatically re-enrolled in a new offering
period. The new offering period will use the lower fair market value as of the
first date of the new offering period to determine the purchase price for
future purchase periods. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1997 Purchase Plan are not transferable by a partici-
pant other than by will, the laws of descent and distribution, or as otherwise
provided under the 1997 Purchase Plan. The 1997 Purchase Plan provides that, in
the event of a merger of the Company with or into another corporation or a sale
of substantially all of the Company's assets, each outstanding option may be
assumed or substituted for by the successor corporation. If the successor cor-
poration refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new
41
<PAGE>
exercise date will be set. The 1997 Purchase Plan will terminate in August
2007. The Board of Directors has the authority to amend or terminate the 1997
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1997 Purchase Plan.
1997 Director Option Plan
The 1997 Director Option Plan (the "Director Plan") was adopted by the Board of
Directors in September 1997 subject to stockholder approval. The Director Plan
provides for the grant of nonstatutory stock options to non-employee directors.
The Director Plan has a term of ten years, unless terminated sooner by the
Board. A total of 350,000 shares of Common Stock have been reserved for issu-
ance under the Director Plan, plus annual increases equal to (i) the optioned
stock underlying options granted in the immediately preceding year, or (ii) a
lesser amount determined by the Board.
The Director Plan provides that each non-employee director shall automatically
be granted an option to purchase 20,000 shares of Common Stock (the "Initial
Option") on the date which such person first becomes a non-employee director,
unless immediately prior to becoming a non-employee director, such person was
an employee director of the Company. In addition to the Initial Option, each
non-employee director shall automatically be granted an option to purchase
5,000 shares (a "Subsequent Option") on the date of the Company's annual
meeting of stockholders, if on such date he or she shall have served on the
Board for at least six months. Each Initial Option and each Subsequent Option
shall have a term of ten years. The shares subject to the Initial Option shall
vest as to 25% of the optioned stock one year from the date of grant, and 1/48
of the optioned stock shall vest each month thereafter, provided the person
continues to serve as a Director on such dates. The exercise price of each Ini-
tial Option and each Subsequent Option shall be 100% of the fair market value
per share of the Common Stock, generally determined with reference to the
closing price of the Common Stock as reported on the Nasdaq National Market on
the last trading day prior to date of grant.
In the event of a merger of the Company or the sale of substantially all of the
assets of the Company, each option may be assumed or an equivalent option sub-
stituted for by the successor corporation. If an option is assumed or substi-
tuted for by the successor corporation, it shall continue to vest as provided
in the Director Plan. However, if a non-employee director's status as a
director of the Company or the successor corporation, as applicable, is termi-
nated other than upon a voluntary resignation by the non-employee director,
each option granted to such non-employee director shall become fully vested and
exercisable. If the successor corporation does not agree to assume or substi-
tute for the option, each option shall become fully vested and exercisable for
a period of 15 days from the date the Board notifies the optionee of the
option's full exercisability, after which period the option shall terminate.
Options granted under the Director Plan must be exercised within three months
of the end of the optionee's tenure as a director of the Company, or within
twelve months after such director's termination by death or disability, but in
no event later than the expiration of the option's ten year term. No option
granted under the Director Plan is transferable by the optionee other than by
will or the laws of descent and distribution, and each option is exercisable,
during the lifetime of the optionee, only by such optionee.
EMPLOYEE RETIREMENT PLANS
The Company has a 401(k) Plan which stipulates that all full-time employees
with at least 60 days of employment can elect to contribute to the 401(k) Plan,
subject to certain limitations, up to 15% of salary on a pretax basis. The Com-
pany has the option to provide matching contributions but has not done so to
date.
42
<PAGE>
CERTAIN TRANSACTIONS
The Company's operations, prior to incorporation and until its April 1996
issuance of Series A Preferred Stock, were funded by VidaCare International,
Inc. ("VidaCare"), a private holding company of Stuart D. Edwards, the Chairman
of the Board, Chief Executive Officer and President of the Company. The
expenses incurred prior to incorporation consisted primarily of payroll,
consultant and legal costs incurred in the establishment of the Company,
intellectual property protection and initial research and development efforts.
Of the $213,660 invested by VidaCare, $63,660 was converted into 63,660 shares
of Series A Preferred Stock in May 1996 and $150,000 was repaid in cash in
April 1996. Since the beginning of the Company's last fiscal year, Mr. Edwards
was indebted to the Company for short-term loans totalling, in the aggregate,
$142,813. The loans carried no interest and the total amount was repaid in
August 1997.
In March 1996, in connection with its formation, the Company issued and sold an
aggregate of 2,365,000 shares of Common Stock to a total of 16 investors at a
purchase price of $0.001 per share. The officers, directors and five percent
stockholders who purchased shares of Common Stock are (i) Stuart D. Edwards,
1,000,000 shares, (ii) Stephen M. Rudy, 5,000 shares, (iii) Ronald G. Lax,
150,000 shares, and (iv) David L. Douglass, 500,000 shares.
In April and May 1996, the Company issued and sold an aggregate of 1,784,160
shares of Series A Preferred Stock to a total of 36 investors at a purchase
price of $1.00 per share. The directors who purchased shares of Series A Pre-
ferred Stock were (i) Ronald G. Lax, 50,000 shares, (ii) David B. Musket,
25,000 shares and (iii) Eric N. Doelling, 15,000 shares.
In September and October 1996, the Company issued and sold an aggregate of
3,500,000 shares of Series B Preferred Stock to a total of 30 investors at a
purchase price of $3.00 per share. The officers, directors and five percent
stockholders who purchased shares of Series B Preferred Stock are (i) persons
and entities affiliated with David B. Musket, 177,700 shares, (ii) Global
Health Sciences Fund, a mutual fund company advised by INVESCO Trust Company,
1,000,000 shares, (iii) entities affiliated with The Travelers Companies,
1,000,000 shares, and (iv) HPB Associates, L.P., 666,667 shares. Pursuant to
the terms of the Series B Preferred Stock Purchase Agreement, a finder's fee
was paid to an entity affiliated with Mr. Musket, Musket Research Associates
("MRA") totaling 7% of the aggregate proceeds received by the Company from the
sale of Series B Preferred Stock. The total finder's fee to MRA of $710,223 was
paid by the issuance of 60,000 shares of Series B Preferred Stock and the
payment of $530,233. Additionally, in connection with the Series B Preferred
Stock financing, MRA and the Company entered into an agreement whereby for each
1% of the shares actually sold in the Company's initial public offering that
are purchased by investors or parties directly affiliated with the investors
identified by MRA in the Series B Preferred Stock financing, MRA will be
granted options or warrants to purchase 1,000 shares of Common Stock at a price
equivalent to the initial public offering price. Such options or warrants if
issued, will have a five year term and be entitled to antidilution and
piggyback registration rights.
During the year ended December 31, 1996, RGL Leasing, a company affiliated with
Ronald G. Lax, a stockholder and Director of the Company, leased equipment with
a value of $78,000 to the Company. The lease agreement provides terms compa-
rable to other lease agreements entered into by the Company.
In April 1997, the Company issued and sold 714,286 shares of Series C Preferred
Stock to Medtronic Asset Management, Inc., an investment entity of Medtronic,
at a purchase price of $7.00 per share. In connection with this transaction,
the Company granted to Medtronic exclusive distribution rights over certain of
the Company's products and devices in the European Union, Australia, Southeast
Asia and certain other areas until April 21, 2000.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Common Stock as of August 31, 1997,
giving effect to the Preferred Stock Conversion, and as adjusted to reflect the
sale of Common Stock offered by the Company hereby for (i) each person who is
known by the Company to own beneficially more than five percent of the Common
Stock, (ii) each of the Company's directors, (iii) the Company's Chief Execu-
tive Officer and (iv) all of the Company's directors and executive officers as
a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
------------------------------------
PERCENT PERCENT
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
- ------------------------------------ ------------- ---------- ----------
<S> <C> <C> <C>
INVESCO Trust Company(2) 1,000,000 11.4%
Attn: Buck Phillips
7800 East Union Avenue, Suite 1100
Denver, CO 80237
Entities affiliated with The 1,000,000 11.4%
Travelers Companies(3)
Attn: Don Scudder
The Travelers Companies
One Tower Square
Hartford, CT 06183
Stuart D. Edwards 808,500 9.2%
Somnus Medical Technologies, Inc.
285 N. Wolfe Road
Sunnyvale, CA 94086
Medtronic Asset Management, Inc. 714,286 8.2%
7000 Central Avenue, NE
Minneapolis, MN 55432-3576
HPB Associates, L.P. 666,667 7.6%
Attn: Howard Berkowitz
888 Seventh Avenue
New York, NY 10106
David L. Douglass 500,000 5.7%
Delphi Ventures
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Ronald G. Lax 300,000 3.4%
Somnus Medical Technologies, Inc.
285 N. Wolfe Road
Sunnyvale, CA 94086
David B. Musket(4) 220,866 2.5%
Musket Research Associates
125 Cambridgepark Drive
Cambridge, MA 02140
Eric N. Doelling(5) 94,000 1.1%
David Illingworth(6) 9,166 *
Woodrow A. Myers, Jr., M.D.(7) 1,666 *
All directors and executive officers 2,093,780 23.7%
as a group (12
persons)(4)(5)(6)(7)(8)
</TABLE>
- -------
* Represents beneficial ownership of less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or invest-
ment power with respect to securities. Beneficial ownership also includes
shares of stock subject to options or warrants currently exercisable or
convertible, or exercisable or convertible within 60 days after the date of
this table. Except as indicated by footnote, and subject to community prop-
erty laws where applicable, to the knowledge of the Company, all persons
named in the table above have sole voting and investment power with respect
to all shares of Common Stock, shown as beneficially owned by them. Per-
centage of beneficial ownership based on 8,749,297 shares of Common Stock
outstanding as of August 31, 1997 and shares of Common Stock out-
standing upon consummation of the Offering.
(2) These shares are owned by the Global Health Sciences Fund, a mutual fund
company advised by INVESCO Trust Company. INVESCO Trust Company has full
voting and investment authority for these shares and is therefore the bene-
ficial owner.
(3) Consists of 450,000 shares held by The Travelers Insurance Company, 440,000
shares held by The Travelers Indemnity Company, 60,000 shares held by The
Phoenix Insurance Company and 50,000 shares held by The Travelers Life and
Annuity Company.
(4) Includes 85,600 shares held by MedCap I Corp. and 41,100 shares held by
ProMed Partners, L.P. Mr. Musket is a managing Member of ProMed Management,
LLC which manages both MedCap I Corp. and ProMed Partners, L.P. and dis-
claims beneficial ownership of the shares held by such entities except to
the extent of his proportionate ownership interest therein. Also includes
options to purchase up to 9,166 shares within 60 days after August 31,
1997.
(5) Includes options to purchase up to 12,500 shares within 60 days after
August 31, 1997.
(6) Consists of options to purchase up to 9,166 shares within 60 days after
August 31, 1997.
(7) Consists of options to purchase up to 1,666 shares within 60 days after
August 31, 1997.
(8) Includes options to purchase up to 40,832 shares within 60 days after
August 31, 1997.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 50,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock after giving effect to
the amendment of the Company's Restated Certificate of Incorporation upon the
consummation of the Offering.
The following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Restated Certificate of Incorpora-
tion which is included as an exhibit to the Registration Statement of which
this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of August 31, 1997, there were 8,749,297 shares of Common Stock outstanding
(assuming the Preferred Stock Conversion) which were held of record by 104
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose. See "Dividend Poli-
cy." In the event of a liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock.
PREFERRED STOCK
Effective upon the consummation of the Offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock, none of which will
be outstanding. The Board of Directors will have the authority, subject to any
limitations prescribed by law, without further action by the stockholders, to
issue the undesignated Preferred Stock in one or more series, to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued shares of undesignated Preferred Stock and to fix the number of
shares constituting any series and the designation of such series.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of, and the voting and other rights of the holders of, Common Stock. At
present, the Company has no plans to issue any of the Preferred Stock.
WARRANTS
As of August 31, 1997, the Company had outstanding warrants to purchase 37,500
shares of Common Stock at $1.00 per share, expiring in June 2006, and 25,000
shares of Common Stock at $3.00 per share, expiring in October 2001. Each war-
rant is exercisable immediately and contains provisions for the adjustment of
the exercise price and the aggregate number of shares issuable upon the exer-
cise of the warrant under certain circumstances, including stock dividends,
stock splits, reorganizations and reclassifications. Each warrant may be exer-
cised, without the payment of cash, for a number of shares of Common Stock
determined pursuant to a net issue exercise formula contained in the warrant.
Each warrant holder has certain registration rights. See "Registration Rights
of Certain Holders."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 5,944,858 shares (the "Registrable Securities") of Common Stock
(including up to 62,500 shares of Common Stock issuable upon exercise of out-
standing warrants) or their transferees are entitled to certain rights with
respect to the registration of such shares under the Securities Act. These
rights are provided under the terms of agreements between the Company and the
holders of the Registrable Securities. Subject to certain limitations in such
agreements and to the Lock-up Agreements, the holders of at least a majority of
the Registrable Securities may require, on two occasions beginning three months
after the date of this Prospectus, that the Company use its best efforts to
register the Registrable Securities for public resale. In addition, if the Com-
pany registers any of its Common Stock either for its own account or for the
account of other security holders, the holders of Registrable Securities are
entitled to include their shares of Common Stock in the registration, subject
to the ability of the underwriters to limit the number of shares included in
such offering. The holders of at least five percent of the Registrable Securi-
ties may also require the Company to register all or a portion of
45
<PAGE>
their Registrable Securities on Form S-3 when use of such form becomes avail-
able to the Company, provided, among other limitations, that the proposed
aggregate selling price (net of any underwriters' discounts or commissions) is
at least $1 million. All registration expenses must be borne by the Company and
all selling expenses relating to Registrable Securities must be borne by the
holders of the securities being registered.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business combina-
tion is approved in a prescribed manner. For purposes of Section 203, a "busi-
ness combination" includes a merger, asset sale or other transaction resulting
in a financial benefit to the interested stockholder, and an "interested stock-
holder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
The Company's Amended and Restated Certificate of Incorporation and Bylaws also
require that, effective upon the consummation of the Offering, any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board or the Chief Executive Officer. The Company's Amended and
Restated Certificate of Incorporation will also provide for a classified Board
which will be instituted at such time as the Company is no longer subject to
Section 2115 of the California Corporations Code and specifies that the
authorized number of directors may be changed only by an amendment to the
Bylaws, duly adopted by the Board of Directors or the stockholders, or by a
duly adopted amendment to the Certificate of Incorporation. These provisions
may have the effect of deterring hostile takeovers or delaying changes in
control or management of the Company. See "Management--Board Composition."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock of the Company in
the public market could materially and adversely affect the prevailing market
price of the Common Stock and the ability of the Company to raise equity cap-
ital in the future.
Upon consummation of the Offering, the Company will have shares of Common
Stock outstanding, assuming no exercise of options after August 31, 1997. Of
these shares, the shares sold in the Offering will be freely tradable
without restriction under the Securities Act, unless held by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act. The
remaining 8,749,297 shares of Common Stock held by existing stockholders are
"restricted securities" within the meaning of the Securities Act. The holders
of the Restricted Shares have entered into Lock-up Agreements under which such
holders have agreed not to sell, directly or indirectly, or otherwise dispose
of any of their shares for a period of 180 days after the date of this Pro-
spectus without the prior written consent of J.P. Morgan Securities Inc. J.P.
Morgan Securities Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to the Lock-up Agree-
ments. As a result of the Lock-up Agreements and the provisions of Rules 144
and 701 promulgated under the Securities Act upon consummation of the Offering,
the Restricted Shares will be available for sale in the public market as fol-
lows: (i) no Restricted Shares will be eligible for immediate sale on the date
of this Prospectus, (ii) 7,965,351 Restricted Shares will be eligible for sale
180 days after the date of the Prospectus upon expiration of the Lock-up Agree-
ments and (iii) the remaining 783,946 Restricted Shares will be eligible for
sale at various times over a period less than one year following the completion
of the Offering, subject to volume limitations pursuant to Rule 144. As of
August 31, 1997 2,242,971 shares were issuable upon exercise of currently out-
standing options, all of which are subject to 180 day lock-up agreements. Of
these shares, 712,517 will be vested 180 days after the date of the Prospectus.
As of August 31, 1997, 62,500 shares were issuable upon exercise of currently
outstanding warrants, all of which are subject to the Lock-up Agreements. All
of these shares will become eligible for sale in the public market 180 days
after the date of this Prospectus upon expiration of the Lock-up Agreements.
After the Offering, the holders of approximately 5,944,858 shares of Common
Stock (including up to 62,500 shares of Common Stock issuable upon exercise of
outstanding warrants as of the date of this Prospectus) will be entitled to
certain demand and piggyback rights with respect to registration of such shares
under the Securities Act upon termination of the Lock-up Agreements. If such
holders, by exercising their demand registration rights, cause a large number
of securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Company's Common Stock. In
addition, the Company intends to file a Registration Statement on Form S-8 to
register shares of Common Stock issuable upon exercise of options granted under
the 1996 Plan and Director Plan and sold pursuant to the 1997 Purchase Plan.
Following the filing of the S-8, shares of Common Stock issued under such plans
will be available for sale in the public market, subject to the Rule 144 volume
limitations as applicable to affiliates.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner, except an affiliate) is enti-
tled to sell in "broker's transactions" or to market makers, within any three-
month period commencing 90 days after the date of this Prospectus, a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately shares immediately
after the Offering) or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the required filing of a Form
144 with respect to such sale. Sales under Rule 144 are generally subject to
certain manner of sale provisions and notice requirements and to the avail-
ability of current public information about the Company. Under Rule 144(k), a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner, except an affiliate), is entitled to sell such shares without
having to comply with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. Under Rule 701 under the Securities Act, per-
sons who purchase shares upon exercise of options granted prior to the effec-
tive date of the Offering are entitled to sell such shares 90 days after the
effective date of the Offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
47
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom J.P. Morgan
Securities Inc., UBS Securities LLC and Smith Barney Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the underwriting agreement between the
Company and the representatives (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
---------
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
J.P. Morgan Securities Inc. ..........................................
UBS Securities LLC....................................................
Smith Barney Inc. ....................................................
----
Total...............................................................
====
</TABLE>
The nature of the Underwriters' obligations under the Underwriting Agreement is
such that all of the Common Stock being offered, excluding shares covered by
the over-allotment option granted to the Underwriters, must be purchased if any
are purchased.
The Representatives have advised the Company that the several Underwriters pro-
pose to offer the Common Stock to the public initially at the public offering
price set forth on the cover page of this Prospectus and may offer the Common
Stock to selected dealers at such price less a concession not to exceed $
per share. The Underwriters may allow, and such dealers may reallow, a conces-
sion to other dealers not to exceed $ per share. After the public offering
of the Common stock, the public offering price and other selling terms may be
changed by the Representatives.
The Company has granted the Underwriters an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to additional shares of
Common Stock from the Company at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to the option, each of the Underwriters
will be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of the Common Stock offered hereby.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company and the Representatives. Among the factors to be considered in
determining the initial public offering price are prevailing market conditions,
the market valuations of certain publicly traded companies, the Company's past
and present financial performance and revenues and earnings of comparable
companies in recent periods, estimates of the business potential and prospects
of the Company, the experience of the Company's management and the position of
the Company in its industry.
The Representatives have informed the Company that the Underwriters will not
confirm, without customer authorization, sales to their customer accounts as to
which they have discretionary trading power.
The Company and current stockholders, who in the aggregate hold more than %
of the Common Stock outstanding immediately prior to the consummation of the
Offering, have agreed not to offer, sell or otherwise dispose of any Common
Stock or any securities convertible into Common Stock or register for sale
under the Securities Act any Common Stock for a period of 180 days after date
of this Prospectus without the prior written consent of J.P. Morgan Securities
Inc., except that the Company may, without such consent, issue Common Stock and
grant options pursuant to the Stock Plans and issue Common Stock pursuant to
the exercise of outstanding warrants. See "Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against certain liabili-
ties, including liabilities under the Securities Act, or to contribute to pay-
ments the Underwriters may be required to make in respect thereof.
48
<PAGE>
The Underwriters have represented and agreed that (i) they have not offered or
sold and, prior to the expiry of the period of six months from the closing of
the Offering, will not offer or sell, any shares of Common Stock to persons in
the United Kingdom, except persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public within the
meaning of the Public Offers of Securities Regulations 1995, (ii) they have
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by them in relation to the
Offering in, from or otherwise involving the United Kingdom and (iii) they have
only issued or passed on, and will only issue and pass on, in the United
Kingdom any document received by them in connection with the Offering to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisement) (Exemptions) Order 1995 or is a person to
whom such document may otherwise lawfully be issued or passed on.
Application has been made to have the Common Stock quoted on The Nasdaq
National Market under the trading symbol "SOMN."
At the Company's request, the Underwriters have reserved up to shares of
Common Stock for sale at the initial public offering price to the Company's
employees and other persons having business relationships with the Company. The
number of shares of Common Stock available for sale to other members of the
public will be reduced to the extent that these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters
on the same basis as the other shares offered hereby.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock
offered hereby. Specifically, the Underwriters may overallot in connection with
the Offering, creating a syndicate short position. In addition, the Under-
writers may bid for, and purchase, Common Stock in the open market to cover
syndicate short positions created in connection with the Offering or to stabi-
lize the price of the Common Stock. Finally, the underwriting syndicate may
reclaim selling concessions allowed for distributing Common Stock in the Offer-
ing, if the syndicate repurchases previously distributed Common Stock in the
market to cover overallotments or to stabilize the price of the Common Stock.
Any of these activities may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriters are not required
to engage in any of these activities, and may end any of them at any time.
49
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Cahill Gordon & Reindel, a partnership including a profes-
sional corporation, is acting as counsel for the Underwriters in connection
with certain legal matters relating to the shares of Common Stock offered
hereby. As of the date of this Prospectus, certain members, associates and
investment partnerships of Wilson Sonsini Goodrich & Rosati, Professional Cor-
poration, beneficially own 138,333 shares of the Common Stock of the Company.
EXPERTS
The consolidated financial statements of Somnus Medical Technologies, Inc. as
of December 31, 1996 and for the period from inception (January 19, 1996)
through December 31, 1996 appearing in this Prospectus and Registration State-
ment have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon appearing elsewhere herein, and are included in reli-
ance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors--Dependence
Upon Patents and Proprietary Technology; Risk of Infringement" and "Business--
Patents and Proprietary Rights" have been reviewed and approved by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, as experts in such
matters, and are included herein in reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and Common Stock offered hereby, reference is made to the Registration
Statement and such exhibits and schedules filed therewith, which may be
inspected without charge at, or copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Registration Statement and such exhibits and schedules are also available on
the Commission's Web site (http://www.sec.gov). Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
50
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statement of Stockholders' Equity.............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Somnus Medical Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Somnus Medical
Technologies, Inc. as of December 31, 1996, and the related consolidated state-
ment of operations, stockholders' equity, and cash flows for the period from
inception (January 19, 1996) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audit provides a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Somnus Medical
Technologies, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the period from inception (January 19, 1996)
to December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 7, 1997
except for Note 8,
as to which the date is
September 4, 1997
F-2
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------------------
PRO FORMA
STOCKHOLDERS'
AS OF AS OF EQUITY AT
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1997
------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,828,708 $ 9,211,064
Accounts receivable -- 233,434
Accounts receivable from officer 12,359 111,221
Other current assets 45,790 64,763
----------- -----------
Total current assets 8,886,857 9,620,482
Property and equipment, net 1,140,168 2,292,238
Other assets 3,840 61,270
----------- -----------
$10,030,865 $11,973,990
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabili-
ties $ 632,183 $ 814,230
Accrued employee benefits 69,169 74,281
Current obligations under lease line
of credit 203,137 372,878
----------- -----------
Total current liabilities 904,489 1,261,389
Long-term obligations under lease line
of credit 773,482 1,738,389
Commitments
Stockholders' equity:
Convertible preferred stock, par
value $0.001 per share, 5,371,660
shares authorized at December 31,
1996 and 6,196,660 shares at June
30, 1997 (unaudited); pro forma
unaudited: 5,000,000 shares autho-
rized, no shares outstanding, issu-
able in series:
Series A: 1,871,660 shares
designated, 1,784,160 shares issued
and outstanding at December 31, 1996
and June 30, 1997 (unaudited);
aggregate liquidation preference of
$1,784,160; pro forma unaudited: no
shares outstanding 1,784 1,784 $ --
Series B: 3,500,000 and 3,525,000
shares designated at December 31,
1996 and June 30, 1997 (unaudited),
respectively; 3,500,000 shares
issued and outstanding at December
31, 1996 and June 30, 1997
(unaudited); aggregate liquidation
preference of $10,500,000; pro forma
unaudited: no shares outstanding 3,500 3,500 --
Series C: 800,000 shares designated,
714,286 shares issued and
outstanding at June 30, 1997
(unaudited); aggregate liquidation
preference of $5,000,002; pro forma
unaudited: no shares outstanding -- 714 --
Common stock, 20,000,000 shares
authorized, par value $0.001 per
share, shares issued and
outstanding: 2,463,125 and 2,568,455
shares at December 31, 1996 and June
30, 1997 (unaudited), respectively;
pro forma unaudited: 50,000,000
shares authorized, 8,566,901 shares
issued and outstanding 2,463 2,568 8,566
Additional paid-in capital 11,969,044 18,172,597 18,172,597
Receivable from stockholder (2,500) -- --
Deferred stock compensation (524,280) (1,562,925) (1,562,925)
Accumulated deficit (3,097,117) (7,644,026) (7,644,026)
----------- ----------- -----------
Total stockholders' equity 8,352,894 8,974,212 $ 8,974,212
----------- ----------- ===========
$10,030,865 $11,973,990
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 19, (JANUARY 19, SIX MONTHS
1996) TO 1996) TO ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Total revenues $ -- $ -- $ 231,425
Manufacturing start-up costs and
costs of revenues 403,088 60,089 958,643
----------- --------- -----------
Gross loss (403,088) (60,089) (727,218)
Operating expenses:
Research and development 1,303,424 305,966 2,051,472
Sales and marketing 237,326 62,170 592,490
General and administrative 1,251,686 363,032 1,347,366
----------- --------- -----------
Total operating expenses 2,792,436 731,168 3,991,328
----------- --------- -----------
Loss from operations (3,195,524) (791,257) (4,718,546)
Interest income 122,325 5,478 215,610
Interest expense (23,918) -- (67,894)
Other income -- -- 23,921
----------- --------- -----------
Net loss $(3,097,117) $(785,779) $(4,546,909)
=========== ========= ===========
Pro forma net loss per share $ (0.37) $ (0.11) $ (0.48)
=========== ========= ===========
Shares used in computing pro forma
net loss per share 8,451,565 7,445,186 9,457,944
=========== ========= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------
SERIES A SERIES B SERIES C COMMON STOCK
---------------- ---------------- -------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ ------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders at
$0.001 per
share in
exchange for
cash and
technology -- $ -- -- $ -- -- $ -- 2,335,000 $2,335
Issuance of
common stock at
$0.10 per share
for services -- -- -- -- 30,000 30
Issuance of
Series A
convertible
preferred stock
at $1.00 per
share in
exchange for
cash, net of
issuance costs
of $16,328 1,784,160 1,784 -- -- -- -- -- --
Issuance of
Series B
convertible
preferred stock
at $3.00 per
share in
exchange for
cash, net of
issuance costs
of $845,468 -- -- 3,500,000 3,500 -- -- -- --
Issuance of
common stock
upon exercise
of stock
options for
cash,
receivable and
associated
compensation
related to 1996
stock option
grants -- -- -- -- -- -- 98,125 98
Net loss -- -- -- -- -- -- -- --
--------- ------ --------- ------ ------- ---- --------- ------
Balances at
December 31,
1996 1,784,160 1,784 3,500,000 3,500 -- -- 2,463,125 2,463
Issuance of
Series C
convertible
preferred stock
at $7.00 per
share in
exchange for
cash, net of
issuance costs
of $47,454
(unaudited) -- -- -- -- 714,286 714 -- --
Issuance of
common stock
upon exercise
of stock
options for
cash
(unaudited) -- -- -- -- -- -- 105,330 105
Repayment of
receivable from
stockholder
(unaudited) -- -- -- -- -- -- -- --
Deferred
compensation
related to
grant of stock
options
(unaudited) -- -- -- -- -- -- -- --
Amortization of
deferred
compensation
(unaudited) -- -- -- -- -- -- -- --
Net loss
(unaudited) -- -- -- -- -- -- -- --
--------- ------ --------- ------ ------- ---- --------- ------
Balances at June
30, 1997
(unaudited) 1,784,160 $1,784 3,500,000 $3,500 714,286 $714 2,568,455 $2,568
========= ====== ========= ====== ======= ==== ========= ======
<CAPTION>
ADDITIONAL RECEIVABLE DEFERRED TOTAL
PAID-IN FROM STOCK ACCUMULATED STOCKHOLDERS'
CAPITAL STOCKHOLDER COMPENSATION DEFICIT EQUITY
----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders at
$0.001 per
share in
exchange for
cash and
technology $ -- $ -- $ -- $ -- $ 2,335
Issuance of
common stock at
$0.10 per share
for services 2,970 -- -- -- 3,000
Issuance of
Series A
convertible
preferred stock
at $1.00 per
share in
exchange for
cash, net of
issuance costs
of $16,328 1,766,048 -- -- -- 1,767,832
Issuance of
Series B
convertible
preferred stock
at $3.00 per
share in
exchange for
cash, net of
issuance costs
of $845,468 9,651,032 -- -- -- 9,654,532
Issuance of
common stock
upon exercise
of stock
options for
cash,
receivable and
associated
compensation
related to 1996
stock option
grants 548,994 (2,500) (524,280) -- 22,312
Net loss -- -- -- (3,097,117) (3,097,117)
----------- ------ ----------- ----------- ----------
Balances at
December 31,
1996 11,969,044 (2,500) (524,280) (3,097,117) 8,352,894
Issuance of
Series C
convertible
preferred stock
at $7.00 per
share in
exchange for
cash, net of
issuance costs
of $47,454
(unaudited) 4,951,834 -- -- -- 4,952,548
Issuance of
common stock
upon exercise
of stock
options for
cash
(unaudited) 8,244 -- -- -- 8,349
Repayment of
receivable from
stockholder
(unaudited) -- 2,500 -- -- 2,500
Deferred
compensation
related to
grant of stock
options
(unaudited) 12,243,475 -- (1,243,475) -- --
Amortization of
deferred
compensation
(unaudited) -- -- 204,830 -- 204,830
Net loss
(unaudited) -- -- -- (4,546,909) (4,546909)
----------- ------ ----------- ----------- ----------
Balances at June
30, 1997
(unaudited) $18,172,597 $ -- $(1,562,925) $(7,644,026) $8,974,212
=========== ====== =========== =========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 19, (JANUARY 19, SIX MONTHS
1996) TO 1996) TO ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES
Net loss $(3,097,117) $ (785,779) $(4,546,909)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferred compensa-
tion -- -- 204,830
Depreciation and amortization 142,662 3,983 263,014
Issuance of stock for noncash con-
sideration 25,350 -- --
Changes in operating assets and
liabilities:
Other current assets (45,790) (14,523) (18,973)
Accounts receivable (12,359) (39,201) (332,296)
Other assets--noncurrent (3,840) -- (57,430)
Accounts payable and accrued lia-
bilities 632,183 627,659 182,047
Accrued employee benefits 69,169 13,043 5,112
----------- ---------- -----------
Net cash used in operating
activities (2,289,742) (194,818) (4,300,605)
CASH FLOWS USED IN INVESTING
ACTIVITIES
Capital expenditures (1,282,830) (642,539) (1,415,084)
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
Proceeds from issuance of preferred
stock 11,422,364 1,767,832 4,952,548
Proceeds from issuance of common
stock 2,297 1,985 10,849
Proceeds from borrowings under lease
line of credit 976,619 308,750 1,134,648
----------- ---------- -----------
Net cash provided by financing
activities 12,401,280 2,078,567 6,098,045
----------- ---------- -----------
Net increase in cash and cash
equivalents 8,828,708 1,241,210 382,356
Cash and cash equivalents, beginning
of period -- -- 8,828,708
----------- ---------- -----------
Cash and cash equivalents at end of
period $ 8,828,708 $1,241,210 $ 9,211,064
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 23,918 $ -- $ 67,894
=========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired
under lease line of credit $ 976,619 $ -- $ 1,161,889
=========== ========== ===========
Issuance of Series B preferred stock
in exchange for services $ 179,990 $ -- $ --
=========== ========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Ownership and Business
Somnus Medical Technologies, Inc. (the "Company"), originally Sleep
Technologies, Inc., was incorporated in Delaware on January 19, 1996. The
Company designs, develops, manufactures and markets medical devices that
utilize proprietary radiofrequency technology for the treatment of upper
airway disorders. The Company's Somnoplasty System is intended to offer
minimally-invasive, curative treatment alternatives for disorders of the
upper airway, including snoring, obstructive sleep apnea, enlarged
turbinates and enlarged tonsils. In 1996, the Company established Somnus
Medical Technologies Pty. Ltd. in Australia for purposes of conducting
clinical research studies on behalf of the Company. Collectively, the
entities are referred to as the Company.
Since inception, the Company's principal activities have been recruiting
personnel, raising capital and performing research and development. Subse-
quent to December 31, 1996, the Company received approval for the sale of
its first product which generated $231,425 of revenue for the six months
ended June 30, 1997. Accordingly, the Company is no longer considered to be
in the development stage.
From incorporation through June 30, 1997 the Company has incurred an
accumulated deficit of $7.6 million. Company activities have been financed
through the private placement of equity securities and loans from a Company
stockholder and founder who also serves as the Company's Chairman of the
Board of Directors, Chief Executive Officer and President.
In the long term, the Company plans to finance operations with revenues
from product sales. The Company's ability to continue as a going concern is
dependent upon additional financing and ultimately upon achieving
profitable operations. In the event it is necessary, the management of the
Company has the intent and believes it has the ability to delay or reduce
expenditures so as not to require additional financial resources if such
resources were not available.
Basis of Presentation
The consolidated financial statements include the accounts of Somnus
Medical Technologies, Inc. and Somnus Medical Technologies Pty. Ltd. All
significant intercompany accounts and transactions have been eliminated.
Interim Financial Information
The financial information at June 30, 1997 and for the period from incep-
tion (January 19, 1996) to June 30, 1996 and for the six months ended June
30, 1997 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Results of the June 30, 1997
period are not necessarily indicative of the results that may be expected
for the entire year.
Revenue Recognition
The Company recognizes revenue at the time products are shipped. To date,
no customers have been given contractual right of return or stock rotation
privileges. Product returns and sales allowances (which were not signifi-
cant through June 30, 1997) are estimated and provided for at the time of
sale.
Dependence on Sole Distributor and Suppliers
All sales recorded to date have been made to the Company's sole distribu-
tor, Medtronic, Inc. ("Medtronic"). The Distribution Agreement with
Medtronic, entered into on April 21, 1997, is for a period of three years
with defined minimum annual purchase requirements. The Agreement grants
Medtronic exclusive distribution rights of certain of the Company's prod-
ucts in the European Union, Australia, Southeast Asia and certain other
areas until April 21, 2000 (see Note 8). All sales in the period ended June
30, 1997 were to Medtronic's European operations.
F-7
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company purchases what is currently its only commercially available
radiofrequency ("RF") generator from a single-source supplier. Establishing
additional or replacement suppliers for such generator or certain of the
components used in the Company's products, if required, may not be
accomplished quickly and could involve significant additional costs. Any
supply interruption from suppliers or failure of the Company to obtain
alternative suppliers for the generator or such components would limit the
Company's ability to manufacture and sell its products and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted-
average number of common shares outstanding. Common equivalent shares from
stock options and warrants are excluded from the computation as their
effect is antidilutive, except that, pursuant to the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletins, common and common
equivalent shares (stock options, warrants and convertible preferred stock)
issued during the 12-month period prior to the initial filing of the
registration statement relating to the proposed public offering at prices
below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented (using
the treasury stock method for stock options and warrants).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
------------------------------------
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 19, (JANUARY 19, SIX MONTHS
1996) TO 1996) TO ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
Net loss per share $ (0.43) $ (0.12) $ (0.59)
========= ========= =========
Shares used in computing historical
net loss per share 7,189,272 6,704,759 7,673,784
========= ========= =========
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC staff policy, to common equivalent shares
from convertible preferred shares issued more than 12 months prior to the
proposed initial public offering that will be converted upon completion of
the Company's initial public offering (using the if-converted method) from
the original date of issuance.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("Statement 128"), which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement 128 is expected to result in no change to
the Company's historical net loss per share as stock options are
antidilutive and therefore have been excluded from the current computation.
Stock-Based Compensation
The Company accounts for stock-based awards to employees and directors in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25") and has adopted the dis-
closure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123").
F-8
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported results of operations during
the reporting period. Actual results could differ from these estimates.
Research and Development
Research and development costs, which include clinical and regulatory
costs, are charged to expense as incurred.
Inventory
Inventories are stated at the lower of cost, determined on an average cost
basis, and market value. During the six months ended June 30, 1997, the
Company acquired inventory for the first time. Inventory on hand at June
30, 1997 has been fully reserved at that date.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets. Equipment purchased
under the Company's lease line of credit is amortized over the lesser of
the lease term or the estimated useful lives of the related assets, which-
ever is shorter.
The Company adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed of,"
effective January 19, 1996. The adoption did not have a material impact on
the Company's financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. The Com-
pany maintains deposits with a financial institution in the United States
and invests its excess cash in U.S. government obligations and U.S. corpo-
rate securities which bear minimal risk. The Company had no short-term
investments at December 31, 1996 or June 30, 1997.
Management determines the appropriate classification of debt securities in
accordance with Statement No. 115, ("Accounting for Certain Investments in
Debt and Equity Securities") at the time of purchase and reevaluates such
designation as of each balance sheet date. At December 31, 1996 and June
30, 1997, all debt securities are designated as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses reported in stockholders' equity. At December
31, 1996 and June 30, 1997, the fair value of investments approximates
cost. The amortized cost of debt securities in this category is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income and have been immaterial in all
periods presented. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
Concentration of Credit Risk
The Company invests cash which is not required for immediate operating
needs principally in a diversified portfolio of financial instruments
issued by institutions with strong credit ratings. By policy, the amount of
credit exposure to any one institution, with the exception of U.S.
government-backed securities, is limited. These investments are not
collateralized and mature within two years. The Company has not experienced
significant losses on these investments.
The Company's revenues and trade accounts receivable consist of shipments
to one large, multinational distributor (see Note 8). The Company has not
incurred any credit losses to date.
F-9
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
2 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
------------------------
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Machinery and equipment $ 632,690 $1,447,150
Computer equipment 397,196 594,854
Furniture and fixtures 78,597 372,218
Purchased software 174,347 283,692
---------- ----------
1,282,830 2,697,914
Less accumulated depreciation and amortization (142,662) (405,676)
---------- ----------
Property and equipment, net $1,140,168 $2,292,238
========== ==========
</TABLE>
3 COMMITMENTS
Long-term obligations consist of capital lease arrangements and secured
borrowings used to acquire capital equipment. In 1996, the Company entered
into $2 million equipment lease lines of credit, of which $1,023,381
remains available at December 31, 1996. The borrowings bear interest at
Prime plus 1.5%-2% (9.75% to 10.25% at December 31, 1996) and are secured
by substantially all of the assets of the Company. The carrying value of
these lease obligations approximate their fair value. The fair value was
estimated using discounted cash flow analyses, based on the Company's
estimate of what the borrowing rate for a similar type of borrowing
arrangement would be.
Included in computer equipment and office equipment, furniture and fixtures
are assets with a cost and accumulated depreciation of approximately
$976,619 and $122,701 respectively, acquired pursuant to these obligations.
In conjunction with equipment term loans, which were repaid prior to
December 31, 1996, the Company issued warrants to purchase preferred stock
(see Note 5).
Future payments under equipment financing arrangements at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
---------------------
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Years ending December 31:
1997 $ 348,000 $ 258,511
1998 405,000 388,034
1999 417,000 355,466
2000 429,000 124,993
2001 441,000 --
2002 and thereafter 111,000 --
---------- ----------
Total minimum payments $2,151,000 1,127,004
==========
Less amount representing interest (150,385)
----------
Present value of minimum payments 976,619
Less current portion (203,137)
----------
Long-term portion $ 773,482
==========
</TABLE>
During the six months ended June 30, 1997 the Company entered into an addi-
tional $1 million equipment lease line of credit. A total of $861,492
remains available at June 30, 1997 from the various lease lines of credit.
F-10
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
3 COMMITMENTS (CONTINUED)
At December 31, 1996, the Company leased its facility under an operating
lease agreement which expired on May 16, 1997. On February 12, 1997, the
Company entered into a lease for new premises which expires on March 31,
2002.
Rent expense was approximately $71,000 for the period from inception (Jan-
uary 19, 1996) to December 31, 1996.
4 RELATED PARTY TRANSACTIONS
The Company's operations, until the April 1996 issuance of Series A
preferred stock, were funded by the Chief Executive Officer's private
holding company, VidaCare International, Inc. ("VidaCare"). The expenses
consisted primarily of payroll, consultant and legal costs incurred in the
establishment of the corporation and initial research and development
efforts. Of the $213,660 incurred by VidaCare, $63,660 was converted into
63,660 shares of Series A preferred stock in May 1996 and $150,000 was
repaid in cash in April 1996.
The Company's Series B preferred stock issuance in September 1996 included
a finder's fee to an entity associated with a member of the board of direc-
tors totaling 7% of the aggregate proceeds received by the Company from the
sale of Series B preferred stock. The agreement included a provision which
allowed the entity to receive not less than 25% of the fee owed by the Com-
pany in equity or debt instruments in the Company. Pursuant to this clause,
the total finder's fee owed of $710,233 was paid with 60,000 shares of
Series B preferred stock valued at $3.00 per share and $530,233 in cash.
This transaction has been included in the issuance costs of the Series B
offering. Additionally, in connection with the Series B preferred stock
financing, the entity associated with a director entered into an agreement
with the Company whereby for each 1% of the shares actually sold in the
Company's initial public offering that are purchased by investors or par-
ties directly affiliated with the investors placed by the entity in the
Series B preferred stock financing, the entity will be granted options or
warrants to purchase 1,000 shares of common stock at a price equivalent to
the initial public offering price. Such options or warrants, if issued,
will have a five-year term and be entitled to anti-dilution and piggyback
registration rights.
During fiscal 1996, a company affiliated with a stockholder and member of
the board of directors leased equipment with a value of $78,000 to the Com-
pany. The lease agreement provides terms comparable to other lease agree-
ments entered into by the Company.
5 STOCKHOLDERS' EQUITY
Preferred Stock
In April 1996, September 1996 and April 1997, the Company issued 1,784,160
Series A convertible preferred shares at a price of $1.00 per share,
3,500,000 Series B convertible preferred shares at a price of $3.00 per
share and 714,286 Series C convertible preferred shares at a price of $7.00
per share, respectively.
Each share of Series A, B and C convertible preferred stock is, at the
option of the holder, convertible into one share of common stock, subject
to certain adjustments for dilution, if any, resulting from future stock
issuances. The outstanding shares of convertible preferred stock
automatically convert into common stock immediately prior to the closing of
an underwritten public offering of common stock under the Securities Act of
1933 in which the Company receives at least $15,000,000 in gross proceeds
and the price per share is at least $6.00.
Series A, B and C convertible preferred stockholders are entitled to
noncumulative dividends of $0.08 per share. Dividends will be paid only
when declared by the board of directors out of legally available funds. No
dividends have been declared or paid as of December 31, 1996 or June 30,
1997.
The Series A, B and C convertible preferred stockholders are entitled to
receive, upon liquidation, an amount per share equal to the issuance price,
plus all declared but unpaid dividends. Thereafter, the remaining assets
and funds, if any, shall be distributed pro rata among the common stock-
holders.
F-11
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
5 STOCKHOLDERS' EQUITY (CONTINUED)
The Series A, B and C convertible preferred stockholders have voting rights
equal to the common shares issuable upon conversion.
Common Stock
The Company has sold 2,335,000 and 30,000 shares of common stock to
founders for $0.001 and $0.10 per share, respectively, which certain shares
are subject to repurchase rights which generally expire ratably over four
years. Upon termination of service, any unvested shares may be repurchased
by the Company at the issuance price. At June 30, 1997, 872,711 shares were
subject to these repurchase rights held by the Company.
The Company has reserved 5,998,446 shares of its common stock for issuance
upon conversion of its Series A, B and C preferred stock and 2,600,000
shares of common stock for issuance under its 1996 Stock Option Plan at
June 30, 1997.
1996 Stock Plan
Under the Company's 1996 Stock Plan (the "Plan"), which was adopted in
March 1996, options may be granted for common stock or common stock may be
issued, pursuant to actions by the board of directors, to eligible partici-
pants. Options granted are either incentive stock options or nonstatutory
stock options and are exercisable within the times or upon the events
determined by the board of directors as specified in each option agreement.
Incentive stock options granted under the Plan are at prices not less than
100% of the fair value at the date of grant, as determined by the board of
directors. Nonstatutory options granted under the plan are at prices not
less than 85% of the fair value on the date of the grant, as determined by
the board of directors. Stock options granted to a 10% stockholder shall
not be less than 110% of the fair value at the date of grant. Stock sold
under issuances is subject to repurchase by the Company upon termination of
the purchasers employment or services at the price paid upon issuance.
Options granted generally vest over a period of four years, with 25% of the
options vesting on the first anniversary of the grant. The term of the plan
is ten years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The effect of applying the minimum value method of FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") to the Company's
stock option grants did not result in pro forma net loss that is materially
different from historical amounts reported. Therefore, such pro forma
disclosure information is not separately presented herein. Future pro forma
net income and earnings/loss per share results may be materially different
from actual amounts reported.
The fair value of each option is estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividends, an expected life of between three and four years, nominal vola-
tility and a risk-free interest rate of 5.3% for fiscal 1996.
F-12
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
5 STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
----------------------------------------
OUTSTANDING STOCK OPTIONS
----------------------------
WEIGHTED-
AVERAGE
SHARES NUMBER OF EXERCISE PRICE
AVAILABLE SHARES PER SHARE
---------- ----------- ---------------
<S> <C> <C> <C>
Original authorization of shares 865,000 -- --
Additional shares authorized for
issuance 1,055,000 -- --
Options granted (1,751,550) 1,751,550 $ 0.17
Options exercised -- (98,125) $ 0.10
Options canceled 15,625 (15,625) $ 0.10
---------- ----------- -------------
Balance at December 31, 1996 184,075 1,637,800 $ 0.17
Additional shares authorized for
issuance (unaudited) 680,000 -- --
Options granted (unaudited) (448,900) 448,900 $ 0.61
Options exercised (unaudited) -- (105,330) $ 0.11
Options canceled (unaudited) 89,670 (89,670) $ 0.12
---------- ----------- -------------
Balance at June 30, 1997 (unau-
dited) 504,845 1,891,700 $ 0.29
========== =========== =============
Weighted-average fair value of
options granted during 1996 $ 0.03
=============
Weighted-average remaining con-
tractual life of options out-
standing at December 31, 1996 9.6 years
=============
Range of per share exercise price
of options outstanding at
December 31, 1996 $ 0.10-$0.30
=============
</TABLE>
At December 31, 1996, options to purchase 684,590 shares were exercisable.
Exercise prices per options outstanding as of June 30, 1997 ranged from
$0.10 to $0.70 per share. The weighted- average remaining contractual use
of those options is 9.35 years.
<TABLE>
<CAPTION>
EXERCISABLE
OPTIONS OUTSTANDING OPTIONS
------------------- -----------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
EXERCISE AVERAGE REMAINING AVERAGE
PRICE EXERCISE CONTRACTUAL EXERCISE
RANGE NUMBER PRICE LIFE (IN YEARS) NUMBER PRICE
-------- ------ --------- --------------- ------ ---------
<S> <C> <C> <C> <C> <C>
$0.10 836,000 $0.10 9.04 246,347 0.10
$0.30 703,900 0.30 9.40 79,660 0.30
$0.70 351,800 0.70 9.96 -- 0.70
--------- ----- ---- ------- ----
1,891,700 0.29 9.35 326,007 0.15
========= ===== ==== ======= ====
</TABLE>
F-13
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
5 STOCKHOLDERS' EQUITY (CONTINUED)
Warrants
In connection with equipment term loans in 1996, the Company issued war-
rants to purchase 37,500 shares of Series A preferred stock at $1.00 per
share and 25,000 shares of Series B preferred stock at $3.00 per share.
These warrants may be exercised at any time prior to June 24, 2006 and
October 1, 2001, respectively. The values of these warrants were determined
by the Company to be immaterial for financial statement purposes.
Warrants outstanding at June 30, 1997 were 62,500.
Stock Compensation
The Company recorded deferred compensation of approximately $546,000 and
$1,243,000 during the period from inception (January 19, 1996) to December
31, 1996 and the six months ended June 30, 1997, respectively. These
amounts represent the difference between the exercise price and the deemed
fair value of certain of the Company's stock options granted in these peri-
ods. The Company recorded amortization expense of $22,000 and $205,000,
respectively, during these periods.
At June 30, 1997, the Company has a total of $1,562,925 remaining to be
amortized over the corresponding vesting period of each respective option,
generally four years.
In July, August and September 1997, options to purchase an additional
745,000 shares of Common Stock were granted to officers, directors and
employees, resulting in approximately $2,741,000 of additional deferred
compensation.
6 EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan which stipulates that all full-time employees
with at least 60 days of employment can elect to contribute to the 401(k)
Plan, subject to certain limitations, up to 15% of salary on a pretax
basis. The Company has the option to provide matching contributions but has
not done so to date.
7 INCOME TAXES
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $3,000,000 and $1,600,000, respec-
tively. The net operating loss carryforwards will expire in 2004, if not
utilized.
Utilization of the net operating loss may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual lim-
itation may result in the expiration of the net operating losses before
utilization.
As of December 31, 1996, the Company had deferred tax assets of approxi-
mately $1,200,000 which have been fully offset by a valuation allowance.
Deferred tax assets relate primarily to the net operating loss
carryforward.
8 SUBSEQUENT EVENTS
In April 1997, the Company issued 714,286 shares of Series C convertible
preferred stock at $7.00 per share, resulting in cash proceeds of
$5,000,002, less issuance costs. The Holder of Series C preferred stock is
entitled to noncumulative dividends of $0.08 per share if and when declared
by the board of directors. Each share of Series C preferred stock is
convertible into one share of common stock at the option of the holder,
subject to certain adjustments. Each share of Series C will automatically
convert into common stock upon the closing of an initial public offering of
the Company's common stock in which the Company receives at least $15
million in gross proceeds and the price per share is at least $6.00 (see
Note 1).
F-14
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION FOR THE PERIOD FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
8 SUBSEQUENT EVENTS (CONTINUED)
In April 1997, and as a condition to the Series C preferred stock agreement
referred to above, the Company entered into a Distribution Agreement with
Medtronic whereby Medtronic is appointed as the Company's exclusive
distributor with the right to sell and distribute certain of the Company's
products in the European Union, Australia, Southeast Asia and certain other
areas. The term of the Distribution Agreement is three years, and is
subject to defined minimum purchase quotas in each year.
On August 21, 1997, the board of directors adopted, and the stockholders
approved, an increase in the number of shares available for issuance under
the 1996 Plan from 2,600,000 to 3,350,000 shares of common stock.
In September 1997, the board of directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission authorizing the initial public offering of shares of its common
stock (the "Offering"). If the Offering is consummated under the terms
presently anticipated, each share of convertible preferred stock
outstanding will convert into one share of common stock and the convertible
obligation will convert into 5,998,446 shares of common stock. Unaudited
pro forma stockholders' equity, as adjusted for the assumed conversion of
the convertible preferred stock and convertible obligation described above,
is set forth on the accompanying balance sheet.
On September 4, 1997, the board of directors adopted, subject to stock-
holder approval, the 1997 Employee Stock Purchase Plan (the "1997 Purchase
Plan"). A total of 50,000 shares of common stock have been reserved ini-
tially for issuance under the 1997 Purchase Plan. Shares may be purchased
under the 1997 Purchase Plan at 85% of the lesser of the fair market value
of the common stock at the beginning of the offering period or at the end
of the purchase period, as defined.
Also on September 4, 1997, the board of directors adopted, subject to
stockholder approval, the 1997 Director Option Plan (the "Director Plan").
The Director Plan provides for the grant of non-statutory stock options to
non-employee directors. A total of 350,000 shares of common stock have been
reserved initially for issuance under the Director Plan.
F-15
<PAGE>
Somnus Medical Technologies, Inc.
Research and Manufacturing Facilities at its headquarters in Sunnyvale,
California
[Photos of Manufacturing and Research and Development Areas]
<PAGE>
[COMPANY LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts, commissions and certain accountable expenses, payable by the Company
in connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $13,940
NASD Filing Fee................................................. 6,250
Nasdaq National Market Listing Fee.............................. *
Printing Fees and Expenses...................................... *
Legal Fees and Expenses......................................... *
Accounting Fees and Expenses.................................... *
Blue Sky Fees and Expenses...................................... *
Transfer Agent and Registrar Fees............................... *
Director and Officer Liability Insurance........................ *
Miscellaneous................................................... *
-------
Total......................................................... $ *
=======
</TABLE>
- -------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by the Delaware General Corporation Law, the Amended and
Restated Certificate of Incorporation of the Company (Exhibit 3.2 hereto) elim-
inates the liability of directors to the Company or its stockholders for mone-
tary damages for breach of fiduciary duty as a director, except to the extent
otherwise required by the Delaware General Corporation Law.
(b) The Amended and Restated Certificate of Incorporation provides that the
Company will indemnify each person who was or is made a party to any proceeding
by reason of the fact that such person is or was a director or officer of the
Company against all expense, liability and loss reasonably incurred or suffered
by such person in connection therewith to the fullest extent authorized by the
Delaware General Corporation Law. The Company's Bylaws (Exhibit 3.3 hereto)
provide for a similar indemnity to directors and officers of the Company to the
fullest extent authorized by the Delaware General Corporation Law.
(c) The Amended and Restated Certificate of Incorporation also gives the Com-
pany the ability to enter into indemnification agreements with each of its
directors and officers. The Company has entered into indemnification agreements
with each of its directors and officers, the form of which is attached hereto
as Exhibit 10.1, which provide for the indemnification of directors and offi-
cers of the Company against any and all expenses, judgments, fines, penalties
and amounts paid in settlement, to the fullest extent permitted by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1996, the Registrant has issued and sold the following unregis-
tered securities:
(1) In March 1996, the Registrant issued and sold 2,365,000 shares of
Common Stock to sixteen Founders of the Company at a price of $0.001 per
share for an aggregate cash purchase price of $2,365.00.
(2) In April 1996, the Registrant issued 1,784,160 shares of Series A
Preferred Stock to a total number of thirty-seven investors at a price of
$1.00 per share for an aggregate cash purchase price of $1,784,160.
(3) In June 1996, the Registrant issued a Warrant to purchase 37,500 shares
of Series A Preferred Stock to Venture Lending, a division of Cupertino
National Bank & Trust at an exercise price of $1.00 per share for an aggre-
gate cash purchase price of $37,500.00.
(4) Since July 1996, the Registrant has issued and sold 385,851 shares of
Common Stock to a total of fifteen employees and consultants at prices
ranging from $0.10 per share to $0.30 per share, upon exercise of stock
options, pursuant to the Amended and Restated 1996 Stock Plan.
(5) In September and October 1996, the Registrant issued and sold 3,500,000
shares of Series B Preferred Stock to a total of twenty-nine investors for
an aggregate cash purchase price of $10,500,000. Under the terms of a
placement
II-1
<PAGE>
agent agreement with the Registrant, Musket Research Associates received a
placement fee equal to seven percent of the aggregate proceeds recorded by
the Registant for the sales of shares of Series B Preferred Stock, which
fee was paid in cash and in 60,000 shares of Series B Preferred Stock
issued to David Musket.
(6) In October 1996, the Registrant issued a Warrant to purchase 25,000
shares of Series B Preferred Stock to Venture Lending, a division of
Cupertino National Bank & Trust at an exercise price of $3.00 per share for
an aggregate purchase price of $75,000.00.
(7) In April 1997, the Registrant issued and sold 714,286 shares of Series
C Preferred Stock to Medtronic Asset Management, Inc. for an aggregate cash
purchase price of $5,000,000.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or in connection with any
sale or distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation, as amended as of April 18,
1997.
3.2 Form of Amended and Restated Certificate of Incorporation to be filed
after the closing of the Offering.
3.3 Form of Bylaws, to be effective upon the closing of the offering.
3.4 Bylaws of the Registrant.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement for directors and officers.
10.2 Amended and Restated 1996 Stock Plan and form of agreement thereunder.
10.3 Restated Investors' Rights Agreements.
10.4+ Distribution Agreement dated April 21, 1997 between the Registrant and
Medtronic, Inc.
10.5+ Development and Supply Agreement dated July 15, 1996 between the
Registrant and Apical Instruments, Inc.
10.6 Letter Agreement dated June 6, 1996 between the Registrant and Musket
Research Associates.
10.7 Lease dated February 4, 1997 for the Registrant's headquarters in
Sunnyvale, California.
10.8 Amended and Restated Loan and Security Agreement dated April 2, 1997
between the Registrant and Venture Lending.
10.9 Employment Letter Agreement dated July 20, 1997 between the Registrant
and Robert McNamara.
10.10 Employment Letter Agreement dated May 8, 1996 between the Registrant
and Eric N. Doelling, and amendment thereto dated August 26, 1996.
10.11 Employment Letter Agreement dated June 1, 1996 between the Registrant
and Stephen M. Rudy, and amendment thereto dated October 14, 1996.
10.12 1997 Employee Stock Purchase Plan.
10.13 1997 Director Option Plan.
10.14 Lease Agreement dated July 1, 1996 between the Registrant and RGL
Leasing Co.
11.1 Statement Regarding the Computation of Per Share Loss.
21.1 List of Subsidiaries of the Registrant.
24.1 Consent of Independent Auditors
24.2* Consent of Counsel (included in Exhibit 5.1).
25.1 Power of Attorney (see page II-4).
27.1* Financial Data Schedule
</TABLE>
- -------
* To be filed by amendment.
+ Confidential treatment is being sought for portions of this exhibit.
(b) Financial Statement Schedules
Consolidated Schedules not listed above have been omitted because the informa-
tion required to be set forth therein is not applicable or is shown in the
Financial Statements or Notes thereto.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such denom-
inations and registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions referenced in Item 14 of this Reg-
istration Statement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such lia-
bilities (other than the payment by the Registrant of expenses incurred or paid
by a director, officer, or controlling person of the Registrant in the suc-
cessful defense of any action, suit or proceeding) is asserted by such direc-
tor, officer or controlling person in connection with the securities being reg-
istered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post
effective amendment thereto which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining. any liability under the Securi-
ties Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the Offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDER-
SIGNED, THEREUNTO DULY AUTHORIZED, IN SUNNYVALE, STATE OF CALIFORNIA, ON THE
11TH DAY OF SEPTEMBER, 1997.
Somnus Medical Technologies, Inc.
By: /s/ Stuart D. Edwards
-----------------------------------
STUART D. EDWARDSPRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stuart D. Edwards and Robert McNamara and each
of them, his attorneys-in-fact, each with power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by the Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, and all post-
effective amendments thereto, and to file the same with all exhibits thereto in
all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that suchattorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Stuart D. Edwards President, Chief September 11, 1997
- ---------------------------------- Executive Officer
(STUART D. EDWARDS) and Director
(Principal
Executive
Officer)
/s/ Robert E. McNamara Chief Financial September 11, 1997
- ---------------------------------- Officer
(ROBERT E. MCNAMARA) (Principal
Financial and
Accounting
Officer)
/s/ Eric N. Doelling Director September 11, 1997
- ----------------------------------
(ERIC N. DOELLING)
/s/ David L. Douglass Director September 11, 1997
- ----------------------------------
(DAVID L. DOUGLASS)
/s/ David J. Illingworth Director September 11, 1997
- ----------------------------------
(DAVID J. ILLINGWORTH)
/s/ Ronald G. Lax Director September 11, 1997
- ----------------------------------
(RONALD G. LAX)
/s/ David B. Musket Director September 11, 1997
- ----------------------------------
(DAVID B. MUSKET)
/s/ Woodrow A. Myers, Jr. Director September 11, 1997
- ----------------------------------
(WOODROW A. MYERS, JR.)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation, as amended as of April 18,
1997.
3.2 Form of Amended and Restated Certificate of Incorporation to be filed
after the closing of the Offering.
3.3 Form of Bylaws, to be effective upon the closing of the offering.
3.4 Bylaws of the Registrant.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement for directors and officers.
10.2 Amended and Restated 1996 Stock Plan and form of agreement thereunder.
10.3 Restated Investors' Rights Agreements.
10.4+ Distribution Agreement dated April 21, 1997 between the Registrant and
Medtronic, Inc.
10.5+ Development and Supply Agreement dated July 15, 1996 between the
Registrant and Apical Instruments, Inc.
10.6 Letter Agreement dated June 6, 1996 between the Registrant and Musket
Research Associates.
10.7 Lease dated February 4, 1997 for the Registrant's headquarters in
Sunnyvale, California.
10.8 Amended and Restated Loan and Security Agreement dated April 2, 1997
between the Registrant and Venture Lending.
10.9 Employment Letter Agreement dated July 20, 1997 between the Registrant
and Robert McNamara.
10.10 Employment Letter Agreement dated May 8, 1996 between the Registrant
and Eric N. Doelling, and amendment thereto dated August 26, 1996.
10.11 Employment Letter Agreement dated June 1, 1996 between the Registrant
and Stephen M. Rudy, and amendment thereto dated October 14, 1996.
10.12 1997 Employee Stock Purchase Plan.
10.13 1997 Director Option Plan.
10.14 Lease Agreement dated July 1, 1996 between the Registrant and RGL
Leasing Co.
11.1 Statement Regarding the Computation of Per Share Loss.
21.1 List of Subsidiaries of the Registrant.
24.1 Consent of Independent Auditors
24.2* Consent of Counsel (included in Exhibit 5.1).
25.1 Power of Attorney (see page II-4).
27.1* Financial Data Schedule
<CAPTION>
</TABLE>
- -------
* To be filed by amendment.
+ Confidential treatment is being sought for portions of this exhibit.
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
Somnus Medical Technologies, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Somnus Medical Technologies, Inc.
(formerly Sleep Technologies, Inc.). The original Certificate of Incorporation
of the corporation was filed with the Secretary of the State of Delaware on
January 19, 1996.
B. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the Certificate of Incorporation
of this corporation.
C. The Certificate of Incorporation as heretofore amended or supplemented
is hereby amended and restated in its entirety to read as follows:
ONE The name of this corporation is Somnus Medical Technologies, Inc.
TWO The address of the corporation's registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Zip Code 19801. The name of its registered
agent at such address is The Corporation Trust Company.
THREE The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOUR This corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is 26,196,660
shares. 20,000,000 shares shall be Common stock with a par value of $.001 per
share. 6,196,660 shares shall be Preferred Stock, 1,871,660 of which are
designated Series A Preferred Stock with a par value of $0.001 per share (the
"Series A Preferred Stock"), 3,525,000 of which are designated Series B
Preferred Stock with a par value of $0.001 per
<PAGE>
share (the "Series B Preferred Stock") and 800,000 of which are designated
Series C Preferred Stock with a par value of $0.001 per share (the "Series C
Preferred Stock").
The rights, preferences, privileges and restrictions granted to or imposed
upon the Common Stock and Preferred Stock are as follows:
1. Dividends. When and as declared by the corporation's board of
---------
directors, the holders of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock shall be entitled to receive, out of any funds legally
available therefor, dividends prior and in preference to any declaration of
payment of any dividend on the Common Stock at the rate of $0.08 per share per
annum. The right of the holders of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock to receive dividends shall not be cumulative,
and no right shall accrue to such holders by reason of the fact that dividends
on such shares are not declared or paid in any prior year. No dividends or other
distributions shall be paid on the Common Stock, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock unless equivalent dividends
per share (on an as-converted basis) are declared and paid as to all of the
outstanding Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock.
2. Liquidation.
-----------
(a) Preferred Stock Preference. The Series A Preferred Stock, Series
--------------------------
B Preferred Stock and Series C Preferred Stock shall all rank on a parity as to
distributions on liquidation, dissolution or winding up. In the event of any
liquidation, dissolution or winding up of the corporation, either voluntary or
involuntary, the holders of Series A Preferred Stock, holders of Series B
Preferred Stock and the holders of Series C Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the corporation to the holders of Common Stock by reason of
their ownership thereof, the amount of $1.00 per share for each share of Series
A Preferred Stock, the amount of $3.00 per share for each share of Series B
Preferred Stock and the amount of $7.00 per share for each share of Series C
Preferred Stock then held by them, and, in addition, an amount equal to all
declared but unpaid dividends, but no more. If the assets and funds thus
distributed among the holders of the Preferred Stock are insufficient to permit
the payment to such holders of their full preferential amount, then the holders
of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock will share ratably in any such distribution of the entire assets and funds
of the corporation legally available for distribution in proportion to the full
respective preferential amounts to which they are entitled.
(b) Remaining Assets. After payment or setting apart of payment has
----------------
been made to the holders of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock of the full preferential amounts so payable
to them, the holders of Common Stock shall be entitled to receive pro rata the
remaining assets of the corporation legally available for distribution.
(c) Reorganization or Merger. A consolidation or merger of the
------------------------
corporation with or into any other corporation or corporations, in which
transaction the corporation's stockholders immediately prior to such transaction
own immediately after such transaction 50% or less of the equity securities of
the surviving or resulting corporation or its parent, shall be deemed to be a
2
<PAGE>
liquidation within the meaning of this Section 2. A sale of all or substantially
all of the assets of the corporation, after which sale the total stockholders'
equity as reflected on the corporation's consolidated balance sheet is 50% or
less of the total stockholders' equity immediately prior to such sale, shall be
deemed to be a liquidation within the meaning of this Section 2.
3. Conversion of Series A Preferred Stock. The holders of the Preferred
--------------------------------------
Stock shall have conversion rights as follows:
(a) Right to Convert. Each share of Series A Preferred Stock, Series
----------------
B Preferred Stock and Series C Preferred Stock shall be convertible, at the
option of the holder thereof, at any time into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Issuance
Price of such series (as defined below) by the Conversion Price (as defined
below) of such series in effect at the time of conversion. The Issuance Price
for the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be $1.00, $3.00 and $5.00, respectively. The Conversion
Price for the Series A Preferred Stock, Series B Preferred Stock and the Series
C Preferred Stock shall initially be $1.00, $3.00 and $5.00 respectively,
subject to adjustment as provided below. The number of shares of Common Stock
into which a share of Preferred Stock is convertible is hereinafter referred to
as the "Conversion Rate" of such series of Preferred Stock.
(b) Automatic Conversion. Each share of each series of Preferred
--------------------
Stock shall automatically be converted into shares of Common Stock at the then
effective Conversion Rate for such series immediately prior to the closing of a
firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933 (the "Act") covering the
offer and sale of Common Stock for the account of the corporation to the public
at a price per share of not less than $6.00 (as appropriately adjusted for any
subsequent stock splits, stock dividends, reclassifications and the like) and an
aggregate offering price (prior to the underwriting commissions and offering
expenses) of not less than $15,000,000.
(c) Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into full shares of Common Stock and to
receive certificates therefor, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or of any
transfer agent for such series of Preferred Stock, and shall give written notice
to the corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 3(b) above, the outstanding shares of Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
corporation or its transfer agent, and provided further that the corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred Stock are either delivered to the corporation or its
transfer agent as provided above, or the holder notifies the corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the corporation to indemnify the
corporation from any loss incurred by it in connection with such certificates.
The corporation shall, as soon as practicable after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of
3
<PAGE>
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which the holder shall be entitled and a check payable to the
holder in the amount of any cash amounts payable as the result of a conversion
into fractional shares of Common Stock. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred Stock to be converted, or in the case of
automatic conversion, on the date of closing of the offering, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(d) Fractional Shares. In lieu of any fractional shares to which the
-----------------
holder of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock would otherwise be entitled, the corporation shall pay cash
equal to such fraction multiplied by the fair market value of one share of such
series of Preferred Stock as determined by the board of directors of the
corporation. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Preferred
Stock of each holder at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.
(e) Adjustment of Conversion Price. The Conversion Price of each
------------------------------
series of Preferred Stock shall be subject to adjustment from time to time as
follows:
(i) If the corporation shall issue (or, pursuant to Subsection
3(e)(i)(B)(3) hereof, shall be deemed to have issued) any Common Stock other
than "Excluded Stock" (as defined below) for a consideration per share less than
the Conversion Price for a series of Preferred Stock in effect immediately prior
to the issuance of such Common Stock (excluding stock dividends, subdivisions,
split-ups, combinations, dividends or recapitalizations which are covered by
Subsections 3(e)(iii), (iv), (v) and (vi)), the Conversion Price for such series
of Preferred Stock in effect immediately after each such issuance shall
forthwith (except as provided in this Section 3(e)) be adjusted to a price equal
to the quotient obtained by dividing:
(A) an amount equal to the sum of
(1) the total number of shares of Common Stock
outstanding (including any shares of Common Stock issuable upon conversion of
the Preferred Stock, or deemed to have been issued pursuant to subdivisions
(B)(3) of this clause (i) and to clause (ii) below) immediately prior to such
issuance multiplied by the Conversion Price for such series of Preferred Stock
in effect immediately prior to such issuance, plus
(2) the consideration received by the corporation upon
such issuance, by
(B) the total number of shares of Common Stock outstanding
immediately prior to such issuance of Common Stock (including any shares of
Common Stock issuable upon conversion of the Preferred Stock or deemed to have
been issued pursuant to subdivision (B)(3) of this clause (i) and to clause (ii)
below) plus the number of shares of Common
4
<PAGE>
Stock actually issued in the transaction which resulted in the adjustment
pursuant to this Subsection 3(e)(i).
For the purposes of any adjustment of the Conversion
Price for a series of Preferred Stock pursuant to this clause (i), the following
provisions shall be applicable:
(1) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
after deducting any discounts or commissions paid or incurred by the corporation
in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as reasonably determined by
the board of directors of the corporation, irrespective of any accounting
treatment.
(3) In the case of the issuance of (i) options to
purchase or rights to subscribe for Common Stock (other than Excluded Stock),
(ii) securities by their terms convertible into or exchangeable for Common Stock
(other than Excluded Stock), or (iii) options to purchase or rights to subscribe
for such convertible or exchangeable securities:
(aa) the aggregate maximum number of shares
of Common Stock deliverable upon exercise of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in subdivisions (1) and (2)
above), if any, received by the corporation upon the issuance of such options or
rights plus the minimum purchase price provided in such options or rights for
the Common Stock covered thereby;
(bb) the aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities, or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof, shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration received by the
corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), plus the
additional minimum consideration, if any, to be received by the corporation upon
the conversion or exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be determined in the manner
provided in subdivisions (1) and (2) above);
(cc) on any change in the number of shares of
Common Stock deliverable upon exercise of any such options or rights or
conversion of or exchange for such convertible or exchangeable securities, or on
any change in the minimum purchase price of such options, rights or securities,
other than a change resulting from the antidilution provisions
5
<PAGE>
of such options, rights or securities, the Conversion Price shall forthwith be
readjusted to such Conversion Price as would have obtained had the adjustment
made upon (x) the issuance of such options, rights or securities not exercised,
converted or exchanged prior to such change or (y) the options or rights related
to such securities not converted or exchanged prior to such change, as the case
may be, been made upon the basis of such change; and
(dd) on the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price shall forthwith be readjusted to such
Conversion Price as would have obtained had the adjustment made upon the
issuance of such options, rights, convertible or exchangeable securities or
options or rights related to such convertible or exchangeable securities, as the
case may be, been made upon the basis of the issuance of only the number of
shares of Common Stock actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such convertible or exchangeable
securities or upon the exercise of the options or rights related to such
convertible or exchangeable securities, as the case may be.
(ii) "Excluded Stock" shall mean:
(A) all shares of Common Stock issued and outstanding on
the date this certificate is filed with the Delaware Secretary of State;
(B) With regard to the Series B Preferred Stock, all shares
of Common Stock or other securities hereafter issued or to be issued to
employees, officers, directors and consultants of the corporation, or suppliers,
lessors or lenders to the corporation, pursuant to any plan or arrangement
approved by the board of directors of the corporation so long as the cumulative
total number of shares of Common Stock so issued or to be issued (and not
repurchased at cost by the corporation in connection with the termination of
employment), including a total of 1,738,400 shares which are subject to
outstanding options and 65,625 shares which have been issued pursuant to the
exercise of options as of the date of this restatement, does not exceed
2,100,000 shares of Common Stock.
(C) With regard to all series of Preferred Stock other than
the Series B Preferred Stock, all shares of Common Stock or other securities
hereafter issued or to be issued to employees, officers, directors and
consultants of the corporation, or suppliers, lessors or lenders to the
corporation, pursuant to any plan or arrangement approved by the board of
directors of the corporation, so long as the cumulative total number of shares
of Common Stock so issued or to be issued (and not repurchased at cost by the
corporation in connection with the termination of employment), including a total
of 1,738,400 shares which are subject to outstanding options and 65,625 shares
which have been issued pursuant to the exercise of options as of the date of
this restatement, does not exceed 2,600,000 shares of Common Stock.
(D) all shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock.
6
<PAGE>
All outstanding shares of Excluded Stock (including shares
issuable upon conversion of the Preferred Stock) shall be deemed to be
outstanding for all purposes of the computations of subsection 3(e)(i) above.
(iii) If the number of shares of Common Stock outstanding at any
time after the date hereof is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock, then, on
the date such payment is made or such change is effective, the Conversion Price
of a series of Preferred Stock shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of any shares of such
series of Preferred Stock shall be increased in proportion to such increase of
outstanding shares.
(iv) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the outstanding
shares of Common Stock, then, on the effective date of such combination, the
Conversion Price of a series of Preferred Stock shall be appropriately increased
so that the number of shares of Common Stock issuable on conversion of any
shares of such series of Preferred Stock shall be decreased in proportion to
such decrease in outstanding share shares.
(v) In case the corporation shall declare a cash dividend upon
its Common Stock payable otherwise than out of retained earnings or shall
distribute to holders of its Common Stock shares of its capital stock (other
than Common Stock), stock or other securities of other persons, evidences of
indebtedness issued by the corporation or other persons, assets (excluding cash
dividends) or options or rights (excluding options to purchase and rights to
subscribe for Common Stock or other securities of the corporation convertible
into or exchangeable for Common Stock), then, in each such case, the holders of
the Preferred Stock shall, concurrently with the distribution to holders of
Common Stock, receive a like distribution based upon the number of shares of
Common Stock into which such Preferred Stock is then convertible.
(vi) In case, at any time after the date hereof, of any capital
reorganization, or any reclassification of the stock of the corporation (other
than as a result of a stock dividend or subdivision, split-up or combination of
shares), or the consolidation or merger of the corporation with or into another
person (other than a consolidation or merger in which the corporation is the
continuing entity and which does not result in any change in the Common Stock),
the shares of Preferred Stock shall, after such reorganization,
reclassification, consolidation, merger, sale or other disposition, be
convertible into the kind and number of shares of stock or other securities or
property of the corporation or otherwise to which such holder would have been
entitled if immediately prior to such reorganization, reclassification,
consolidation, merger, sale or other disposition such holder had converted its
shares of Preferred Stock into Common Stock. The provisions of this clause (vi)
shall similarly apply to successive reorganizations, reclassification,
consolidations, mergers, sales or other dispositions.
(vii) All calculations under this section 3 shall be made to the
nearest cent or to the nearest one-hundredth (1/100) of a share, as the case may
be.
7
<PAGE>
(f) Minimal Adjustments. No adjustment in the Conversion Price for
-------------------
a series of Preferred Stock need be made if such adjustment would result in a
change in the Conversion Price of less than $0.01. Any adjustment of less than
$0.01 which is not made shall be carried forward and shall be made at the time
of and together with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $0.01 or more in the Conversion Price of a series of
Preferred Stock.
(g) No Impairment. The corporation will not through any
-------------
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3 and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Preferred Stock against impairment.
This provision shall not restrict the corporation's right to amend its
Certificate of Incorporation with the requisite stockholder consent.
(h) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Rate for a series of Preferred
Stock pursuant to this Section 3, the corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such series of Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The corporation
shall, upon written request at any time of any holder of Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) all such adjustments and readjustments, (ii) the Conversion Rate at the time
in effect for such series, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be received upon
the conversion of such holder's shares of Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution (other than a cash dividend), any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property or to receive any other right, the corporation
shall mail to each holder of Preferred Stock at least twenty (20) days prior to
such record date, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution or right, and the amount
and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of such
series of Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Preferred Stock, the corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
8
<PAGE>
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(k) Notices. Any notice required by the provisions of this Section
-------
3 to be given to any holder of Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder's address appearing on the corporation's books.
(l) Reissuance of Converted Shares. No shares of Preferred Stock
------------------------------
which have been converted into Common Stock after the original issuance thereof
shall ever again be reissued and all such shares so converted shall upon such
conversion cease to be a part of the authorized shares of the corporation.
4. Voting Rights. There shall be no cumulative voting. The holders of
-------------
the Common Stock are entitled to one vote for each share held at all meetings of
stockholders. The holder of each share of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of the corporation and shall
vote with holders of the Common Stock upon the election of directors and upon
any other matter submitted to a vote of stockholders, except those matters
required by law to be submitted to a class vote and except as otherwise set
forth herein. A holder of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall be entitled to that number of
votes equal to the number of shares of Common Stock into which such shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
could be converted on the record date for the vote or consent of stockholders.
Fractional votes shall not, however, be permitted and any fractional voting
rights resulting from the above formula shall be disregarded.
5. Protective Provisions. So long as 100,000 shares of Preferred Stock
---------------------
are outstanding, this corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least sixty percent (60%) of the outstanding shares of Preferred Stock, voting,
or consenting, as the case may be, as a single class:
(a) sell, convey, or otherwise dispose of thirty percent (30%) or
more (in terms of dollar value) of its property or business or merge into or
consolidate with any other corporation (other than a wholly-owned subsidiary
corporation) or effect any transaction or series of related transactions in
which more than fifty percent (50%) of the voting power of the corporation is
disposed of;
(b) increase or decrease (other than by conversion) the total number
of authorized shares of Preferred Stock or amend the terms of the Preferred
Stock; provided, however, any amendment that alters or changes the powers,
preferences or special rights of a series of Preferred Stock so as to affect
that series adversely (but does not so affect all other series of Preferred
Stock) and any increase or decrease in the total number of authorized shares of
a series of Preferred Stock shall also require the approval (by vote or written
consent, as provided by law) of the holders of a majority of the outstanding
shares of that series;
9
<PAGE>
(c) authorize or issue, or obligate itself to issue, any convertible
debt or any other equity security, including any other security or debt
instrument convertible into or exercisable for any such equity security, having
a preference over, or being on a parity with, the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock with respect to dividends
or liquidation; provided, however, any such authorization or issuance for
securities having preference over a series of Preferred Stock shall also require
the approval (by vote or written consent, as provided by law) of the holders of
a majority of the outstanding shares of that series;
(d) engage in any spin-out, distribution or sale of any business unit
of the corporation;
(e) enter into any transactions with affiliates of the corporation
except on arms-length terms approved by a majority of the disinterested members
of the corporation's board of directors;
(f) redeem or repurchase any outstanding Common Stock of the
corporation except for repurchases of unvested or restricted shares of Common
Stock at cost from employees, consultants, or members of the board of directors
pursuant to repurchase options of the corporation (i) currently outstanding or
(ii) hereafter entered into pursuant to a stock option plan or restricted stock
plan approved by the corporation's board of directors;
(g) redeem, purchase or otherwise acquire for value any share or
shares of the Preferred Stock except pursuant to an offer made upon the same
terms pro rata to all holders of outstanding shares of the Preferred Stock and
--- ----
except pursuant to repurchases from employees, officers and members of the board
of directors at cost;
(h) liquidate, dissolve or otherwise wind up the affairs of the
corporation; or
(i) adopt any stock option, restricted stock or like plan providing
for the grant of equity incentives to employees, directors or consultants.
6. Common Stock. The voting, dividend and liquidation rights of the
------------
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock.
FIVE The corporation is to have perpetual existence.
SIX In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized to make, alter, amend or
repeal the bylaws of the corporation.
SEVEN The election of directors need not be by written ballot unless
the bylaws of the corporation shall so provide.
EIGHT To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
10
<PAGE>
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of any
inconsistent provision.
NINE The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the corporation has caused this Certificate to be
signed by its President, and attested by its Secretary, this 18th of April,
1997.
SOMNUS MEDICAL TECHNOLOGIES, INC.
/s/ Stuart D. Edwards
---------------------------------------
Stuart D. Edwards, President
/s/ J. Casey McGlynn
- ------------------------------------
J. Casey McGlynn, Secretary
11
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
Somnus Medical Technologies, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
A. The name of the Corporation is Somnus Medical Technologies, Inc. The
Corporation was originally incorporated under the name Sleep Technologies, Inc.
and the original Certificate of Incorporation of the Corporation was filed with
the Delaware Secretary of State on January 19, 1996.
B. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate of Incorporation
restates and amends the provisions of the Certificate of Incorporation of this
Corporation.
C. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
The name of the corporation is Somnus Medical Technologies, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.001 par value, and Preferred Stock,
$0.001 par value. The total number of shares that the Corporation is authorized
to issue is 55,000,000 shares. The number of shares of Common Stock authorized
is 50,000,000. The number of shares of Preferred Stock authorized is 5,000,000.
<PAGE>
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the Board of Directors (authority to do so being hereby expressly vested in the
board). The Board of Directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and to fix the number of shares of any
series of Preferred Stock and the designation of any such series of Preferred
Stock. The Board of Directors, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares in any such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series.
The authority of the Board of Directors with respect to each such class or
series shall include, without limitation of the foregoing, the right to
determine and fix:
(a) the distinctive designation of such class or series and the number
of shares to constitute such class or series;
(b) the rate at which dividends on the shares of such class or series
shall be declared and paid, or set aside for payment, whether dividends at the
rate so determined shall be cumulative or accruing, and whether the shares of
such class or series shall be entitled to any participating or other dividends
in addition to dividends at the rate so determined, and if so, on what terms;
(c) the right or obligation, if any, of the corporation to redeem
shares of the particular class or series of Preferred Stock and, if redeemable,
the price, terms and manner of such redemption;
(d) the special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such class or series of
Preferred Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(e) the terms and conditions, if any, upon which shares of such class
or series shall be convertible into, or exchangeable for, shares of capital
stock of any other class or series, including the price or prices or the rate or
rates of conversion or exchange and the terms of adjustment, if any;
(f) the obligation, if any, of the corporation to retire, redeem or
purchase shares of such class or series pursuant to a sinking fund or fund of a
similar nature or otherwise, and the terms and conditions of such obligation;
(g) voting rights, if any, on the issuance of additional shares of
such class or series or any shares of any other class or series of Preferred
Stock;
(h) limitations, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
and
-2-
<PAGE>
(i) such other preferences, powers, qualifications, special or
relative rights and privileges thereof as the Board of Directors of the
corporation, acting in accordance with this Amended and Restated Certificate of
Incorporation, may deem advisable and are not inconsistent with law and the
provisions of this Amended and Restated Certificate of Incorporation.
ARTICLE V
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon the stockholders herein are granted subject to this right.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The Corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the Corporation, or any predecessor of
the Corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the Corporation or any predecessor to the
Corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII, nor
----------
the adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal, or adoption of an inconsistent provision.
ARTICLE VIII
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the Corporation.
-3-
<PAGE>
ARTICLE IX
Holders of stock of any class or series of this corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting is
required pursuant to Sections 2115 and/or 301.5 of the California Corporations
Code, in which event each such holder shall be entitled to as many votes as
shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and the holder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such holder may see fit, so long as the
name of the candidate for director shall have been placed in nomination prior to
the voting and the stockholder, or any other holder of the same class or series
of stock, has given notice at the meeting prior to the voting of the intention
to cumulate votes.
ARTICLE X
1. Number of Directors. The number of directors which constitutes the
-------------------
whole Board of Directors of the corporation shall be designated in the Bylaws of
the corporation. The directors shall be divided into three classes with the
term of office of the first class (Class I) to expire at the annual meeting of
stockholders held in 1998; the term of office of the second class (Class II) to
expire at the annual meeting of stockholders held in 1999; the term of office of
the third class (Class III) to expire at the annual meeting of stockholders held
in 2000; and thereafter for each such term to expire at each third succeeding
annual meeting of stockholders after such election.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless the Bylaws of the corporation shall so provide.
ARTICLE XI
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the corporation.
ARTICLE XII
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of the stockholders called in accordance with the
Bylaws and no action shall be taken by the stockholders by written consent. The
affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the then
outstanding voting securities of the corporation, voting together as a single
class, shall be required for the amendment, repeal or modification of the
provisions of Article IX, Article X or Article XII of this Amended and Restated
Certificate of Incorporation or Sections 2.3 (Special Meeting), 2.5 (Advance
Notice of Stockholder Nominees and Stockholder Business) or 2.9 (Voting) of the
Corporation's Bylaws.
-4-
<PAGE>
ARTICLE XIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
This Amended and Amended and Restated Certificate of Incorporation has been
duly adopted by the Board of Directors of the Corporation in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware, as amended.
In witness whereof, the Corporation has caused this Certificate to be
signed by Stuart D. Edwards, its President and Chief Executive Officer, and
attested by its Secretary, this ___ day of ________________, 1997.
_______________________________________
Stuart D. Edwards, President and
Chief Executive Officer
_______________________________
J. Casey McGlynn, Secretary
-5-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
<PAGE>
BYLAWS OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
(a Delaware corporation)
TABLE OF CONTENTS
Page
----
ARTICLE I CORPORATE OFFICES............................................. 1
1.1 REGISTERED OFFICE............................................ 1
1.2 OTHER OFFICES................................................ 1
ARTICLE II MEETINGS OF STOCKHOLDERS.................................... 1
2.1 PLACE OF MEETINGS............................................ 1
2.2 ANNUAL MEETING............................................... 1
2.3 SPECIAL MEETING.............................................. 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................. 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES
AND STOCKHOLDER BUSINESS.................................... 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................. 4
2.7 QUORUM....................................................... 4
2.8 ADJOURNED MEETING; NOTICE.................................... 4
2.9 VOTING....................................................... 5
2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING................... 5
2.11 PROXIES...................................................... 6
2.12 ORGANIZATION................................................. 6
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE........................ 6
2.14 WAIVER OF NOTICE............................................. 7
ARTICLE III DIRECTORS.................................................. 7
3.1 POWERS....................................................... 7
3.2 NUMBER OF DIRECTORS.......................................... 7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS..................... 8
3.4 RESIGNATION AND VACANCIES.................................... 8
3.5 REMOVAL OF DIRECTORS......................................... 9
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..................... 9
3.7 FIRST MEETINGS............................................... 9
3.8 REGULAR MEETINGS.............................................10
3.9 SPECIAL MEETINGS; NOTICE.....................................10
3.10 QUORUM.......................................................10
3.11 WAIVER OF NOTICE.............................................10
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<PAGE>
TABLE OF CONTENTS
(Continued)
Page
----
3.12 ADJOURNMENT................................................. 11
3.13 NOTICE OF ADJOURNMENT....................................... 11
3.14 BOARD ACTION BY WRITTEN CONSENT
WITHOUT A MEETING.......................................... 11
3.15 FEES AND COMPENSATION OF DIRECTORS.......................... 11
3.16 APPROVAL OF LOANS TO OFFICERS............................... 11
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE
OF INCORPORATION........................................... 12
ARTICLE IV COMMITTEES................................................. 12
4.1 COMMITTEES OF DIRECTORS...................................... 12
4.2 MEETINGS AND ACTION OF COMMITTEES............................ 12
4.3 COMMITTEE MINUTES............................................ 13
ARTICLE V OFFICERS.................................................... 13
5.1 OFFICERS..................................................... 13
5.2 ELECTION OF OFFICERS......................................... 13
5.3 SUBORDINATE OFFICERS......................................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................... 14
5.5 VACANCIES IN OFFICES......................................... 14
5.6 CHAIRMAN OF THE BOARD........................................ 14
5.7 PRESIDENT.................................................... 14
5.8 VICE PRESIDENTS.............................................. 15
5.9 SECRETARY.................................................... 15
5.10 CHIEF FINANCIAL OFFICER...................................... 15
5.11 ASSISTANT SECRETARY.......................................... 16
5.12 ADMINISTRATIVE OFFICERS...................................... 16
5.13 AUTHORITY AND DUTIES OF OFFICERS............................. 16
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS............................... 17
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................... 17
6.2 INDEMNIFICATION OF OTHERS.................................... 18
6.3 INSURANCE.................................................... 18
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<PAGE>
TABLE OF CONTENTS
(Continued)
Page
----
ARTICLE VII RECORDS AND REPORTS....................................... 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS........................ 18
7.2 INSPECTION BY DIRECTORS...................................... 19
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................. 19
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............... 19
7.5 CERTIFICATION AND INSPECTION OF BYLAWS....................... 19
ARTICLE VIII GENERAL MATTERS.......................................... 19
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING........ 19
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................... 20
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........... 20
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES............. 20
8.5 SPECIAL DESIGNATION ON CERTIFICATES.......................... 21
8.6 LOST CERTIFICATES............................................ 21
8.7 TRANSFER AGENTS AND REGISTRARS............................... 22
8.8 CONSTRUCTION; DEFINITIONS.................................... 23
ARTICLE IX AMENDMENTS................................................. 23
-iii-
<PAGE>
AMENDED AND RESTATED BYLAWS
---------------------------
OF
--
SOMNUS MEDICAL TECHNOLOGIES, INC.
---------------------------------
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the Certificate
of Incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the first
Wednesday of June in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, by the chairman of the board or by the president. No other
person or persons are permitted to call a special meeting.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these Bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these Bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
2
<PAGE>
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such stockholder has given timely notice in
proper written form of their intent to make such nomination or nominations or to
propose such business. To be timely, such stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than one hundred twenty (120) calendar days in advance of
the date specified in the corporation's proxy statement released to stockholders
in connection with the previous year's annual meeting of stockholders; provided,
however, that in the event that no annual meeting was held in the previous year
or the date of the annual meeting has been changed by more than thirty (30) days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholder to be timely must be so received a reasonable time
before the solicitation is made. To be in proper form, a stockholder's notice
to the secretary shall set forth:
(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the person
or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of record of stock
of the corporation entitled to vote at such meeting and, if applicable,
intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice;
(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as director of the
corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
3
<PAGE>
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been given
at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stock holders for the
transaction of business except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these Bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the Certificate of Incorporation or these Bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these Bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
4
<PAGE>
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.10 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the Certificate of Incorporation or
these Bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder and stockholders shall not be entitled to
cumulate their votes in the election of directors or with respect to any matter
submitted to a vote of the stockholders.
Notwithstanding the foregoing, if the stockholders of the corporation are
entitled, pursuant to Sections 2115 and 301.5 of the California Corporations
Code, to cumulate their votes in the election of directors, each such
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes that such stockholder normally
is entitled to cast) only if the candidates' names have been properly placed in
nomination (in accordance with these Bylaws) prior to commencement of the
voting, and the stockholder requesting cumulative voting has given notice prior
to commencement of the voting of the stockholder's intention to cumulate votes.
If cumulative voting is properly requested, each holder of stock, or of any
class or classes or of a series or series thereof, who elects to cumulate votes
shall be entitled to as many votes as equals the number of votes that (absent
this provision as to cumulative voting) he or she would be entitled to cast for
the election of directors with respect to his or her shares of stock multiplied
by the number of directors to be elected by him, and he or she may cast all of
such votes for a single director or may distribute them among the number to be
voted for, or for any two or more of them, as he or she may see fit.
2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
5
<PAGE>
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these Bylaws.
2.11 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.12 ORGANIZATION
------------
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
6
<PAGE>
2.14 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the Certificate of Incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these Bylaws.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and to
any limitations in the Certificate of Incorporation or these Bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall not be less than five (5) nor more than nine
(9) members. The exact number of directors shall be seven (7) until changed,
within the limits specified above by a bylaw amending this Section 3.2 duly
adopted by the board of directors or the stockholders. The indefinite number of
directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by an amendment to this bylaw, duly adopted by the
board of directors or by the stockholders, or by a duly adopted amendment to the
Certificate of Incorporation. No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires.
Upon the closing of the first sale of the corporation's common stock
pursuant to a firmly underwritten registered public offering (the "IPO"), the
directors shall be divided into three classes, with the term of office of the
first class, which class shall initially consist of two directors, to expire at
the first annual meeting of stockholders held after the IPO; the term of office
of the second class, which class shall initially consist of three directors, to
7
<PAGE>
expire at the second annual meeting of stockholders held after the IPO; the term
of office of the third class, which class shall initially consist of two
directors, to expire at the third annual meeting of stockholders held after the
IPO; and thereafter for each such term to expire at each third succeeding annual
meeting of stockholders held after such election.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next annual meeting of the stockholders and until a successor has been
elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
Certificate of Incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
8
<PAGE>
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the Certificate of Incorporation
or by these Bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, if and so
long as stockholders of the corporation are entitled to cumulative voting, if
less than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire board of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting. In the event of the failure of the stockholders to fix the time
or place of such first meeting of the newly elected board of directors, or in
the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
9
<PAGE>
3.8 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting shall
be held at the same time and place on the next succeeding full business day.
3.9 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the corporation.
3.10 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.12
of these Bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
Certificate of Incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.11 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of
10
<PAGE>
the minutes of the meeting. A waiver of notice need not specify the purpose of
any regular or special meeting of the board of directors.
3.12 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.
3.13 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.9 of these
Bylaws, to the directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.16 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
11
<PAGE>
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
------------------------------------------------------
In the event only one director is required by these Bylaws or the
Certificate of Incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the directors
shall be deemed to refer to such notice, waiver, etc., by such sole director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to the board of directors.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the Certificate of Incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution or (v) amend the Bylaws of the corporation; and, unless the
board resolution establishing the committee, the Bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the following provisions of Article III of these Bylaws:
Section 3.6 (place of meetings; meetings by tele phone), Section 3.8 (regular
meetings), Section 3.9 (special meetings; notice), Section 3.10 (quorum),
Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section 3.13
(notice of adjournment) and
12
<PAGE>
Section 3.14 (board action by written consent without meeting), with such
changes in the context of those Bylaws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors, and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The Corporate Officers of the corporation shall be a president, a secretary
and a chief financial officer. The corporation may also have, at the discretion
of the board of directors, a chairman of the board, one or more vice presidents
(however denominated), one or more assistant secretaries, a treasurer and one or
more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these Bylaws. Any number of
offices may be held by the same person.
In addition to the Corporate Officers of the Company described above, there
may also be such Administrative Officers of the corporation as may be designated
and appointed from time to time by the president of the corporation in
accordance with the provisions of Section 5.12 of these Bylaws.
5.2 ELECTION OF OFFICERS
--------------------
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these Bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for
13
<PAGE>
such period, have such power and authority, and perform such duties as are
provided in these Bylaws or as the board of directors may from time to time
determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these Bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of a Corporate Officer under any contract of
employment, any Corporate Officer may be removed, either with or without cause,
by the board of directors at any regular or special meeting of the board or,
except in case of a Corporate Officer chosen by the board of directors, by any
Corporate Officer upon whom such power of removal may be conferred by the board
of directors.
Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president may be
removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these Bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these Bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the
14
<PAGE>
board of directors. He or she shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and perform such other duties as may be prescribed by the
board of directors or these Bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, and if there is no chairman
of the board, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the board of directors, these Bylaws, the president or the
chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these Bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director for a purpose reasonably related to
his position as a director.
15
<PAGE>
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these Bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
-----------------------
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these Bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these Bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing powers, authority and duties, all officers of
the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
16
<PAGE>
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
-------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
Bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
17
<PAGE>
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power
18
<PAGE>
of attorney or such other writing that authorizes the attorney or other agent to
so act on behalf of the stockholder. The demand under oath shall be directed to
the corporation at its registered office in Delaware or at its principal place
of business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these Bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the
19
<PAGE>
resolution fixing the record date is adopted and which shall not be more than
sixty (60) days before any such action. In that case, only stockholders of
record at the close of business on the date so fixed are entitled to receive the
dividend, distribution or allotment of rights, or to exercise such rights, as
the case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date so fixed, except as otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these Bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
20
<PAGE>
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, how ever, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or
21
<PAGE>
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, as used in these Bylaws, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both an
entity and a natural person.
ARTICLE IX
AMENDMENTS
----------
The original or other Bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal Bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of Bylaws with the original Bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
22
<PAGE>
Exhibit 3.4
BYLAWS
OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
ARTICLE I - CORPORATE OFFICES........................... 1
1.1 REGISTERED OFFICE........................... 1
1.2 OTHER OFFICES............................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS................... 1
2.1 PLACE OF MEETINGS........................... 1
2.2 ANNUAL MEETING.............................. 1
2.3 SPECIAL MEETING............................. 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............ 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE 2
2.6 QUORUM...................................... 3
2.7 ADJOURNED MEETING; NOTICE................... 3
2.8 CONDUCT OF BUSINESS......................... 3
2.9 VOTING...................................... 3
2.10 WAIVER OF NOTICE............................ 4
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING.......................... 4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING;
GIVING CONSENTS............................ 5
2.13 PROXIES..................................... 6
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE....... 6
ARTICLE III - DIRECTORS................................. 7
3.1 POWERS...................................... 7
3.2 NUMBER OF DIRECTORS......................... 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE
OF DIRECTORS............................... 7
3.4 RESIGNATION AND VACANCIES................... 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.... 8
3.6 REGULAR MEETINGS............................ 9
3.7 SPECIAL MEETINGS; NOTICE.................... 9
3.8 QUORUM...................................... 9
3.9 WAIVER OF NOTICE............................ 10
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A
MEETING.................................... 10
3.11 FEES AND COMPENSATION OF DIRECTORS.......... 10
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
3.12 APPROVAL OF LOANS TO OFFICERS ............. 10
3.13 REMOVAL OF DIRECTORS....................... 11
ARTICLE IV - COMMITTEES................................. 11
4.1 COMMITTEES OF DIRECTORS..................... 11
4.2 COMMITTEE MINUTES........................... 12
4.3 MEETINGS AND ACTION OF COMMITTEES........... 12
ARTICLE V - OFFICERS.................................... 13
5.1 OFFICERS.................................... 13
5.2 APPOINTMENT OF OFFICERS..................... 13
5.3 SUBORDINATE OFFICERS........................ 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS......... 13
5.5 VACANCIES IN OFFICES........................ 14
5.6 CHAIRMAN OF THE BOARD....................... 14
5.7 PRESIDENT................................... 14
5.8 VICE PRESIDENTS............................. 14
5.9 SECRETARY................................... 15
5.10 CHIEF FINANCIAL OFFICER..................... 15
5.11 ASSISTANT SECRETARY......................... 16
5.12 ASSISTANT TREASURER......................... 16
5.13 REPRESENTATION OF SHARES OF OTHER
CORPORATIONS............................... 16
5.14 AUTHORITY AND DUTIES OF OFFICERS............ 17
ARTICLE VI - INDEMNITY.................................. 17
6.1 THIRD PARTY ACTIONS......................... 17
6.2 ACTIONS BY OR IN THE RIGHT OF THE
CORPORATION................................ 18
6.3 SUCCESSFUL DEFENSE.......................... 18
6.4 DETERMINATION OF CONDUCT.................... 18
6.5 PAYMENT OF EXPENSES IN ADVANCE.............. 19
6.6 INDEMNITY NOT EXCLUSIVE..................... 19
6.7 INSURANCE INDEMNIFICATION................... 19
6.8 THE CORPORATION............................. 20
6.9 EMPLOYEE BENEFIT PLANS...................... 20
6.10 CONTINUATION OF INDEMNIFICATION AND
ADVANCEMENT OF EXPENSES.................... 20
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
ARTICLE VII - RECORDS AND REPORTS....................... 21
7.1 MAINTENANCE AND INSPECTION OF RECORDS....... 21
7.2 INSPECTION BY DIRECTORS..................... 22
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............ 22
ARTICLE VIII - GENERAL MATTERS.......................... 22
8.1 CHECKS...................................... 22
8.2 EXECUTION OF CORPORATE CONTRACTS AND
INSTRUMENTS................................ 22
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES...... 23
8.4 SPECIAL DESIGNATION ON CERTIFICATES......... 23
8.5 LOST CERTIFICATES........................... 24
8.6 CONSTRUCTION; DEFINITIONS................... 24
8.7 DIVIDENDS................................... 24
8.8 FISCAL YEAR................................. 25
8.9 SEAL........................................ 25
8.10 TRANSFER OF STOCK........................... 25
8.11 STOCK TRANSFER AGREEMENTS................... 25
8.12 REGISTERED STOCKHOLDERS..................... 25
ARTICLE IX - AMENDMENTS................................. 25
</TABLE>
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<PAGE>
BYLAWS
------
OF
--
SOMNUS MEDICAL TECHNOLOGIES, INC.
---------------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation the annual meeting of shareholders shall be held on the second
Monday of May of each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding business day. At the meeting, directors shall be elected and any
other proper business may be transacted.
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<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president or the
secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than ten (10) nor more than sixty (60) days after
the receipt of the request. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the Secretary or an Assistant Secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stock holders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
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<PAGE>
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS
-------------------
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation
Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.9, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, each
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the voting
and the stockholder requesting cumulative voting or any other stockholder voting
at the meeting in person or by proxy has given notice prior to commencement of
the voting of the stockholder's intention to cumulate votes. If cumulative
voting is properly requested, each holder of stock, or of any class or classes
or of a series or series thereof, who elects to cumulate votes shall be entitled
to as many votes as equals the number of votes which (absent this provision as
to cumulative voting) he would be entitled to cast for the election of directors
with respect to his shares of stock multiplied by the number of directors to be
elected by him, and he may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or more of
them, as he may see fit.
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<PAGE>
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
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<PAGE>
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
- 5 -
<PAGE>
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS(1)
-------------------
The number of directors of the corporation shall be not less than four (4)
nor more than seven (7). The exact number of Directors shall be seven (7) until
changed, within the limits specified above, by a Bylaw amending this Section
3.2, duly adopted by the Board of Directors or by the stockholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
certificate of incorporation or by an amendment to these Bylaws duly adopted by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote. No reduction of the authorized number of directors shall have
the effect of removing any director before that director's term of office
expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stock holders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his successor is elected and qualified or
until his earlier resignation or removal.
Elections of directors need not be by written ballot.
(1) Since the adoption of these Bylaws on March 15, 1996, this Section 3.2 has
been amended as follows:
(a) Board (July 19, 1996) and Stockholders (November 6, 1996) approved an
amendment which set range at 4-7 and fixed number of directors at 5;
(b) November 6, 1996 - Board approved amendment which increased fixed
number of directors from 5 to 6; and
(c) August 21, 1997 - Board approved amendment which increased fixed
number of directors from 6 to 7.
- 6 -
<PAGE>
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the attention
of the Secretary of the corporation. When one or more directors so resigns and
the resignation is effective at a future date, a majority of the directors then
in office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
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<PAGE>
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
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<PAGE>
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.12 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of
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<PAGE>
a majority of the shares then entitled to vote at an election of directors;
provided, however, that, so long as shareholders of the corporation are entitled
to cumulative voting, if less than the entire board is to be removed, no
director may be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire board of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
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<PAGE>
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings and meetings by
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<PAGE>
telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and
notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10
(action without a meeting), with such changes in the context of those bylaws as
are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
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<PAGE>
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
- 13 -
<PAGE>
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the president. The vice presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the board of directors, these bylaws,
the president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
- 14 -
<PAGE>
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositories as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or these bylaws.
The chief financial officer shall be the treasurer of the corporation.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as may be
prescribed by the board of directors or these bylaws.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers of
the chief financial officer and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these bylaws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of
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<PAGE>
directors or the president or a vice president, is authorized to vote,
represent, and exercise on behalf of this corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
this corporation. The authority granted herein may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 THIRD PARTY ACTIONS
-------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the corporation, which approval shall not be unreasonably
withheld) actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
---- ----------
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
---------------------------------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to
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<PAGE>
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) and amounts paid in settlement (if such
settlement is approved in advance by the corporation, which approval shall not
be unreasonably withheld) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper. Notwithstanding any other
provision of this Article VI, no person shall be indemnified hereunder for any
expenses or amounts paid in settlement with respect to any action to recover
short-swing profits under Section 16(b) of the Securities Exchange Act of 1934,
as amended.
6.3 SUCCESSFUL DEFENSE
------------------
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 DETERMINATION OF CONDUCT
------------------------
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made
(1) by the Board of Directors or the Executive Committee by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders. Notwithstanding the foregoing, a
director, officer, employee or agent of the Corporation shall be entitled to
contest any determination that the director, officer, employee or agent has not
met the applicable standard of conduct set forth in Sections 6.1 and 6.2 by
petitioning a court of competent jurisdiction.
- 17 -
<PAGE>
6.5 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
Section 6.1 or 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
6.7 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
6.8 THE CORPORATION
---------------
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VI (including,
without limitation the provisions of Section 6.4) with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
- 18 -
<PAGE>
6.9 EMPLOYEE BENEFIT PLANS
----------------------
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
Article VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
- 19 -
<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive officer or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock ledger, a
list of its stockholders, and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
- 20 -
<PAGE>
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such
- 21 -
<PAGE>
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
- 22 -
<PAGE>
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
(i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors, and may use the same by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the
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<PAGE>
part of another person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
----------
The bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal bylaws.
- 24 -
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
Adoption by Incorporator
------------------------
The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of Somnus Medical Technologies, Inc. hereby adopts the
foregoing Bylaws, comprising twenty-three (23) pages, as the Bylaws of the
corporation.
Executed this 15th day of March, 1996.
/s/ J. Casey McGlynn
--------------------------------
J.Casey McGlynn, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Somnus Medical Technologies, Inc. and that the foregoing
Bylaws, comprising twenty-three (23) pages, were adopted as the Bylaws of the
corporation on November 1, 1996, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this 15th day of March, 1996.
/s/ J. Casey McGlynn
-----------------------------------
J. Casey McGlynn, Secretary
- 25 -
<PAGE>
EXHIBIT 10.1
SOMNUS MEDICAL TECHNOLOGIES, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of
_______________, 1997 by and between Somnus Medical Technologies, Inc., a
Delaware corporation (the "Company"), and __________________, ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, the Company and Indemnitee desire to have in place the additional
protection provided by an indemnification agreement to provide indemnification
and advancement of expenses to the Indemnitee to the maximum extent permitted by
Delaware law;
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
-------------------
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) or group acting in concert, other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the
<PAGE>
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing more than 50% of the total
voting power represented by the Company's then outstanding Voting Securities,
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Company and
any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least two
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
(iii) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation other than a merger or consolidation which
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or (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 (in one transaction or a series of related transactions) all
or substantially all of the Company's assets.
(b) "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.
(c) References to the "Company" shall include, in addition to Somnus
Medical Technologies, Inc. any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger to which
Somnus Medical Technologies, Inc. (or any of its wholly owned subsidiaries) is a
party which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
2
<PAGE>
(e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of any Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
3
<PAGE>
2. Indemnification.
---------------
(a) Indemnification of Expenses. Subject to the provisions of Section
---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder
under applicable law; provided, however, that if Indemnitee has commenced or
-------- -------
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee is entitled to be indemnified hereunder
under applicable law, any determination made by any Reviewing Party that
Indemnitee is not entitled to be indemnified hereunder under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expenses theretofore paid in indemnifying Indemnitee until a
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expenses shall be unsecured and no
interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect.
--------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has not
-----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by
4
<PAGE>
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the employment of separate counsel by one or more
Indemnitees has been previously authorized by the Company in writing, or (ii) an
Indemnitee shall have provided to the Company a written statement that such
Indemnitee has reasonably concluded that there may be a conflict of interest
between such Indemnitee and the other Indemnitees with respect to the matters
arising under this Agreement.
(e) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
3. Expense Advances.
----------------
(a) Obligation to Make Expense Advances. Upon receipt of a written
-----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefore by the Company hereunder under applicable law, the Company shall make
Expense Advances to Indemnitee.
(b) Form of Undertaking. Any obligation to repay any Expense Advances
-------------------
hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured
and no interest shall be charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agree
--------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
(a) Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made
5
<PAGE>
to the fullest extent permitted by law as soon as practicable after written
demand by Indemnitee therefor is presented to the Company, but in no event later
than thirty (30) business days after such written demand by Indemnitee is
presented to the Company, except in the case of Expense Advances, which shall be
made no later than ten (10) business days after such written demand by
Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder under applicable law, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
------------------
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the
6
<PAGE>
delivery to Indemnitee of written notice of the Company's election to do so.
After delivery of such notice, approval of such counsel by Indemnitee and the
retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees or expenses of separate counsel
subsequently retained by or on behalf of Indemnitee with respect to the same
Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's
separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the
employment of separate counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not continue to retain such counsel to
defend such Claim, then the fees and expenses of Indemnitee's separate counsel
shall be Expenses for which Indemnitee may receive indemnification or Expense
Advances hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7
<PAGE>
7. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify or make Expense
----------------------------
Advances to Indemnitee with respect to Claims arising out of acts, omissions or
transactions for which Indemnitee is prohibited from receiving indemnification
under applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, Expense Advances, or insurance recovery, as
the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in
8
<PAGE>
good faith or was frivolous, or (ii) by or in the name of the Company to enforce
or interpret this Agreement, if a court having jurisdiction over such action
determines as provided in Section 13 that each of the material defenses asserted
by Indemnitee in such action was made in bad faith or was frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for Expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until
9
<PAGE>
such final judicial determination is made, Indemnitee shall be entitled under
Section 3 to receive payment of Expense Advances hereunder with respect to such
action.
14. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
15. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
17. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
18. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
in the State of Delaware without regard to principles of conflicts of laws.
19. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
10
<PAGE>
20. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.
21. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
22. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
SOMNUS MEDICAL TECHNOLOGIES, INC.
By: ________________________ AGREED TO AND ACCEPTED
Print Name: ________________________ INDEMNITEE:
Title: ________________________
___________________________________
Address: 285 N. Wolfe Rd. (signature)
Sunnyvale, CA 94086
Print Name:________________________
Address:___________________________
11
<PAGE>
EXHIBIT 10.2
SOMNUS MEDICAL TECHNOLOGIES, INC.
1996 STOCK PLAN
(AS AMENDED AND RESTATED, EFFECTIVE AUGUST 21, 1997)
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. 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 as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the
---------
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Somnus Medical Technologies, Inc., a Delaware
-------
corporation.
<PAGE>
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, 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 shall be determined in good faith by the
Administrator.
-2-
<PAGE>
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1996 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
-3-
<PAGE>
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "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 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is (a) 3,350,000 Shares, plus (b) 750,000 shares to be added on
the date of the 1998 annual meeting of the stockholders of the Company, plus (c)
an annual increase to be added on the date of the annual meeting of the
stockholders of the Company, beginning with the 1999 annual meeting of the
stockholders of the Company, equal to the lesser of (i) 500,000 Shares, (ii)
2.5% of the outstanding Shares on such date or (iii) a lesser amount determined
by the Board. The Shares may be authorized, but unissued, or reacquired Common
Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the
-4-
<PAGE>
meaning of Section 162(m) of the Code, the Plan shall be administered by a
Committee of two or more "outside directors" within the meaning of Section
162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transaction
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
-5-
<PAGE>
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. 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. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
-6-
<PAGE>
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 450,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 450,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
------------
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option 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 determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
-7-
<PAGE>
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the 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 Employee other than an Employee
described in paragraph (A) immediately above, 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, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) 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;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
-8-
<PAGE>
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), 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.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter 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 Relationship as a Service Provider. If an
-------------------------------------------------
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option,
-9-
<PAGE>
the Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) 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 or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such
-10-
<PAGE>
offer. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(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 service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(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.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not
-11-
<PAGE>
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the
-12-
<PAGE>
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. 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 shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. 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.
17. Inability to Obtain Authority. 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.
-13-
<PAGE>
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.
19. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-14-
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
1996 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
[25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to the Optionee continuing to be a Service
Provider on such dates].
<PAGE>
Termination Period:
------------------
This Option may be exercised for thirty days after Optionee ceases to be a
Service Provider. Upon the death or Disability of the Optionee, this Option may
be exercised for one year after Optionee ceases to be a Service Provider. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
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 Grant and the
applicable provisions of the Plan and this 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 completed
by the Optionee and delivered 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 Applicable Laws. 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.
-2-
<PAGE>
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;
(b) check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; 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 and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this 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 Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
----------------
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option.
---------------------
(i) Nonstatutory Stock Option. The Optionee may incur
-------------------------
regular federal income tax liability upon exercise of a NSO. 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. If
the Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
-3-
<PAGE>
(ii) Incentive Stock Option. If this Option qualifies as an
----------------------
ISO, the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) Disposition of Shares.
---------------------
(i) NSO. If the Optionee holds NSO Shares for at least one
---
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
---
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, 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 (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
-4-
<PAGE>
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
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 Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: SOMNUS MEDICAL TECHNOLOGIES, INC.
____________________________________ ________________________________________
Signature By
____________________________________ ________________________________________
Print Name Title
____________________________________
Residence Address
____________________________________
-5-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
_______________________________________
Spouse of Optionee
-6-
<PAGE>
EXHIBIT A
---------
1996 STOCK PLAN
EXERCISE NOTICE
Somnus Medical Technologies, Inc.
285 N. Wolfe Road
Sunnyvale, CA 94086
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________, 199__,
------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Somnus Medical Technologies, Inc. (the
"Company") under and pursuant to the 1996 Stock Plan (the "Plan") and the Stock
Option Agreement dated _____________, 19___ (the "Option Agreement"). The
purchase price for the Shares shall be $_____________, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Stockholder. 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 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. The 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 of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
<PAGE>
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER: SOMNUS MEDICAL TECHNOLOGIES, INC.
____________________________________ ______________________________________
Signature By
____________________________________ ______________________________________
Print Name Its
Address: Address:
- ------- -------
_________________________________ 285 N. Wolfe Road
_________________________________ Sunnyvale, CA 94086
______________________________________
Date Received
-2-
<PAGE>
EXHIBIT 10.3
SOMNUS MEDICAL TECHNOLOGIES, INC.
RESTATED INVESTORS' RIGHTS AGREEMENT
____________________
April 21, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Registration Rights................................................... -1-
1.1 Definitions..................................................... -1-
1.2 Request for Registration........................................ -2-
1.3 Company Registration............................................ -3-
1.4 Obligations of the Company...................................... -4-
1.5 Furnish Information............................................. -5-
1.6 Expenses of Demand Registration................................. -5-
1.7 Expenses of Company Registration................................ -5-
1.8 Underwriting Requirements....................................... -5-
1.9 Delay of Registration........................................... -5-
1.10 Indemnification................................................. -5-
1.11 Reports Under Securities Exchange Act of 1934................... -7-
1.12 Form S-3 Registration........................................... -8-
1.13 Assignment of Registration Rights............................... -8-
1.14 Termination of Registration Rights.............................. -9-
2. Covenants of the Company.............................................. -9-
2.1 Financial Statements and Other Information...................... -9-
2.2 Inspection of Property..........................................-10-
2.3 Right of First Offer............................................-10-
2.4 Positive Covenants..............................................-12-
2.5 Standoff Agreement..............................................-12-
3. Amendment and Restatement.............................................-12-
4. Waiver of Right of First Offer........................................-13-
5. Miscellaneous.........................................................-13-
5.1 Successors and Assigns..........................................-13-
5.2 Governing Law...................................................-13-
5.3 Counterparts....................................................-13-
5.4 Titles and Subtitles............................................-13-
5.5 Notices.........................................................-13-
5.6 Expenses........................................................-13-
5.7 Amendments and Waivers..........................................-13-
5.8 Severability....................................................-14-
5.9 Entire Agreement................................................-14-
</TABLE>
SCHEDULES
EXHIBIT A Schedule of Investors
-i-
<PAGE>
RESTATED INVESTORS' RIGHTS AGREEMENT
------------------------------------
This RESTATED INVESTORS' RIGHTS AGREEMENT (this "Agreement") is made
as of the 21st day of April, 1997, by and among Somnus Medical Technologies,
Inc., a Delaware corporation (the "Company"), and the investors listed on
Schedule A hereto (each an "Investor" and collectively the "Investors").
- ----------
RECITALS
--------
WHEREAS, the Company and certain of the Investors are parties to that
certain Series B Preferred Stock Purchase Agreement dated September 11, 1996
(the "Series B Purchase Agreement") or are parties to that certain Series C
Preferred Stock Purchase Agreement dated April 21, 1997 (the "Series C Purchase
Agreement");
WHEREAS, the Company now wishes to restate the Investors' Rights
Agreement dated September 11, 1996 (the "Prior Agreement") in conjunction with
its issuance of Series C Convertible Preferred Stock;
WHEREAS, to induce one of the Investors to invest funds in the Company
pursuant to the Series C Purchase Agreement, the parties hereto intend that this
Agreement shall govern the rights of such Investor to cause the Company to
register shares of Common Stock issuable to such investor upon conversion of the
Series C Convertible Preferred Stock, and to restate the Investors' Rights
Agreement dated September 11, 1996;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereto agree as follows:
1. Registration Rights. The Company covenants and agrees as
-------------------
follows:
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Common Stock" means shares of the common stock of
the Company, par value $.001 per share.
(c) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(d) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
(e) The term "Major Holder" means any holder of at least 25,000
shares of Series B Preferred Stock or 200,000 shares of any later series of
Preferred Stock.
<PAGE>
(f) The term "MRA Common Stock" shall mean Common Stock issued to
Musket Research Associates Inc. ("MRA") upon exercise of options or warrants
hereinafter issuable to MRA pursuant to Section 8 of that certain letter
agreement dated June 6, 1996 between MRA and the Company.
(g) The term "1934 Act" means the Securities Exchange Act of
1934, as amended.
(h) The term "Preferred Stock" means shares of the Company's
Series A Convertible Preferred Stock, par value $.001 per share, the Series B
Convertible Preferred Stock, par value $.001 per share, or the Series C
Convertible Preferred Stock, par value $.001 per share.
(i) The terms "register," "registered," "registration" and
"registration statement" refer to a registration effected by preparing and
filing a registration statement or similar document in compliance with the Act,
and the declaration or ordering of effectiveness of such registration statement
or document.
(j) The term "IPO" means the effective date of the first
registration statement for a public offering of securities of the Company (other
than a registration statement relating either to the sale of securities to
employees of the Company pursuant to a stock option, stock purchase or similar
plan or an SEC Rule 145 transaction).
(k) The term "Registrable Securities" means (i) the Common Stock
issuable or issued upon conversion of the Preferred Stock, (ii) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of the Common
Stock referenced in preceding clause (i), excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which his rights
under this Section 1 are not assigned, and (iii) the MRA Common Stock.
(l) The term "SEC" shall mean the Securities and Exchange
Commission.
1.2 Request for Registration.
------------------------
(a) If the Company shall receive at any time after the earlier of
(i) December 31, 2001 or (ii) ninety (90) days after the IPO, a written request
from the Holders of securities constituting, directly or upon conversion or
exercise, at least twenty-five percent (25%) of the then Registrable Securities
that the Company file a registration statement under the Act covering the
registration of securities constituting, directly or upon conversion or
exercise, at least twenty-five percent (25%) of the then Registrable Securities,
the Company shall:
(i) within ten (10) days of the receipt thereof, give
written notice, in accordance with Section 5.5 hereof, of such request
to all Holders; and
(ii) file as soon as practicable, and in any event within
sixty (60) days of the receipt of such request, a registration
statement pertaining to all Registrable Securities which the Holders
request to be registered, subject to the limitations of Subsection
1.2(b), and use its best efforts to cause such registration statement
to become effective as soon as practicable.
(b) If the Holders initiating the registration request hereunder
(the "Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an
-2-
<PAGE>
underwriting, they shall so advise the Company as a part of their request made
pursuant to Subsection 1.2(a) and the Company shall include such information in
the written notice referred to in Subsection 1.2(a)(i). The underwriter will be
selected by the Company and shall be reasonably acceptable to Initiating Holders
holding a majority of the Registrable Securities to be registered (a "majority-
in-interest" of the Initiating Holders). In such event, the right of any Holder
to include his Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by such Holder and a majority-in-interest of the Initiating Holders) to
the extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company as provided in
Subsection 1.4(e)) enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting. Notwithstanding
any other provision of this Section 1.2, if the underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Initiating Holders shall so advise
all Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares of Registrable Securities that may be
included in the underwriting shall be allocated among all Holders thereof,
including the Initiating Holders, in proportion (as nearly as practicable) to
the amount of Registrable Securities owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall furnish
to the Initiating Holders a certificate signed by the Chief Executive Officer of
the Company stating that, in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its
stockholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer taking action with respect to such filing for a period
of not more than 60 days after receipt of the request of the Initiating Holders;
provided, however, that the Company may not utilize this right more than once in
any 12 month period.
(d) In addition, the Company shall not be obligated to effect, or
to take any action to effect, any registration pursuant to this Section 1.2:
(i) After the Company has effected two (2) registrations
pursuant to this Section 1.2, excluding any registrations effected on
Form S-3, and such registrations have been declared or ordered
effective;
(ii) If the Initiating Holders propose to dispose of shares
of Registrable Securities that may be immediately registered on Form
S-3 pursuant to a request made pursuant to Section 1.12 below; or
(iii) If the Company delivers to the Initiating Holders an
opinion, in form and substance acceptable to such Initiating Holders,
of counsel satisfactory to the Initiating Holders that the Registrable
Securities requested to be registered by the Initiating Holders may be
sold or transferred pursuant to Rule 144(k) of the Act.
1.3 Company Registration. If (but without any obligation to do so)
--------------------
the Company proposes to register (including for this purpose a registration
effected by the Company for its stockholders other than the Holders) any of its
stock or other securities under the Act in connection with a public offering of
such securities (other than a registration relating solely to the sale of
securities to participants in a Company stock plan, a registration relating
solely to a Rule 145 transaction, a registration on any form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities or a
registration in which the only Common Stock
-3-
<PAGE>
being registered is Common Stock issuable upon conversion of debt securities
which are also being registered), the Company shall, at such time, promptly give
each Holder written notice of such registration in accordance with Section 5.5.
Upon the written request of each Holder to the Company given within twenty (20)
days following receipt of such notice by the Company, the Company shall, subject
to the provisions of Section 1.8, cause to be registered under the Act all of
the Registrable Securities that each such Holder has requested to be registered.
1.4 Obligations of the Company. Whenever required under this
--------------------------
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and keep such registration statement
effective for a period of up to 120 days or until the distribution contemplated
in the Registration Statement has been completed, whichever first occurs;
provided, however, that such 120 day period shall be extended for a period of
time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter of any securities
of the Company, and provided further that in the case of any registration of
Registrable Securities on Form S-3 that are intended to be offered on a
continuous or delayed basis, such 120 day period shall be extended until all
such Registrable Securities are sold, if applicable rules under the Act
governing the obligation to file a post-effective amendment permit, in lieu of
filing a post-effective amendment which (i) includes any prospectus required by
Section 10(a)(3) of the Act or (ii) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (i) and (ii) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as, in the opinion of counsel to the Company, may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Act.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then
-4-
<PAGE>
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange (or on the Nasdaq Stock
Market, as the case may be) on which similar securities issued by the Company
are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
1.5 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
1.6 Expenses of Demand Registration. All expenses other than
-------------------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company.
1.7 Expenses of Company Registration. The Company shall bear and
--------------------------------
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder, including (without limitation) all
registration, filing, and qualification fees, printers' and accounting fees
relating or apportionable thereto and the reasonable fees and disbursements of
one counsel for the selling Holders, but excluding underwriting discounts and
commissions relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of a Holder's securities
in such underwriting unless such Holder accepts the terms of the underwriting as
agreed upon between the Company and the underwriters selected by it (or by other
persons entitled to select the underwriters), and then only in such quantity as
the underwriters determine in their sole discretion will not jeopardize the
success of the offering by the Company. If the total amount of securities,
including Registrable Securities, requested by stockholders to be included in
such offering exceeds the amount of securities sold other than by the Company
that the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering (the securities so included to be apportioned pro
---
rata among the Holders according to the total amount of Registrable Securities
- ----
entitled to be included therein owned by each Holder or in such other
proportions as shall mutually be agreed to by the Holders); provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be so reduced unless the securities of other selling
stockholders are first entirely excluded from the underwriting. For purposes of
the preceding parenthetical concerning apportionment, for any Holder that is a
partnership or corporation, the partners, retired partners and stockholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single Holder, and any pro rata reduction with respect
--- ----
-5-
<PAGE>
to such Holder shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
Holder, as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the officers and directors of each Holder
participating in such registration, any underwriter (as defined in the Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the 1934 Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, or the 1934 Act, or otherwise insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, or any rule or regulation
promulgated under the Act, or the 1934 Act, and the Company will pay to each
such Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Subsection 1.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company,
which consent shall not be unreasonably withheld, nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, or the 1934 Act, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay, as incurred, any legal or
other expenses reasonably incurred by any person intended to be indemnified
pursuant to this Subsection 1.10(b), in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Subsection 1.10(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Holder,
which consent shall not be unreasonably withheld; provided, that, in no event
shall any selling Holder's liability under this Subsection 1.10(b) exceed the
proceeds received by such Holder from the offering (net of any underwriting
discounts and commissions).
-6-
<PAGE>
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this Section
1.10 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after the effective
date of the IPO;
(b) use their best efforts to take such action as is necessary to
enable the Holders to utilize Form S-3 pursuant to Section 1.12 for the sale of
their Registrable Securities, such action to be taken concurrently with the IPO;
-7-
<PAGE>
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after the effective date of the IPO), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), (ii) a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive at any
---------------------
time after the completion of the IPO, a written request from the Holders of
securities constituting, directly or upon conversion or exercise, at least one
percent (1%) of the then Registrable Securities, that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
(a) promptly give written notice pursuant to Section 5.5 of the
proposed registration, and any related qualification or compliance, to all other
Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holders'
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
twenty (20) days following receipt of notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.12: (i) if
the Holder or Holders requesting registration do not propose to dispose of
shares of Registrable Securities which they reasonably anticipate will have an
aggregate disposition price (before deduction of underwriting discounts and
expenses of sale) of at least one million dollars ($1,000,000); (ii) if Form S-3
is not available for such offering by the Holders; (iii) if the Company shall
furnish to the Holders a certificate signed by the President of the Company
stating that, in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such Form S-3 registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than 60 days after receipt of the request of
the Holder or Holders under this Section 1.12; provided, however, that the
Company shall not utilize this right more than once in any 12 month period; (iv)
if the Company has already effected four registrations on Form S-3, or any
equivalent successor form, for the Holders pursuant to this Section 1.12; or (v)
in any particular jurisdiction in which the Company would be required on account
of such registration, qualification or compliance to qualify to do business or
to execute a general consent to service of process.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to this Section 1.12, including, without
limitation, all registration, filing, qualification, printers' and accounting
fees and the reasonable fees and disbursements of one counsel for the selling
Holder or Holders and counsel for the Company, but excluding any underwriting
discounts or commissions associated with Registrable Securities, shall be borne
by the Company. Registrations effected pursuant to this Section 1.12 shall not
be counted as registrations effected pursuant to Sections 1.2 or 1.3.
-8-
<PAGE>
(d) The Company shall not be obligated to effect any registration
pursuant to this Section 1.12 if the Company delivers to the Holders requesting
registration under this Section 1.12 an opinion, in form and substance
acceptable to such Holders, of counsel satisfactory to such Holders, that the
Registrable Securities so requested to be registered may be sold or transferred
pursuant to Rule 144(k) under the Act.
1.13 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to any partner or
stockholder of such Holder or, in the case of a Holder that is an investment
company registered under the Investment Company Act of 1940, to another such
investment company (a "Related Mutual Fund") that has the same investment
advisor as the transferring investment company, without restriction or
requirement as to number of shares, or to a transferee or assignee of such
securities who, as a result of such assignment or transfer, acquires at least
25,000 of such transferring Holder's shares of Registrable Securities (subject
to appropriate adjustment for stock splits, stock dividends, combinations,
recapitalizations and any similar events), provided: (a) the Company is, within
a reasonable time after such transfer, furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned; (b) such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement, including without limitation the provisions of
Section 1.14 below; and (c) such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Act.
1.14 Termination of Registration Rights. No Holder shall be entitled
----------------------------------
to exercise any right provided for in this Section 1 after five (5) years
following the consummation of the sale of the Company's securities pursuant to a
registration statement filed by the Company under the Act in connection with a
firm commitment underwritten offering of its securities to the general public
resulting in gross proceeds to the Company of at least $15,000,000 and at a
price per share to the public of at least $6.00 (as adjusted for stock splits,
combinations and similar transactions) (a "Qualified Public Offering").
2. Covenants of the Company.
------------------------
2.1 Financial Statements and Other Information. Except as otherwise
------------------------------------------
set forth below in this Section 2.1, until the Company is subject to the
reporting requirements of the 1934 Act, the Company will deliver to each Major
Holder:
(a) as soon as available, but in any event within 30 days, after
the end of each quarterly accounting period in each fiscal year, unaudited
consolidated statements of operations and cash flows of the Company and its
subsidiaries for such quarterly period and for the period from the beginning of
the fiscal year to the end of such quarter, and consolidated balance sheets of
the Company and its subsidiaries as of the end of such quarterly period, setting
forth in each case comparisons to the annual budget and to the corresponding
period in the preceding fiscal year, all such statements to be prepared in
accordance with generally accepted accounting principles, consistently applied
(except for the absence of notes and subject to normal year-end audit
adjustments);
(b) as promptly as possible, but in any event within 90 days,
after the end of each fiscal year, consolidated statements of operations and
cash flows of the Company and its subsidiaries for such fiscal year, and a
consolidated balance sheet and statement of stockholders' equity of the Company
and its subsidiaries as of the end of such fiscal year, setting forth
comparisons to the annual budget and to the preceding fiscal year, all prepared
in accordance with generally accepted accounting principles, consistently
applied, and accompanied by an unqualified opinion (except for qualifications
regarding
-9-
<PAGE>
specified contingent liabilities) of an independent accounting firm selected by
the Company's Board of Directors;
(c) prior to the end of each fiscal year, an annual budget
(approved by the Board of Directors) prepared on a monthly, consolidated basis
for the Company and its subsidiaries for the succeeding fiscal year (displaying
detailed anticipated statements of operations and cash flows and balance
sheets), and promptly upon preparation thereof any other significant budgets
which the Company prepares and any revisions of such annual or other budgets;
(d) promptly (and in any event within 30 days) after the
discovery or receipt of notice of any event or circumstance affecting the
Company or its subsidiaries that is determined in good faith by the Company to
be material to the Company and its subsidiaries, taken as a whole, including,
but not limited to, the filing of any material litigation against the Company or
its subsidiaries, acquisitions, mergers, substantial sales of assets,
significant regulatory or legal developments, the commencement of voluntary or
involuntary bankruptcy proceedings, natural or other disasters, significant
changes in management or directors, changes in auditors, and execution or
termination of, or defaults under, material contracts, a letter from the Chief
Executive Officer or Chief Financial Officer of the Company specifying the
nature and period of existence thereof and, in the case of material litigation,
what actions the Company and its subsidiaries have taken and propose to take
with respect thereto;
(e) promptly after transmission thereof, copies of all financial
statements, proxy statements, reports and any other written communications which
the Company sends to its stockholders generally and copies of all registration
statements and all regular, special or periodic reports which it files with the
SEC or with any securities exchange on which any of its securities are then
listed, and copies of all press releases and other statements made available
generally by the Company to the public;
(f) a notice specifying the terms of all sales of the Company's
securities, promptly following the consummation thereof;
(g) within fifteen (15) days after the end of each month, an
income statement for such month and a balance sheet of the Company for and as of
the end of such month, together with such other business and financial data as
may be reasonably requested by each Investor; and
(h) notice of the effectiveness under the Act of the registration
covering the Company's IPO, such notice to be provided by telecopier immediately
following the SEC's notification to the Company of such effectiveness.
Each of the financial statements referred to in this Section 2.1 shall
be true and correct in all material respects and shall fairly present the
Company's consolidated financial position and results of operations as of the
dates and for the periods stated therein, subject in the case of the unaudited
financial statements to changes resulting from normal year-end audit adjustments
(none of which would, alone or in the aggregate, be materially adverse to the
Company's financial condition, operating results or business prospects). The
Company's obligation to provide to the Major Holders the materials described in
Subsection (e) above will continue after the Company is subject to the reporting
requirements of the 1934 Act.
2.2 Inspection of Property. Until the Company is subject to the
----------------------
reporting requirements of the 1934 Act, the Company will permit each Holder, or
any representative designated by a Holder, upon reasonable notice and during
normal business hours or at such other times as such Holder may reasonably
request, to (a) visit and inspect any of the properties of the Company and its
subsidiaries, (b) examine the
-10-
<PAGE>
corporate and financial records of the Company and its subsidiaries and make
copies thereof or extracts therefrom, (c) discuss the affairs, finances and
accounts of the Company and its subsidiaries with the directors, senior
management and independent accountants of the Company and its subsidiaries, and
(d) consult with and advise the management of the Company and its subsidiaries
as to their affairs, finances and accounts, provided, however, that the Company
shall not be obligated to provide any information that it considers in good
faith to be a trade secret or to contain confidential or classified information
unless such Investor is a member of the Company's Board of Directors or agrees
to execute a reasonable covenant or agreement regarding the maintenance of the
confidentiality of such information.
2.3 Right of First Offer. Subject to the terms and conditions
--------------------
specified in this Section 2.3, the Company hereby grants to each Major Holder a
right of first offer with respect to future sales by the Company of its Shares
(as hereinafter defined). A Major Holder shall be entitled to apportion the
right of first offer hereby granted it among itself and its partners and
affiliates and, in the case of a Major Holder that is a registered investment
company, among itself and its Related Mutual Funds, in such proportions as it
deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall first make an offering of such Shares to
each Major Holder in accordance with the following provisions:
(a) The Company shall give notice to all Major Holders stating
(i) its bona fide intention to offer such Shares, (ii) the number of such Shares
to be offered, and (iii) the price and terms, if any, upon which it proposes to
offer such Shares.
(b) By written notice to the Company, within 20 calendar days
after giving of the Company's Notice, the Major Holder may elect to purchase or
obtain, at the price and on the terms specified in the Notice, up to that
portion of such Shares which equals the proportion that the number of shares of
Common Stock issued and held and issuable upon conversion of the Series B and
Series C Preferred Stock then held by such Major Holder bears to the total
number of shares of Common Stock of the Company then outstanding (assuming full
conversion of all convertible securities) ("Pro Rata Share"). To the extent a
Major Holder does not elect to purchase or obtain the full amount of its Pro
Rata Share, the unsubscribed portion of such Major Holder's Pro Rata Share may
be purchased or obtained by any other Major Holder(s), on a pro rata basis, at
--- ----
the price and on the terms specified in the Company's notice, provided that such
purchase shall be consummated within forty-five (45) days after giving of such
notice.
(c) If all Shares referred to in the Notice which Major Holders
are entitled to obtain pursuant to Subsection 2.3(b) are not elected to be
obtained as provided in Subsection 2.3(b) hereof, the Company may, during the 60
day period following the expiration of the period provided in Subsection 2.3(b)
hereof, offer the remaining unsubscribed portion of such Shares to any person or
persons at a price not less than, and upon terms no more favorable to the
offeree than those specified in the Notice. If the Company does not enter into
an agreement for the sale of the Shares within such period, or if such agreement
is not consummated within thirty (30) days of the execution thereof, the rights
provided to Major Holders hereunder shall be deemed to be revived and such
Shares shall not be offered unless first reoffered to the Major Holders in
accordance herewith.
(d) The right of first offer in this Section 2.3 shall not be
applicable to:
(i) shares of Common Stock issuable or issued to employees,
advisors, consultants or outside directors of the Company directly or
pursuant to a stock option plan or restricted stock plan approved by
the Board of Directors of the Company;
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<PAGE>
(ii) Common Stock issued or issuable upon conversion of the
Company's Preferred Stock; or
(iii) Common Stock issued or issuable in connection with a
merger, acquisition or consolidation as a result of which the holders
of the Company's outstanding securities immediately prior to the
consummation of such transaction hold securities in excess of fifty
percent (50%) of the voting power of the surviving or resulting
entity.
(e) The right of first offer set forth in this Section 2.3 may
not be assigned or transferred, except that (i) such right is assignable by each
Holder to any wholly-owned subsidiary or parent of, or to any corporation or
entity that is, within the meaning of the Act, controlling, controlled by or
under common control with, any such Holder and (ii) such right may be assigned
by an Investor that is a registered investment company to a Related Mutual Fund.
(f) The right of first offer set forth in this Section 2.3 are
hereby made subject and subordinate to the rights of first offer granted to the
Investor in the Series C Purchase Agreement.
2.4 Positive Covenants. As soon as practicable following execution
------------------
of this Agreement, and so long as any shares of the Series B Preferred Stock or
the Series C Preferred Stock are outstanding, the Company agrees as follows:
(a) The Company will retain independent public accountants of
recognized national standing who shall certify the Company's financial
statements at the end of each fiscal year. In the event the services of the
independent public accountants so selected, or any firm of independent public
accountants hereafter employed by the Company are terminated, the Company will
promptly thereafter notify the Holders and will request the firm of independent
public accountants whose services are terminated to deliver to the Holders a
letter from such firm setting forth the reasons for the termination of their
services. In the event of such termination, the Company will promptly
thereafter engage another firm of independent public accountants of recognized
national standing. In its notice to the Holders the Company shall state whether
the change of accountants was recommended or approved by the Board of Directors
of the Company or any committee thereof.
(b) The Company will cause senior management personnel and key
employees now or hereafter employed by it or any subsidiary to enter into a
proprietary information and inventions agreement.
(c) The Company's Board of Directors will meet at least once
every fiscal quarter.
(d) The Company shall, promptly following the date of this
Agreement, obtain, and thereafter maintain in full force and effect, fire,
casualty, workmen's compensation and liability insurance policies, with extended
coverage, in such amounts and with such coverage as are carried by companies in
a position similar to that of the Company.
(e) The Company will, in good faith, continue its search for
qualified individuals to be employed as the Company's Chief Executive Officer
and Chief Financial Officer. Any candidate selected by the Company, and the
terms of his or her employment, shall be approved by a majority of the Company's
Board of Directors, and a majority of the non-employee directors.
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<PAGE>
(f) At the Company's next Board of Directors meeting, the Company
shall establish (i) an Executive Search Committee, consisting of David Douglass,
Stuart Edwards and David Musket, which will oversee the Company's search for
qualified individuals to be employed as the Company's Chief Executive Officer
and Chief Financial Officer and (ii) a Compensation Committee, consisting of
Stuart Edwards David Illingworth and David Musket with the responsibility of
reviewing and providing prior approval of all future offers of options to
purchase stock under the Company's Stock Option Plan.
2.5 Standoff Agreement. Each Holder agrees, in connection with the
------------------
Company's IPO, not to sell, make any short sale of, pledge, grant any option for
the purchase of, or otherwise dispose of any Registrable Securities (other than
those included in such registration) without the prior written consent of the
Company or the underwriters of such IPO for such period of time as may be
required by such underwriters (not to exceed one hundred eighty (180) days) from
the effective date of such registration; provided, that the officers, directors
of the Company who own the Company's capital stock and the holders of 5% or more
of the Company's capital stock are also subject to such restrictions.
3. Amendment and Restatement. This Agreement amends and restates
-------------------------
the Investors' Rights Agreement originally dated September 11, 1996 effective
upon the date this Agreement has been executed by the Company and the Holders of
securities constituting, directly or upon conversion or exercise, two-thirds of
the Registrable Securities thereunder.
4. Waiver of Right of First Offer. Each Major Holder under the
------------------------------
Prior Agreement shall be deemed to have waived and hereby waives its right of
first offer with regard to the issuance of the Series C Preferred Stock being
issued under the Series C Agreement.
5. Miscellaneous.
-------------
5.1 Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
5.2 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of California, without reference to the
conflicts of laws provisions thereof.
5.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or four (4)
days after deposit with the United States Post Office or air courier in the case
of non-U.S. parties, by registered or certified mail, postage prepaid and
addressed to the party to be notified at the address indicated for such party on
the signature page hereof, or at such other address as such party may designate
by 10 days' advance written notice to the other parties.
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<PAGE>
5.6 Expenses. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
5.7 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
securities constituting, directly or upon conversion or exercise, at least sixty
percent (60%) of the then Registrable Securities, except Section 2.3, the terms
of which may be amended and the observance of any term of which may be waived
with the written consent of the Company and Major Holders holding securities
constituting, directly or upon conversion or exercise, at least sixty percent
(60%) of the then Registrable Securities of all Major Holders. Any amendment or
waiver effected in accordance with this Section 5.7 shall be binding upon each
Holder of any securities constituting, directly or upon conversion or exercise,
Registrable Securities. Notwithstanding the foregoing, no amendment or waiver
that adversely affects any rights for certain Registrable Securities of certain
Holders of Registrable Securities (but does not so equally affect all other
securities constituting Registrable Securities) or that alters any special
rights and privileges for such certain Registrable Securities or of such Holders
will be effective or binding unless it is approved by at least sixty percent
(60%) of the Registrable Securities adversely affected.
5.8 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
5.9 Entire Agreement. This Agreement constitutes the full and
----------------
entire understanding and agreement between the parties with regard to the
subjects hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
SOMNUS MEDICAL TECHNOLOGIES, INC.
285 N. Wolfe Road
Sunnyvale, California 94086
By: /s/ Stuart D. Edwards
------------------------------------
Stuart D. Edwards, President
and Chief Executive Officer
-14-
<PAGE>
INVESTORS:
/s/ Angelo Acquista
-------------------------------
ANGELO ACQUISTA, M.D.
/s/ Theo. P. Algren
-------------------------------
THEODORE P. ALGREN
/s/ Geoffrey U. Hartzler for
-------------------------------
Angela G. Arnn (Power of Attorney)
-------------------------------
ANGELA G. ARNN
/s/ Peter A. Baciewicz
-------------------------------
PETER A. BACIEWICZ
B & D PARTNERS
BY: /s/ Mark Douglass
----------------------------
NAME: Mark Douglass
--------------------------
TITLE: General Partner
-------------------------
CARDIOVASCULAR MEDICINE AND
CORONARY INTERVENTIONS 401(K)
SAVINGS PLAN FBO DR. DENNIS
SHEEHAN
BY: /s/ Bruce McAuley
----------------------------
NAME: Bruce McAuley
--------------------------
TITLE: Trustee
-------------------------
/s/ Joanne J. Chambers
-------------------------------
JOANNE CHAMBERS
<PAGE>
CMCA PROFIT SHARING PLAN
BY: /S/ Roger Winkle
----------------------------
NAME:
--------------------------
TITLE: Trustee
-------------------------
-------------------------------
CHRISTOPHER J. COMFORT, D.D.S.
/s/ Lorenzo DiFabrizio
-------------------------------
LORENZO DIFABRIZIO, M.D.
/s/ Stuart D. Edwards
-------------------------------
STUART D. EDWARDS
/s/ Robert S. Enea
-------------------------------
ROBERT S. ENEA
ES PARTNERS
BY: /s/ John Friedman
----------------------------
NAME: John Friedman
--------------------------
TITLE: Managing General Partner,
-------------------------
President of Easton Capital Corp.
---------------------------------
/s/ Eric S. Fain
-------------------------------
ERIC S. FAIN
/s/ Jody Fast
-------------------------------
JODY FAST
<PAGE>
/s/ Larry N. Feinberg
-------------------------------
LARRY N. FEINBERG
THE FOGARTY FAMILY
REVOCABLE TRUST DATED 9/14/71,
AS AMENDED AND RESTATED
8/14/91
BY: /s/ Thomas J. Fogarty
----------------------------
NAME:
--------------------------
TITLE: Trustee
-------------------------
/s/ Michael Franz
-------------------------------
MICHAEL FRANZ
/s/ E. Ray Gamble
-------------------------------
E. RAY GAMBLE
GBP TRUST
BY: /s/ G. B. Pentz
----------------------------
NAME: G. B. Pentz
--------------------------
TITLE: Trustee
-------------------------
/s/ Abigail M. Hartzler
-------------------------------
ABIGAIL M. HARTZLER
/s/ Geoffrey O. Hartzler for
-------------------------------
Christine E. Hartzler (Power of Attorney)
-----------------------------------------
CHRISTINE E. HARTZLER
/s/ Geoffrey O. Hartzler
-------------------------------
GEOFFREY O. HARTZLER AS
CUSTODIAN FOR AMANDA C.
HARTZLER
<PAGE>
/s/ Geoffrey Hartzler
-------------------------------
GEOFFREY HARTZLER
/s/ Gregory A. Hartzler
-------------------------------
GREGORY A. HARTZLER
/s/ Charles Henningsen
-------------------------------
CHARLES HENNINGSEN
/s/ Sandra N. Henningsen
-------------------------------
SANDRA N. HENNINGSEN
/s/ Robert Hess, TTEE
-------------------------------
ROBERT HESS, AS TRUSTEE OF
THE HESS FAMILY TRUST U/A/D
8/3/89
/s/ Steven I. Hochberg
-------------------------------
STEVEN I. HOCHBERG
HPB ASSOCIATES, L.P.
By: /s/ Howard P. Berkowitz
----------------------------
Name: Howard P. Berkowitz
--------------------------
Title: Sr. Managing Member of the
-------------------------------
General Partner, HPB Group, LLC
-------------------------------
JOSEPH P. ILVENTO, M.D. AND
JUDY C. DEAN, M.D. MONEY
PENSION PLAN
BY: /s/ Joseph P. Ilvento
----------------------------
NAME: Joseph P. Ilvento
-------------------------
TITLE: Trustee
-------------------------
/s/ Kenneth W. Kizer
-------------------------------
KENNETH W. KIZER, M.D.
<PAGE>
/s/ Douglas B. Lax
-------------------------------
DOUGLAS B. LAX
/s/ Ronald G. Lax
-------------------------------
RONALD G. LAX
/s/ Joel Liffman
-------------------------------
JOEL LIFFMAN
-------------------------------
FRANK LITVACK, M.D.
/s/ Christian Lundquist
-------------------------------
CHRISTIAN LUNDQUIST
/s/ Ingemar Lundquist
-------------------------------
INGEMAR LUNDQUIST
THE MARCUS FAMILY TRUST
DATED 7/14/93
BY: /s/ Steven V. Marcus
----------------------------
NAME: Steven V. Marcus
-------------------------
TITLE: Trustee
------------------------
/s/ J. Casey Mcglynn
-------------------------------
J. CASEY MCGLYNN
/s/ Hardwin Mead
-------------------------------
HARDWIN MEAD
<PAGE>
MEDCAP I. CORP.
BY: /s/ David B. Musket
---------------------------
NAME: David B. Musket
-------------------------
TITLE: Managing Member
------------------------
MEDTRONIC ASSET
MANAGEMENT, INC.
BY: /s/ Michael D. Ellwein
----------------------------
NAME: Michael D. Ellwein
--------------------------
TITLE: Vice President
-------------------------
MOSS FOREST VENTURE VI
BY: /s/ Frank H. Montgomery, Jr.
----------------------------
NAME: Frank H. Montgomery, Jr.
--------------------------
TITLE: Venture Manager
-------------------------
/s/ Georges Muller
-------------------------------
GEORGES MULLER
/s/ David B. Musket
-------------------------------
DAVID B. MUSKET
OCH-ZIFF CAPITAL MANAGEMENT
BY: /s/ Daniel S. Och
----------------------------
NAME: Daniel S. Och
--------------------------
TITLE: Managing Member
-------------------------
<PAGE>
/s/ Philip E. Oyer
-------------------------------
PHILIP E. OYER
MELISSA PARSONS IRA
BY: /s/ Melissa B. Parsons
----------------------------
NAME: Melissa B. Parsons
--------------------------
TITLE:
-------------------------
THE PHOENIX INSURANCE
COMPANY
BY: /s/ James B. Anderson
----------------------------
NAME: James B. Anderson
--------------------------
TITLE: Second Vice President
-------------------------
PIRATE SHIP & CO.
BY THE GLOBAL HEALTH
SCIENCES FUND
BY: /s/ Glen A. Payne
----------------------------
NAME: Glen A. Payne
--------------------------
TITLE: Secretary
-------------------------
PROMED PARTNERS, L.P.
BY: /s/ David B. Musket
----------------------------
NAME: David B. Musket
--------------------------
TITLE: Managing Member
-------------------------
RIVER EDGE PARTNERS, INC.
BY: /s/ J. A. Ciffilillo
----------------------------
NAME: J. A. Ciffilillo
--------------------------
TITLE: President
-------------------------
<PAGE>
/s/ Randall Rose
-------------------------------
RANDALL ROSE
LORRAINE SCHWARZ IRA
BY: /s/ Lorraine Schwartz
----------------------------
NAME: Lorraine Schwartz
--------------------------
TITLE:
-------------------------
/s/ Steven M. and Paula Mae Schwartz
-------------------------------
STEVEN M. AND PAULA MAE
SCHWARTZ
THE STARLING FAMILY TRUST
U/D/T DTD 8/15/90
BY: /s/ William N. Starling, Jr.
----------------------------
NAME:
--------------------------
TITLE: Trustee
-------------------------
/s/ William N. Starling, Jr.
-------------------------------
WILLIAM N. STARLING, JR.
/s/ Henry C. Stockman
-------------------------------
HENRY C. STOCKMAN
THIRD POINT PARTNERS
BY: /s/ Dan Loeb
----------------------------
NAME: Dan Loeb
--------------------------
TITLE: Managing Member
-------------------------
<PAGE>
THE TRAVELERS INDEMNITY
COMPANY
BY: /s/ James B. Anderson
----------------------------
NAME: James B. Anderson
--------------------------
TITLE: Second Vice President
-------------------------
THE TRAVELERS INSURANCE
COMPANY
BY: /s/ James B. Anderson
----------------------------
NAME: James B. Anderson
--------------------------
TITLE: Second Vice President
-------------------------
THE TRAVELERS LIFE AND
ANNUITY COMPANY
BY: /s/ James B. Anderson
----------------------------
NAME: James B. Anderson
--------------------------
TITLE: Second Vice President
-------------------------
VIKING MEDICAL VENTURES LTD.
BY: /s/ Michael R. Edmunds
----------------------------
NAME: Michael R. Edmunds
--------------------------
TITLE: Director
-------------------------
/s/ Roger Winkle
-------------------------------
ROGER WINKLE
<PAGE>
R. WINKLE, H. MEAD, R. RUDER, E.
ANDERSON & N. SMITH TTEE
CARD MED & CARD PSP
U/A DTD 9/1/84 FBO. R.
WINKLE
BY: /s/ R. Winkle
------------------------------------
NAME:
----------------------------------
TITLE: Trustee
---------------------------------
WS INVESTMENTS 96A
BY: /s/ Mary Ann Pedroni
------------------------------------
NAME: Mary Ann Pedroni
----------------------------------
TITLE: Acting Administration
---------------------------------
WSGR RETIREMENT PLAN FBO J.
CASEY MCGLYNN
BY: /s/ D.M. Laurice /s/ M.M. Rosati
------------------------------------
NAME: D.M. Laurice & M.M. Rosati
----------------------------------
TITLE: Trustee, WSGR Retirement Plan
---------------------------------
WTI VENTURES
BY: /s/ S. Allan Johnson
------------------------------------
NAME: S. Allan Johnson
----------------------------------
TITLE: Gen. Part.
---------------------------------
---------------------------------------
JAMES L. ZIMMERMAN, M.D.
<PAGE>
EXHIBIT A
---------
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
I. SERIES A PREFERRED STOCK INVESTORS SHARES PURCHASED
<S> <C>
Theo P. Algren 50,000
185 Snow Crest Road
Los Gatos, CA 95030
Angela G. Arnn 12,500
c/o Geoffrey Hartzler
2600 Verona Road
Mission Hills, KS 66208
R. Winkle, H. Mead, R. Ruder, E. Anderson & 50,000
N. Smith, TTEE CARD MED & CARD PSP U/A
dtd 9/1/84 fbo E. Anderson
770 Welch Road, Suite 100
Palo Alto, CA 94304
B & D Partners 6,000
Attn: Mark Douglass
221 Evergreen Drive
Kentfield, CA 94904
Peter Baciewicz 25,000
1600 Villa St. #306
Mountain View, CA 94041
Joanne Chambers 30,000
24861 Hutchinson Road
Los Gatos, CA 95030
Christopher J. Comfort, DDS 50,000
333 El Camino Real
Sunnyvale, CA 94087
Stuart D. Edwards 13,660
658 Westridge Drive
Portola Valley, CA 94028
Robert S. Enea 50,000
6670 Amador Plaza Rd.
Dublin, CA 94568
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Eric S. Fain 25,000
236 Marmona Dr.
Menlo Park, CA 94025
Jody Fast 100,000
P.O. Box 641161
San Jose, CA 95164-1161
Thomas J. Fogarty, M.D., Trustee of the 50,000
Fogarty Family Revocable Trust dated 9/14/71
as amended and restated 8/14/91
3270 Alpine Road
Portola Valley, CA 94028
Michael Franz 50,000
4701 Connecticut Ave N.W. #506
Washington, D.C. 20008
E. Ray Gamble 10,000
1540 Bergerac Drive
San Jose, CA 95118
GBP Trust 78,000
Attn: George B. Pence
c/o CPS Realty Group
1740 Technology Drive, #290
San Jose, CA 95110
Geoffrey O. Hartzler as custodian for Amanda 12,500
C. Hartzler under the UTMA until age twenty-one
2600 Verona Road
Mission Hills, KS 66208
Abigail M. Hartzler 12,500
2600 Verona Road
Mission Hills, KS 66208
Christine E. Hartzler 12,500
2600 Verona Road
Mission Hills, KS 66208
Geoffrey O. Hartzler 100,000
2600 Vernoa Road
Mission Hills, KS 66208
Gregory Hartzler 50,000
1245 Wilson Ave.
Goshen, IN 46526
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
Charles Henningsen 40,000
826 28th Ave.
San Francisco, CA 94121
Sandra Norton Henningsen 10,000
876 28th Ave.
San Francisco, CA 94121
Joseph P. Ilvento, M.D. and Judy C. Dean, M.D. 50,000
Money Pension Plan, PaineWebber, Inc.
Attn.: Jean Neusstadt, Jr.
5 Post Oak Place
P.O. Box 27828
Houston, TX 77227-7828
Kenneth W. Kizer, M.D. 50,000
3740 Clover Valley Road
Rocklin, CA 95677
Ronald G. Lax 50,000
P.O. Box 2357
Los Gatos, CA 95031-2357
Douglas B. Lax 50,000
2402 Michelson Dr., #100
Irvine, CA 92715
Christian H. Lundquist 50,000
11300 Sun Valley Drive
Oakland, CA 94605
Ingemar H. Lundquist 50,000
1154 The Dune at 17 Mile Drive
P.O. Box 1186
Pebble Beach, CA 93953
Steven V. Marcus and Denise C. Marcus 50,000
of the Marcus Family Trust DTD 7/14/93
1471 Hollidale Ct.
Los Altos, CA 94024
J. Casey McGlynn 25,000
650 Page Mill Road
Palo Alto, CA 94304
David B. Musket 25,000
c/o MRA
125 Cambridge Park Dr.
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C>
Cambridge, MA 02178
Philip E. Oyer 50,000
15975 Skyline Blvd.
Woodside, CA 94062
MLPF & S FBO Melissa Parsons IRA 50,000
81 Almendral Avenue
Atherton, CA 94027
William N. Starling, Jr. and Dana Gregory Starling, 50,000
Trustees of the Starling Family Trust
U/D/T dtd 8/15/90
345 Golden Hills Dr.
Portola Valley, CA 94028
William N. Starling, Jr. 7,500
345 Golden Hills Dr.
Portola Valley, CA 94028
Henry C. Stockrnan 25,000
c/o Hambrecht & Quist
One Bush Street, 16th Fl.
San Francisco, CA 94104
Roger A. Winkle, Trustee 70,000
CMCA Profit Sharing Plan
770 Welch Road, #100
Palo Alto, CA 94304
Roger A. Winkle 175,000
3347 St. Michael Ct.
Palo Alto, CA 94306
WS Investments 96A 35,000
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
WTI Ventures 50,000
Attn: S. Allan Johnson
1010 El Camino Real, Suite 300
Menlo Park, CA 94025
James J. Zimmerman, M.D. 25,000
499 Walsh Road
Atherton, CA 94027
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
II. SERIES B PREFERRED STOCK INVESTORS SHARES PURCHASED
<S> <C>
Pirate Ship & Co. 1,000,000
By The Global Health Sciences Fund
Attn: Buck Phillips
INVESCO Trust Co.
7800 East Union Avenue
Suite 1100
Denver, CO 80237
(303) 930-6521
The Travelers Insurance Company 450,000
Dan Scudder
The Travelers Companies
One Tower Square
Hartford, CT 06183
(860) 954-3129
The Travelers Indemnity Company 440,000
Dan Scudder
The Travelers Companies
One Tower Square
Hartford, CT 06183
(860) 954-3129
The Phoenix Insurance Company 60,000
Dan Scudder
The Travelers Companies
One Tower Square
Hartford, CT 06183
(860) 954-3129
The Travelers Life and Annuity Company 50,000
Dan Scudder
The Travelers Companies
One Tower Square
Hartford, CT 06183
(860) 954-3129
HPB Associates, L.P. 666,667
Howard Berkowitz
HPB Associates, L.P.
888 Seventh Avenue
New York, NY 10106
(212) 664-0990
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
Och-Ziff Capital Management 166,667
Dan Och
Och-Ziff Capital Management
153 East 53rd
43rd Floor
New York, NY 10022
(212) 292-5956
Randall Rose 100,000
8 1/2 West Chester Road
Nantucket, MA 02554
(508) 228-6586
ES Partners 26,000
John Friedman
Easton Capital
415 Madison Avenue
20th Floor
New York, NY 10017
(212) 702-0950
Third Point Partners, L.P. 16,667
Dan Loeb
277 Park Avenue
26th Floor
New York, NY 10017
(212) 350-5170
Viking Medical Ventures Ltd. 33,333
Michael D. Edmunds
8 Queensway House
Queen Street
St. Heller, Jersey, JE2
4WD
Channel Islands
011-44-1534-22787
David B. Musket 60,000
Musket Research Assoc.
125 Cambridgepark Drive
Cambridge, MA 02140
(617) 441-0259
ProMed Partners, L.P. 30,000
David B. Musket
Musket Research Assoc.
125 Cambridgepark Drive
Cambridge, MA 02140
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
(617) 441-0259
Hardwin Mead 33,333
940 Roble Ride
Palo Alto, CA 94306
(415) 627-8100
Home - (415) 858-0331
Robb Hess 16,667
35 Tagus Court
Portola Valley, CA 94028
(415) 815-7576
Steven M. and Paula Mae Schwartz 8,333
85 Old Colony Road
Wellesley Hills, MA 02181
(617) 237-7365
III. SECOND CLOSING PURCHASERS
MedCap I Corp. 85,600
David B. Musket
Musket Research Associates, Inc.
125 Cambridgepark Drive
Cambridge, MA 02140
(617) 441-0259
ProMed Partners, L.P. 2,100
David B. Musket
Musket Research Associates, Inc.
125 Cambridgepark Drive
Cambridge, MA 02140
(617) 441-0259
River Edge Partners, L.P. 16,667
Joseph Ciffolillo
31 Brimmer Street
Boston, MA 02108
Cardiovascular Medicine and 30,000
Coronary Interventions
401 (K) Savings Plan FBO
Dr. Dennis Sheehan
2900 Whipple Road, Suite 230
Redwood City, CA 94062
(415) 365-4784
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C>
Moss Forest Venture VI 79,631
Frank Montgomery
9 Moss Forest Place
Jackson, MS 39211
(601) 856-4393
Frank Litvack, M.D. 8,334
120 South Thurston Ave.
Los Angeles, CA 90049
(310) 471-1245
Lorraine Schwarz IRA 8,333
91 Ellison Avenue
Bronxville, NY 10708
(914)793-8175
Steven Hochberg 8,333
Advanced Health
560 White Plains Road
Second Floor
Tarrytown, NY 10591
(914) 524-4205
Larry Feinberg 33,334
Oracle Partners
712 Fifth Avenue, 45th Flr.
New York, NY 10019
(212) 373-9201
Joel Liffmann 16,667
Oracle Partners
712 Fifth Avenue, 45 Flr.
New York, NY 10019
(212) 373-9201
Angelo Acquista, M.D. 8,334
876 Park Avenue
New York, NY 10021
(212) 517-3010
Larry DiFabrizio, M.D. 8,334
876 Park Avenue
New York, NY 10021
(212) 517-3010
</TABLE>
-8-
<PAGE>
<TABLE>
<S> <C>
Georges Muller 33,333
BetaInvest
Avenue Montbenon 2
Lausanne 1003
Switzerland
011-41-21-212-2383
Trustee, WSGR Retirement Plan fbo J. Casey McGlynn 3,333
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
(415) 493-9300
<CAPTION>
III. SERIES C PREFERRED STOCK INVESTOR SHARES PURCHASED
<S> <C>
Medtronic Asset Management, Inc. 714,286
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
Attention: General Counsel
Ph. (612) 574-3048
Fax (612) 572-5459
</TABLE>
-9-
<PAGE>
Exhibit 10.4
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT (the "Agreement") is made and entered into as
of April 21st, 1997, (the "Effective Date") between SOMNUS MEDICAL TECHNOLOGIES,
INC. ("Somnus"), a Delaware corporation, and MEDTRONIC, INC. (as defined below,
"Medtronic"), a Minnesota corporation.
WITNESSETH:
WHEREAS, Somnus is developing ablation methods and devices using radio
frequency technology for use in, among other areas, ablation of the tongue,
palate and turbinates; and
WHEREAS, on even date herewith, Somnus, Medtronic and Medtronic Asset
Management, Inc., a wholly-owned subsidiary of Medtronic ("MAMI") have entered
into a Series C Preferred Stock Purchase Agreement of even date herewith (the
"Investment Agreement") pursuant to which MAMI is purchasing Series C Preferred
Stock of Somnus and Medtronic is receiving various rights; and
WHEREAS, it is a condition to MAMI's willingness to purchase such Somnus
Series C Preferred Stock that the parties enter into this Agreement.
NOW THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, and for other valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the parties mutually
agree as follows:
ARTICLE 1
DEFINITIONS
-----------
1.1) Specific Definitions. As used in this Agreement, the following terms
--------------------
shall have the meanings set forth or as referenced below:
"Affiliate" of a specified person (natural or juridical) means a person that
---------
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified. "Control"
shall mean ownership of more than 50% of the shares of stock entitled to vote
for the election of directors in the case of a corporation, and more than 50% of
the voting power in the case of a business entity other than a corporation.
"Agreement" means this Agreement and all Exhibits and Schedules hereto.
---------
[*] - CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
1
<PAGE>
"Confidential Information" means know-how, trade secrets, and unpublished
------------------------
information disclosed (whether before or during the term of this Agreement) by
one of the parties (the "disclosing party") to the other party (the "receiving
party") or generated by the disclosing party under this Agreement, and which is
marked as proprietary or confidential as provided below, excluding information
that:
(a) was already in the possession of receiving party prior to its
receipt from the disclosing party (provided that the receiving party is
able to provide the disclosing party with reasonable documentary proof
thereof);
(b) is or becomes part of the public domain by reason of acts not
attributable to the receiving party;
(c) is or becomes available to receiving party from a source other
than the disclosing party which source, to the best of receiving party's
knowledge, has rightfully obtained such information and has no obligation
of nondisclosure or confidentiality to the disclosing party with respect
thereto;
(d) is made available by the disclosing party to a third party
unaffiliated with the disclosing party on an unrestricted basis;
(e) is independently developed by the receiving party completely
without reference to any Confidential Information of the disclosing party,
as evidenced by the receiving party's written records; or
(f) has been or must be publicly disclosed by reason of legal,
accounting or regulatory requirements beyond the reasonable control, and
despite the reasonable efforts, of the receiving party.
All Confidential Information disclosed by one party to the other under this
Agreement shall be in writing and bear a legend "Proprietary," " Confidential"
or words of similar import or, if disclosed in any manner other than writing,
shall be followed by confirmation that such information is confidential by the
disclosing party within 30 days.
"Field" means the ablation of soft tissue in the airway, including anatomical
-----
structures of the nose, mouth, pharynx, larynx and trachea.
"Foreign Device Regulatory Authorities" means foreign regulatory authorities,
-------------------------------------
the function and purpose of which include regulating the design, manufacture,
quality and/or sale of medical devices.
"Intellectual Property" means letters patent and patent applications;
---------------------
trademarks, service marks and registrations thereof and applications therefor;
copyrights and copyright registrations and applications; mask works and
registrations thereof; all inventions, discoveries, ideas, technology, know-how,
trade secrets, data, information, processes,
2
<PAGE>
formulas, drawings and designs, licenses, computer programs and software; and
all amendments, modifications, and improvements to any of the foregoing.
"Knowledge" means actual knowledge of a fact or the knowledge that such person
---------
could reasonably be expected to have based on reasonable inquiry. The
"knowledge" of an entity shall include the knowledge of such entity's employees.
"Medtronic" means Medtronic, Inc. and its Affiliates.
---------
"Products" means all systems, products, and devices now or during the Term (as
--------
defined in Section 10.1) of this Agreement developed, manufactured, produced or
sold by Somnus, including specifically Somnus' ablation Systems and devices
using radio frequency technology, including all components thereof and
accessories thereto, and any modifications, improvements, substitutions and
future generations of such products made by or under the authority of Somnus
during the Term, which Products are from time to time commercially available
from Somnus. Somnus shall be under no obligation to continue the production of
any Product, except as provided herein.
"Product Liability Damages" means any liability, claim or expense, including but
-------------------------
not limited to reasonable attorneys' fees and medical expenses, arising in whole
or in part out of claims of third parties for personal injury or loss of or
damage to property relating to or arising out of the Products, whether based on
strict liability in tort, negligent manufacture of product, or any other
allegation of liability arising directly from the design, testing, manufacture,
packaging, labeling (including instructions for use), or sale of the Products.
"Quota" means the mutually agreed upon minimum six-month payment for Products to
-----
be purchased for such six-month period by Medtronic in accordance with the terms
and conditions of Article 6.
"Somnus" means Somnus Medical Technologies, Inc. and its Affiliates,
- -------
"Specifications" means Somnus' current specifications for the Products, as the
--------------
same may be amended from time to time by Somnus.
1.2) Other Terms. Other terms may be defined elsewhere in the text of this
-----------
Agreement and shall have the meaning indicated throughout this Agreement.
1.3) Definitional Provisions.
-----------------------
(a) The words "hereof," "herein," and "hereunder" and words of similar
import, when used in this Agreement, shall refer to this Agreement as a
whole and not to any particular provisions of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
3
<PAGE>
(c) References to an "Exhibit" or to a "Schedule" are, unless
otherwise specified, to one of the Exhibits or Schedules attached to or
referenced in this Agreement, and references to an "Article" or a "Section"
are, unless otherwise specified, to one of the Articles or Sections of this
Agreement.
(d) The term "person" includes any individual, partnership, joint
venture, corporation, trust, unincorporated organization or government or
any department or corporation, agency thereof.
(e) The term "dollars" or "$" shall refer to the currency of the
United States of America.
"Territory" means the countries which are members of the European Common Market
---------
as of the Effective Date and Norway, Switzerland, Poland, the Czech Republic,
Slovakia, Hungary, Slovenia, Estonia, Latvia, Lithuania, Turkey, Australia, New
Zealand, Singapore, Indonesia, Malaysia, Thailand and Hong Kong.
ARTICLE 2
APPOINTMENT: ADDITIONAL RIGHTS OF FIRST OFFER
---------------------------------------------
2.1) Scope. Subject to the terms and conditions of this Agreement, Somnus
-----
hereby appoints Medtronic, and Medtronic hereby accepts appointment, as Somnus'
exclusive distributor during the Term with the right to sell and distribute
Products in the Territory solely for use in the Field. Except as provided in
Section 2.4, Medtronic shall not have any right to distribute Products for use
outside the Field or outside the Territory.
2.2) Exclusivity. Medtronic's distribution rights under this Agreement
-----------
shall be exclusive in the Territory. Somnus represents and warrants to Medtronic
that Somnus has not entered into any other distributorship agreements or sales
representative agreements, written or oral, with any third party permitting the
sale of Products for use in the Field in the Territory, and covenants and agrees
that during the Term, Somnus will not enter into any such agreement or itself
sell or distribute any Products for use in the Field in the Territory. If
Medtronic wishes to pursue individual sales leads in the countries of Eastern
Europe, which are not included in the definition of the Territory hereunder, it
may do so upon the prior written approval of Somnus. Each such approval will be
limited to a specific customer site.
2.3) Subdistributors. Medtronic may appoint subdistributors for the sale or
---------------
distribution of Products for use in the Field in the Territory, provided that
Medtronic provides to Somnus prior written notice of the identity of such
subdistributors, and uses commercially reasonable efforts to ensure that such
subdistributors comply with the applicable provisions of this Agreement.
Notwithstanding such appointment of subdistributors, Medtronic shall remain
fully responsible for the performance of all of its covenants and obligations
hereunder, and any sales by Somnus to such Medtronic subdistributors shall be
billed by Somnus to Medtronic directly. Medtronic shall indemnify
4
<PAGE>
and hold Somnus harmless from and against any claim, loss, damage or expense
(including reasonable attorneys' fees) suffered or incurred by Somnus relating
to any claim in connection with this Agreement that is threatened or initiated
by any subdistributor or sub-agent appointed by Medtronic, except for claims for
which Medtronic is entitled to indemnification from Somnus under Section 9.1.
2.4) Right of First Offer for Distribution Rights in United States.
-------------------------------------------------------------
(a) During the initial Term of this Agreement (without regard to any
extensions of the Term), in the event that Somnus proposes to sell Products
in the Field in the United States on other than a direct selling basis,
Somnus shall not enter into any transaction of the general types described
in subsection (b) below without first giving Somnus' Notice (as defined
below) to Medtronic with respect thereto and complying with the terms of
this Section.
(b) In the event that (referred to as a "Proposed Transaction"):
(i) Somnus receives a bona fide offer from a third party
regarding the grant by Somnus of distribution or sales representative
rights for Products in the United States, or otherwise for the sale of
Products in the United States on other than a direct selling basis; or
(ii) Somnus determines that it wishes to grant distribution or
sales representative rights for Products in the United States, or
otherwise to sell Products in the United States on other than a direct
selling basis (including, without limitation, a determination to seek
indications of interest with respect to such a transaction or
agreement);
then Somnus shall, within five days after such event, notify Medtronic in
writing of Somnus' receipt of such offer described in clause (i) above or
of Somnus' determination described in clause (ii) above ("Somnus' Notice").
Somnus' Notice need not identify the third party offeror, in the case of
clause (i) above, but shall set forth the material terms and provisions
upon which Somnus would be willing to enter into a comparable transaction
(the "Medtronic Transaction") with Medtronic.
(c) During the 60-day period following Medtronic's receipt of Somnus'
Notice with respect to any such Proposed Transaction (the "Exclusive
Period"), Somnus shall negotiate in good faith exclusively with Medtronic
regarding the Medtronic Transaction or any comparable transaction. During
the Exclusive Period, Somnus will not solicit offers from, negotiate with,
or provide information to any third party regarding the Proposed
Transaction or any comparable transaction.
(d) If Medtronic and Somnus fail to reach mutual agreement upon the
terms and provisions of Definitive Agreement(s) for the Medtronic
Transaction during the Exclusive Period, then Somnus shall have 90 days, in
the case of Section 2.4(b)(i), or 180 days, in the case of Section
2.4(b)(ii), from the expiration of the
5
<PAGE>
Exclusive Period in which to enter into Definitive Agreements for the
related Proposed Transaction with the third party whose bona fide offer was
described in Somnus' Notice (with respect to a Proposed Transaction
described in paragraph (b)(i) above) or with any third party (with respect
to a Proposed Transaction described in paragraph (b)(ii) above); provided
that Somnus may not enter into such Definitive Agreements unless the terms
and provisions thereof have been found by the Board of Directors of Somnus
in good faith to be, in the aggregate, more favorable to Somnus than the
final terms and provisions proposed by Medtronic during the Exclusive
Period. If Somnus falls to enter into such Definitive Agreements with
respect to such particular Proposed Transaction within such 90-day or 180-
day period, as the case may be, then Medtronic's rights under this Section
2.4 shall be reinstated and Somnus may not enter into such Proposed
Transaction without first giving Medtronic a new Somnus' Notice and
complying with the terms of this Section 2.4.
(e) As used in this Section 2.4, "Definitive Agreements" with respect
---------------------
to a Proposed Transaction or a Medtronic Transaction means one or more
binding written agreements that (i) set forth all of the terms and
provisions of such proposed transaction, (ii) are not subject to any
further material negotiations or agreements, and (iii) do not condition
either party's obligations upon any further approval by such party, or upon
any other condition within the control of such party.
2.5) Reservation of Rights: No Rights Beyond Products. Except as expressly
------------------------------------------------
provided in this Article 2, no right, title, or interest is granted, whether
express or implied by Somnus to Medtronic, and nothing in this Agreement shall
be deemed to grant to Medtronic rights in any products or technology other than
the Products, nor shall any provision of this Agreement be deemed to restrict
Somnus' right to exploit technology, know-how, patents, or any other
Intellectual Property rights relating to the Products in products other than
Products. In addition, notwithstanding any other provision of this Agreement,
Somnus reserves the right to market, sell or otherwise distribute, directly or
indirectly, Products in the Territory for use outside the Field. It is further
understood and agreed that Somnus may distribute products other than Products in
the Territory, either directly or indirectly, for any and all uses.
2.6) Sale Conveys No Right to Manufacture or Modify. The Products are
----------------------------------------------
offered for sale and are sold by Medtronic subject in every case to the
condition that such sale does not convey any license, expressly or by
implication, to manufacture, modify, duplicate or otherwise copy or reproduce
any of the Products.
ARTICLE 3
GENERAL OBLIGATIONS OF MEDTRONIC
--------------------------------
3.1) Marketing and Distribution. Medtronic shall use commercially
--------------------------
reasonable efforts to further the promotion, marketing, sale and/or other
distribution of Products for use in the Field in the Territory. Without limiting
the generality of the foregoing, Medtronic
6
<PAGE>
shall maintain adequate sales channels to market and distribute the Products for
use in the Field in the Territory.
3.2) Quality Control. Medtronic agrees to follow reasonable quality control
---------------
standards with respect to the storage, preservation, sale and use of the
Products purchased under this Agreement. Medtronic shall make no representations
or warranties concerning such Products other than as made to Medtronic by Somnus
or as otherwise may be agreed by the parties.
3.3) Sales and Service: Training.
---------------------------
(a) Medtronic shall be solely responsible for marketing, selling,
installing and servicing all Products for use in the Field in the
Territory.
(b) Subject to Section 4.4, Medtronic shall be solely responsible for
providing customer and physician training to any purchaser of Products for
use in the Field in the Territory.
3.4) Inventory. Medtronic shall maintain a quantity of each Product at all
---------
times during the Term as reasonably necessary to meet the demand of Somnus'
customers and potential customers in the Territory.
3.5) Marketing Materials. Subject to Section 4.5, Medtronic shall be
-------------------
responsible for the preparation of sales' and marketing materials for the
marketing and sale of Products for use within the Field in the Territory,
including the translation, adaptation and/or modification of Somnus' sales and
marketing materials, as deemed appropriate by Medtronic, to reflect the culture
or business practices and languages of the particular regions within the
Territory and to reflect Medtronic as the exclusive distributor of the Products
for use in the Field in the Territory. Medtronic shall provide to Somnus for
purposes of review and comment all such sales and marketing materials relating
to Products at least ten (10) days prior to the commercial release of such
materials.
3.6) Records and Recall. Medtronic shall maintain complete and accurate
------------------
records of all Products sold by Medtronic and its subdistributors in sufficient
detail to enable Somnus to conduct an effective recall of Products if Somnus
determines that such a recall is required or otherwise necessary or appropriate.
In addition, Medtronic shall provide to Somnus a list of all institutional
customers and, when known to Medtronic, end user customers including their
names, addresses and telephone numbers on a quarterly basis during the Term.
Medtronic shall not initiate a recall of Products without Somnus' prior written
consent, which consent shall not be unreasonably withheld. In the event of a
recall of any of the Products, Medtronic will cooperate with and assist Somnus
in effecting such recall, including promptly contacting any purchasers that
Somnus reasonably desires to be contacted and promptly communicating to such
purchasers the information or instructions Somnus reasonably desires to be
transmitted relating to such recall, all of which customer contact and
communication shall be conducted by Medtronic at its own expense.
Notwithstanding the foregoing, Somnus shall pay, or reimburse Medtronic, for all
other costs of effecting such recall, including any
7
<PAGE>
shipping costs related to returning recalled Products to Somnus and replacing
such recalled Products with new Products at Somnus' expense.
3.7) Import Approvals. Except for the CE Mark, which Somnus will be
----------------
responsible for obtaining, Medtronic shall be responsible for obtaining all
import licenses and permits as may be required to import the Products into
countries within the Territory as selected by Medtronic in accordance with then
prevailing laws and regulations of such countries. All such filings and
registrations of the Products shall be owned by Somnus and shall be obtained and
maintained in the name of Somnus, whenever feasible in accordance with
prevailing laws and regulations. Somnus shall cooperate fully with Medtronic in
its efforts to obtain any such approvals.
3.8) European Authorized Representative. Medtronic agrees to act as Somnus'
----------------------------------
European Authorized Representative as required by the Medical Device Directive
and as Somnus' representative for Products for use within the Field in the
countries outside the European Common Market, but within the definition of the
Territory as set forth in Section 1.1 above. Medtronic shall, as soon as
reasonably practicable, notify, document and forward to Somnus or Somnus'
authorized representative all customer complaints received by Medtronic such
that Somnus can comply with Medical Device Reporting (MDR) regulations and
vigilance. Medtronic shall notify Competent Authorities of clinical
investigations as required, and shall represent Somnus if a Competent Authority
decides to: (i) refuse to allow the marketing of a Product in the Territory,
(ii) restrict the marketing of Product in the Territory, or (iii) withdraw a
Product from the market in the Territory. Medtronic agrees to provide the
competent authorities and notified bodies with access to the table of contents
for the Technical File. In addition, Medtronic shall authorize Somnus to list
Medtronic at its Maastricht address as the Authorized European Representative on
product labeling, outer packaging, and instructions for use.
3.9) Clinical Trials. Medtronic shall purchase and provide a Somnus RF
---------------
Generator to a mutually agreed number of clinical centers in connection with the
clinical studies described in Section 4.2(b). Medtronic will manage the local
logistics of the clinical accounts, including delivering the probes to be used
by such accounts. Somnus will provide Medtronic [
*
]. The parties acknowledge that (i) the initial clinical
trials must start at the beginning of May 1997 if the Territory sales plan and
the Quotas are to be achieved, (ii) it is presently anticipated that 10
generators will be ordered for delivery in May, at least five of which must be
available May 1,1997 for end user installation, and (iii) the five primary
centers need to be identified, recruited, trained and ready to start by May 1,
1997; in the event of delays in the foregoing matters, the parties will agree to
an appropriate reduction in the Quota for the period ending April 30, 1998.
[*] - CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
8
<PAGE>
ARTICLE 4
GENERAL OBLIGATIONS OF SOMNUS
-----------------------------
4.1) Manufacture and Supply of Products. Somnus shall use commercially
----------------------------------
reasonable efforts to manufacture, or have manufactured, Products in accordance
with the Specifications and to ship such Products to Medtronic in the quantities
ordered by Medtronic pursuant to Article 5 of this Agreement. Somnus shall be
responsible for packaging in accordance with packaging specifications to be
mutually agreed upon by Medtronic and Somnus, and for any necessary
sterilization of Products purchased under this Agreement in accordance with the
Specifications.
4.2) Regulatory Approvals.
--------------------
(a) Clinicals. Somnus shall be responsible for all clinical study
---------
design, investigator selection, data analysis in connection with clinical
trials of the Products. Medtronic shall assist Somnus in such clinical
study activities such as investigator selection, and such other clinical
matters as the parties may agree. The cost of clinical studies for the
evaluation of the uvula, palate, turbinate, and tongue procedures will be
borne by Somnus, [
* ] Payments will be
made to clinical investigators only upon receipt of completed and
acceptable patient data sets. Somnus and Medtronic will work together to
select such centers based on their ability to provide quality clinical data
and promote market development. Without limitation of the foregoing, Somnus
will provide the centers with the clinical protocol, assist with ethics
approval, provide all required technical training and support, and provide
data analysis. Somnus shall provide training at up to three (3) training
sessions in the Territory designed to instruct multiple investigators.
Medtronic shall organize those sessions in coordination with Somnus. Somnus
shall pay the local costs of running such training, such as transportation,
local living expenses, cost of putting on such training and any directly
related consulting costs incurred in connection therewith. Medtronic shall
devote clinical management personnel resources reasonably necessary to
perform Medtronic's obligations under this Agreement. Medtronic shall be
responsible for site monitoring and on-site support for all clinical
investigations.
(b) Device Approvals. Somnus shall be responsible, on a timely basis
----------------
and at its expense, for filing, obtaining and maintaining the CE Mark for
Common Market approval. For countries requiring additional or an
alternative regulatory approval, Medtronic may obtain any required
regulatory approvals at its own expense. To the extent permitted by law,
all foreign regulatory approvals, including those processed by Medtronic,
shall be owned by Somnus and shall be in the name of Somnus. Medtronic will
provide Somnus access to the copies of all government approval applications
and other regulatory and governmental filings made by Medtronic with
respect to each Product, together with the underlying data, promptly after
submission to government authorities and shall provide to Somnus copies of
all correspondence with government authorities with respect to Products
promptly after receipt or
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
9
<PAGE>
submission thereof. Somnus may use, reference, and provide copies of
regulatory and governmental filings and Product data made, developed, or
acquired by Medtronic relating to its Products, to third parties as is
reasonably necessary or useful for commercialization of any and all
products or as required by law. Except as otherwise required by law or
agreed by the parties, Somnus will be responsible for the content of its
own labeling. In connection with obtaining Device Approvals, Somnus shall
bear the expenses of meeting any applicable Product design and
manufacturing facility requirements applicable to its then current
manufacturing facility, and shall take all steps as are necessary to meet
the EMD Directive.
(c) Export. Somnus shall be responsible for obtaining all export
------
licenses and permits as may be required to export the Products from the
country of manufacture into the particular countries within the Territory.
Medtronic shall cooperate fully with Somnus in its efforts to obtain any
such approvals.
(d) Good Manufacturing Practices/Quality Systems Regulations. Somnus
--------------------------------------------------------
shall be responsible for compliance with present and future applicable
statutes, laws, ordinances and regulations of national, federal, state and
local governments now or hereafter in effect relating to the design,
manufacture and/or quality of Products. Without limitation of the
foregoing, Somnus represents and warrants to Medtronic that all Products
sold and delivered to Medtronic under this Agreement will have been
designed, manufactured and labeled in accordance with all applicable
requirements. Somnus shall cause Medtronic's regulatory personnel to be
provided with reasonable access from time to time to the facilities and
records of Somnus for the purpose of confirming Somnus' compliance with
this Section 4.2(d).
4.3) Clinical Review Meetings. In support of the clinical and market
------------------------
development efforts of the parties, Somnus and Medtronic shall organize ablation
clinical review meetings to occur at the time of the AAO in San Francisco,
anticipated to be in September 1997, and a European ENT meeting to be
determined. In support of the clinical effort, Somnus will be responsible for
the local arrangements and costs for the AAO review meeting and will pay the
transportation costs of three European investigators to travel to the AAO review
meeting and the transportation costs of up to three United States investigators
to travel to the European meeting. Medtronic will be responsible for the local
arrangements and costs for the European meeting, other than the transportation
costs noted in the preceding sentence.
4.4) Training. Somnus at its expense will provide Medtronic with surgical
--------
procedure manuals and a reasonable level of sales and technical training for
Medtronic's dedicated sales personnel in the Territory and other appropriate
Medtronic personnel. If requested by Medtronic, Somnus at its expense will also
provide training for up to seven physicians outside the clinical study.
Medtronic will bear the cost of bringing the designated people to California for
training. In addition, Somnus will stock a spare warranty replacement set of
radio frequency generator parts at the Medtronic facility at a location in the
Territory designated from time to time by Medtronic and reasonably acceptable to
Somnus, and provide training for one or more service personnel to diagnose
generator failures and swap components.
10
<PAGE>
4.5) Product Literature and Packaging. Somnus will work jointly with
--------------------------------
Medtronic in the preparation of mutually acceptable Product packaging, labeling
and operations and technical manuals for use in the Territory, and will not
unreasonably refuse to incorporate any changes thereto reasonably requested by
Medtronic. Somnus at its expense shall provide Medtronic from time to time as
requested by Medtronic with a reasonable supply of Product sales and marketing
materials in the English language. Pursuant to Section 3.5, Medtronic shall be
responsible for the translation, adaptation and/or modification of Somnus' sales
and marketing materials as deemed appropriate by Medtronic, and Somnus shall
supply any artwork or other materials reasonably requested by Medtronic in
connection therewith.
4.6) Sales Leads. Somnus shall forward to Medtronic all leads for sales of
-----------
Products in the Field of Use in the Territory, and Medtronic shall forward to
Somnus all leads for sales of Products in the Field of Use outside of the
Territory.
ARTICLE 5
ORDERS FOR PRODUCTS
-------------------
5.1) Purchase Orders. Medtronic shall submit purchase orders for Products
---------------
to Somnus in writing, whether by mall, telecopier, telegram or otherwise, at the
time that each forecast is delivered to Somnus pursuant to Section 5.2. Each
purchase order shall, at a minimum, set forth the product numbers, quantities
(subject to Section 5.3), delivery dates, and shipping instructions and shipping
addresses for all Products ordered. All orders shall be subject to acceptance in
accordance with the terms of this Agreement by Somnus at its office. Somnus
shall use reasonable efforts to fulfill purchase orders submitted in accordance
with Somnus' standard lead times, it being understood that no purchase order
shall be binding upon Somnus until accepted by Somnus by fax or in writing. Each
purchase order shall, upon acceptance by Somnus, give rise to a contract between
Medtronic and Somnus for the sale of the Products ordered and shall be subject
to and governed by the terms of this Agreement. No partial shipment of an order
shall constitute the acceptance of the entire order, absent the written
acceptance of such entire order. The terms and conditions of this Agreement
shall so govern and supersede any additional or contrary terms set forth in
Medtronic's purchase order or any Somnus or Medtronic acceptance, confirmation,
invoice or other document unless duly signed by an officer of Medtronic and an
officer of Somnus and expressly stating and identifying which specific
additional or contrary terms shall supersede the terms and conditions of this
Agreement. Upon the execution of this Agreement, Medtronic will place a three-
month purchase order for deliveries in May, June and July 1997. Subsequently,
Medtronic will place orders for the next succeeding months on a monthly basis,
at the time that it provides its forecast described in Section 5.2, with all
such subsequent purchase orders submitted at least 90 days in advance of the
earliest scheduled delivery date for such order.
5.2) Medtronic's Forecasts. At the time that Medtronic places its order for
---------------------
the first month following the three months covered by the initial purchase
order, Medtronic shall provide Somnus with a six-month sales plan indicating by
month the number of Products anticipated to be sold by Medtronic or purchased by
Medtronic for use as demonstration units
11
<PAGE>
(as updated as provided herein, the "Plan") in the Territory. The Plan shall be
updated by Medtronic on a monthly basis (on or before the first day of each
subsequent month) for a rolling successive six-month period. Each Plan shall be
used for purposes of facilitating Medtronic's marketing plans, Somnus'
manufacturing plans, and meeting the lead times required by certain of Somnus'
suppliers, but are not legally binding on Medtronic or Somnus in any manner.
5.3) Order Limitations. Somnus shall not be required to deliver quantities
-----------------
in excess of 100% of forecasted requirements, provided, however, that Somnus
shall use all commercially reasonable efforts to supply such excess.
5.4) Modification of Orders. Medtronic may cancel or reschedule purchase
----------------------
orders for products only with Somnus' prior written approval. Notwithstanding
the foregoing, any purchase order may be cancelled by Medtronic as to any
Products that are not delivered within 60 days after the delivery date requested
by Medtronic pursuant to a purchase order, and any such cancellation shall not
limit or affect any contract remedies available to Medtronic with respect
thereto. Any such cancellation by Medtronic must be by written notice to Somnus
given within 15 business days alter such 6Oth day.
5.5) Delivery Terms. Subject to Somnus' obligations in Sections 3.9 and 4.2
--------------
above, all deliveries of Products shall be F.O.B. Somnus' facility in
California. Except as otherwise provided in Article 8 or Article 9 below, Somnus
shall have no further responsibility for risk of damage to or loss or delay of
Products after their delivery at the aforesaid F.O.B point. All Product
deliveries shall be made by a common carrier specified by Medtronic or, in the
event that no carrier shall have been specified by Medtronic on or before the
date 15 days prior to the requested shipment date, a common carrier selected by
Somnus.
5.6) Product Changes. Somnus shall not, without Medtronic's prior written
---------------
consent (which consent shall not be unreasonably withheld or delayed), modify
the Specifications for a Product in a manner that materially affects the
performance or regulatory approval status of the Product or materially increases
Medtronic's costs or expenses. Subject to the foregoing, Somnus may modify the
Specifications for the Product without the consent of Medtronic, provided that
Somnus notifies Medtronic of such modifications within 30 days. If such
modifications affect the performance or applicable regulatory approvals of the
Product, Medtronic shall not be obligated to purchase such altered Product.
5.7) Custom Products. In the event Medtronic is requested by a customer to
---------------
provide customized Products, Medtronic shall provide the specifications for the
customized Product to Somnus. Somnus will determine and provide to Medtronic
the additional cost, if any, and the feasibility of providing the customized
Product. Medtronic will thereafter notify Somnus if it intends to provide such
customer with the customized Product.
5.8) Reports. Medtronic shall provide Somnus, on a quarterly basis, with
-------
reports reflecting Medtronic's sales of the Products in the Territory.
12
<PAGE>
ARTICLE 6
MINIMUM PURCHASE QUOTA
----------------------
6.1) Determination of Quota. Each six-month period during the Term,
----------------------
Medtronic shall purchase the Quota. The Quota for each such six-month period
shall be the "Purchase Total" amount set forth on Exhibit A hereto under the
column that corresponds to such period. The parties agree that Medtronic can
change the product mix for the Model 1000, Model 2000 and Model 3000 probes and
generator, provided that the total six-month dollar volume does not change.
6.2) Reductions in Quota. Notwithstanding Section 6.1, the Quota for any
-------------------
period shall be reduced (a) in the case of subpart (i) below by an amount equal
to 1.5 times the aggregate transfer price of Products not supplied by Somnus
against purchase orders issued by Medtronic in accordance with Article 5, (b) in
the case of subpart (ii) below, by an amount equal to 1.5 times the aggregate
transfer price of Products affected by such recall or withdrawal, and (c) in the
case of subpart (iii) below, by a pro rata amount of the Quota for the
applicable period based upon the number of days of such period that have
transpired prior to the removal of the restriction on sale referenced in such
subpart:
(i) If Somnus materially and substantially fails for any reason
to deliver ordered Products by the date scheduled for delivery thereof
pursuant to purchase orders issued by Medtronic in accordance with
Article 5, including but not limited to a failure to deliver Products
that conform to the then current Specifications and such failure is
not cured within 30 days;
(ii) If a Product covered by this Agreement is recalled from the
market or withdrawn from sale for reasons of product safety or quality
as determined by any applicable governmental authority or by the
mutual agreement of the parties; or
(iii) If Medtronic is restricted in the sale of Products in a
market within the European Common Market that affects the CE Mark by
any applicable regulatory authority because approval to sell the
Product is pending, denied or revoked therein.
6.3) Termination of Agreement. If Medtronic does not order at least the
------------------------
applicable Quota, as it may be modified as provided herein, for any applicable
six-month period and does not elect to make the Shortfall payment described
below, Somnus shall have the right, at its option, to terminate this Agreement.
Notice of Somnus' election to terminate this Agreement (the "Termination
Notice") must be given by Somnus in writing within 30 days following the period
for which Medtronic has not satisfied the Quota, specifying the amount by which
Medtronic's purchases for such period were below the Quota (the "Shortfall"). If
within 30 days after such Termination Notice Medtronic either (i) places orders
for the purchase of sufficient quantities of Products to make up the Shortfall
and agrees to pay for such Products within 10 days after shipment thereof, or
(ii) Medtronic pays Somnus cash in the amount of the Shortfall, then Somnus'
Termination Notice will be deemed to be
13
<PAGE>
automatically withdrawn. If Medtronic pays Somnus cash in the amount of the
Shortfall, such payment shall be treated as a prepayment for Products to be
ordered by Medtronic in the future and shall be applied toward the purchase
price of such future Product purchase orders as Medtronic directs; provided that
such future Product purchases to which such Shortfall payment is applied shall
not be counted as Product purchases for purposes of determining whether the
Quota for such future six-month period is met. Termination of this Agreement
shall be Somnus' sole and exclusive remedy for any failure by Medtronic to
purchase the applicable Quota.
ARTICLE 7
PRICES AND PAYMENTS
-------------------
7.1) Prices. Unless and until otherwise mutually agreed by the parties in
------
writing, the purchase prices per unit of Products to Medtronic under this
Agreement shall be determined as follows:
(a) From the date of this Agreement until changed by written agreement
of the parties, the transfer prices for the Products shall be as set forth
on Exhibit A. Somnus and Medtronic agree to review Product transfer prices
at least annually to determine if adjustments are appropriate, taking into
account then market conditions. The difference between Medtronic's transfer
price and Medtronic's price to its customers or subdistributors shall be
Medtronic's sole remuneration for the sale of the Products. Any prices
referred to in any information provided to Medtronic by Somnus (other than
the transfer prices for Products) are recommended prices only and Medtronic
has no obligation to comply with any such recommendations.
(b) [
*
]
7.2) Payment Terms. Payments made by Medtronic for Products purchased
-------------
hereunder shall be due and payable in full within 30 days after the date of
invoice by Somnus. Medtronic shall make payments to Somnus under this Agreement
by wire transfer in immediately available funds to an account designated by
Somnus. Any payments due hereunder which are not paid on the date such payments
are due shall bear interest at the lesser of one and one-half percent (1-1/2%)
per month or the maximum rate permitted by law, calculated on the number of days
such payment is delinquent. This Section 7.2 shall in no way limit any other
remedies available to Somnus.
7.3) Taxes. The transfer prices for Products established pursuant to this
-----
Article 7 do not include any sales, use, value added or similar taxes, customs,
duties, or tariffs imposed by any governmental authority or agency on Products
or any components thereof that are imported by Medtronic into any country in the
Territory (other than taxes on the net
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
14
<PAGE>
income of Somnus), and Medtronic shall bear all such taxes and duties. Somnus
shall be required to take appropriate steps to minimize imposition of such taxes
by filing sales exemption certificates and taking similar actions where
applicable to the seller. When Somnus has the legal obligation to collect and/or
pay such taxes, the appropriate amount shall be added to Medtronic's invoice and
paid by Medtronic, unless Medtronic provides Somnus with a valid tax exemption
certificate authorized by the appropriate taxing authority. Medtronic shall not
be obligated to pay or reimburse Somnus for taxes that are not imposed on the
sale of Product to Medtronic.
ARTICLE 8
INSPECTION, WARRANTY AND SERVICE
--------------------------------
8.1) Inspection of Product. Medtronic shall inspect all Products promptly
---------------------
upon receipt thereof, and in the event of any shortage, damage or discrepancy in
or to a shipment of Products or in the event any of the Products fall to comply
with the then current Specifications for the Products (except for latent defects
not readily observable by Medtronic), Medtronic shall report the same to Somnus
within 30 days after delivery thereof to Medtronic and furnish such written
evidence or other documentation as Somnus reasonably may deem appropriate. If
the substantiating evidence delivered by Medtronic reasonably demonstrates that
such shortage, damage or discrepancy or nonconformity with Specifications
existed at the time of delivery of the Products, Medtronic may return the
Products to Somnus, at Somnus' expense, and, at Medtronic's request, Somnus
shall use all reasonable efforts to deliver promptly replacement Products to
Medtronic in accordance with the delivery procedures set forth herein. Any
Products not rejected by Medtronic by written notice given to Somnus within such
30-day period (other than Products containing latent defects not readily
observable by Medtronic) shall be deemed to have been accepted by Medtronic.
Following any such acceptance, the sole remedies of Medtronic with respect to
damage to or defects in the Products shall be those set forth in Sections 8.2
and 9.1.
8.2) Warranty.
--------
(a) Somnus represents and warrants to Medtronic that all Products sold
under this Agreement will have been designed, manufactured, labeled,
packaged and sold to Medtronic in accordance with all applicable laws and
regulations, including (as applicable) European Medical Device Directive
requirements, ISO 9001 certification or successor requirements, and all
other applicable manufacturing requirements. Somnus shall cause Medtronic'
5 regulatory personnel to be provided with reasonable access from time to
time to the facilities and records of Somnus for the purpose of confirming
Somnus' and the Product's compliance with all applicable laws and
regulations.
(b) Somnus warrants to Medtronic and to Medtronic's customers that
Products shall, when delivered to Medtronic, meet the Specifications and,
for a period of one year after delivery of the Product to the customer but
not more than 18 months after receipt by Medtronic, be free from defects in
materials and workmanship. The
15
<PAGE>
foregoing express warranty is contingent upon proper use of the Products in
the applications for which they were intended as indicated in the Product
label claims. Medtronic shall invoice Somnus for, and Somnus shall promptly
pay, all shipping, transportation, insurance and other expenses actually
incurred in replacing defective Products that were under warranty. Somnus
will repair, replace or credit Medtronic's account for any Product that it
reasonably determines was defective at the lime of shipment to Medtronic or
that does not conform to the express warranties herein; provided, however,
that Somnus shall have no obligation under this warranty to repair or make
replacements necessitated in whole or in part by accidents; failure to
maintain in accordance with any transportation, storage, handling, or
maintenance, instructions supplied by Somnus; damage by acts of nature,
vandalism, burglary neglect or misuse; or other fault or negligence of
Medtronic or (except for any strict liability of Somnus) the user. Prior to
returning any Product alleged to be defective, Medtronic shall notify
Somnus in writing of the claimed defect and shall include the model and
lot/serial number of such Product, as well as the number and date of the
invoice therefor. No Product shall be returned without first obtaining a
returned goods authorization from Somnus, which authorization shall not be
unreasonably withheld.
8.3) Limited Warranty. THE EXPRESS WARRANTY SET FORTH ABOVE ARE IN LIEU OF
----------------
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY SPECIFICALLY
DISCLAIMED AND EXCLUDED BY SOMNUS, INCLUDING WITHOUT LIMITATION THE IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, AND
NONINFRINGEMENT. THE SOLE AND EXCLUSIVE REMEDIES OF MEDTRONIC FOR BREACH OF
PRODUCT WARRANTY SHALL BE LIMITED TO THE REMEDIES PROVIDED IN THIS ARTICLE 8 AND
IN ARTICLE 9. IN NO EVENT SHALL SOMNUS' LIABILITY FOR PRODUCT WARRANTY INCLUDE
ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, EVEN IF
SOMNUS SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR
DAMAGE. THIS LIMITATION SHALL APPLY, NOTWITHSTANDING THE FAILURE OF THE
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY STATED HEREIN. ANY OTHER PRODUCT
REPRESENTATIONS OR WARRANTY MADE BY ANY OTHER PERSON OR ENTITY, INCLUDING
EMPLOYEES OR REPRESENTATIVES OF MEDTRONIC, THAT ARE INCONSISTENT HEREWITH SHALL
BE DISREGARDED AND SHALL NOT BE BINDING UPON SOMNUS OR ITS THIRD PARTY
SUPPLIERS.
ARTICLE 9
INDEMNIFICATION
---------------
9.1) Somnus' Liability. Somnus shall indemnify, defend and hold harmless
-----------------
Medtronic and each of its subsidiaries, officers, directors, employees,
shareholders and distributors from and against and in respect of any and all
demands, claims, actions or causes of action, assessments, losses, damages,
liabilities, interest and penalties, costs and expenses (including, without
limitation, reasonable legal fees and disbursements incurred in connection
16
<PAGE>
therewith and in seeking indemnification therefor, and any amounts or expenses
required to be paid or incurred in connection with any action, suit, proceeding,
claim, appeal, demand, assessment or judgment) finally awarded ("Indemnifiable
Losses"), resulting from, arising out of, or imposed upon or incurred by any
person to be indemnified hereunder by reason of (i) any breach of
representation, warranty, or agreement on the part of Somnus under this
Agreement, (ii) Product Liability Damages with respect to the Products, or (iii)
other negligence or intentional misconduct of Somnus; provided that in no event
shall Somnus be liable for matters for which Medtronic is responsible under
Section 9.2 below or for punitive or exemplary damages. Somnus shall maintain
product liability insurance or self-insurance in such amounts as ordinary good
business practice for its type of business would make advisable and shall
provide Medtronic with evidence of this coverage.
9.2) Medtronic's Liability. Medtronic shall indemnify, defend and hold
---------------------
harmless Somnus and each of its subsidiaries, officers, directors, employees,
shareholders and suppliers from and against and in respect of any and all
Indemnifiable Losses resulting from, arising out of, or imposed upon or incurred
by any person to be indemnified hereunder by reason of (i) any breach of
representation, warranty, or agreement on the part of Medtronic under this
Agreement, (ii) product claims whether written or oral, made or alleged to be
made, by Medtronic in its advertising, publicity, promotion, or sale of any
Products where such product claims were not provided by or approved by Somnus,
(iii) negligent handling by Medtronic of the Products or changes, additions or
modifications to the Products by Medtronic, or (iv) other negligence or
intentional misconduct of Medtronic; provided that in no event shall Medtronic
be liable for matters for which Somnus is responsible under Section 9.1 above or
for punitive or exemplary damages. Medtronic shall maintain product liability
insurance or self-insurance in such amounts as ordinary good business practice
for its type of business would make advisable and shall provide Somnus with
evidence of this coverage.
9.3) Procedure. If a claim by a third party is made and a party (the
---------
"Indemnitee") intends to claim indemnification under this Article 9, the
Indemnitee shall promptly notify the other party (the "Indemnitor") in writing
of any claim in respect of which the Indemnitee or any of its subsidiaries,
directors, officers, employees, shareholders, suppliers or distributors intends
to claim such indemnification and the Indemnitor shall have sole control of the
defense and/or settlement thereof, provided that the Indemnitee may participate
in any such proceeding with counsel of its choice at its own expense. The
indemnity agreement in this Article 9 shall not apply to amounts paid in
settlement of any Indemnifiable Losses if such settlement is effected without
the consent of the Indemnitor, which consent shall not be withheld unreasonably.
The failure to deliver written notice to the Indemnitor within a reasonable time
after the commencement of any such action, if adversely prejudicial to its
ability to defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Article 9, but the omission to so deliver written
notice to the Indemnitor shall not relieve the Indemnitor of any liability that
it may otherwise have to any Indemnitee other than under this Article 9. If the
Indemnitor fails to provide defense of the claim, and diligently defend or
settle the same, the Indemnitee may defend or settle the claim without prejudice
to its rights to indemnification hereunder. The Indemnitee under this Article 9,
its
17
<PAGE>
employees and agents, shall cooperate fully with the Indemnitor and its legal
representatives and provide full information in the investigation of any
Indemnifiable Losses covered by this indemnification.
ARTICLE 10
TERM AND TERMINATION
--------------------
10.1) Term. This Agreement shall take effect as of the date hereof and
----
shall continue in force until the third anniversary of the date hereof or such
later date as the parties may mutually agree in writing (the "Term").
10.2) Termination. Notwithstanding the provisions of Section 10.1 above,
-----------
this Agreement may be terminated in accordance with the following provisions:
(a) Somnus may terminate this Agreement in the manner described in
Section 6.3 hereof;
(b) Except as described in Section 6.3, a party may terminate this
Agreement by giving notice in writing to the other party if the other party
is in breach of any material representation, warranty or covenant of this
Agreement and, except as otherwise provided herein, shall have failed to
cure such breach within 60 days alter receipt of written notice thereof
from the first party;
(c) A party may terminate this Agreement at any time by giving notice
in writing to the other party, which notice shall be effective upon
dispatch, should the other party become insolvent, make an assignment for
the benefit of creditors, go into liquidation or receivership or otherwise
lose legal control of its business; or
(d) A party may terminate this Agreement by giving notice in writing
to the other party should an event of Force Majeure preventing performance
by such other party continue for more than 180 consecutive days as provided
in Article 11 below.
10.3) Rights and Obligations on Termination. In the event of termination of
-------------------------------------
this Agreement for any reason, the parties shall have the following rights and
obligations:
(a) Termination of this Agreement shall not release either party from
the obligation to make payment of all amounts previously due and payable.
(b) The terminating party shall have the right, at its option, to
cancel any or all purchase orders that provide for delivery alter the
effective date of termination.
(c) Somnus shall have the right, at its option, to repurchase from
Medtronic all of Medtronic's inventory of Products as of the termination
date at Somnus' invoiced price (and inclusive of any shipping charges or
taxes) to Medtronic
18
<PAGE>
for such Products. Somnus may exercise its option under this Section
10.3(c) by notifying Medtronic in writing no later than 30 days after the
effective termination date. Medtronic shall be permitted to resell any such
inventory of Products that Somnus does not repurchase from Medtronic.
(d) Medtronic shall provide to Somnus a complete customer list for
Products in the Field of Use (including the names, addresses and phone
numbers) upon termination, which Somnus shall have the right to use for any
purpose.
(e) The parties' obligations pursuant to Articles 8, 9 and 12 and
Sections 2.3, 3.6, 10.3, 10.4, and 14.1 hereof shall survive termination of
this Agreement. All other provisions of this Agreement shall terminate upon
termination of this Agreement.
10.4) Termination of Subdistributors. If Somnus terminates this Agreement
------------------------------
in accordance with its rights under Section 10.2, Medtronic shall have sole
responsibility for termination of any subdistributor, including any costs or
expenses associated therewith, and shall indemnify and hold Somnus harmless from
and against any claim, loss, damage or expense (including reasonable attorneys'
fees) suffered or incurred by Somnus relating to the termination of any
subdistributor appointed by Medtronic.
ARTICLE 11
FORCE MAJEURE
-------------
11.1) Force Majeure. "Force Majeure" shall mean any event or condition, not
-------------
existing as of the date of signature of this Agreement, not reasonably
foreseeable as of such date and not reasonably within the control of either
party, which prevents in whole or in material part the performance by one of the
parties of its obligations hereunder, such as an act of government, war or
related actions, civil insurrection, riot, sabotage, strike, epidemic, fire,
flood, windstorm, and similar events.
11.2) Notice. Upon giving notice to the other party, a party affected by an
------
event of Force Majeure shall be released without any liability on its part from
the performance of its obligations under this Agreement, except for the
obligation to pay any amounts due and owing hereunder, but only to the extent
and only for the period that its performance of such obligations is prevented by
the event of Force Majeure.
11.3) Suspension of Performance. During the period that the performance by
-------------------------
one of the parties of its obligations under this Agreement has been suspended by
reason of an event of Force Majeure, the other party may likewise suspend the
performance of all or part of its obligations hereunder to the extent that such
suspension is commercially reasonable.
19
<PAGE>
ARTICLE 12
INTELLECTUAL PROPERTY
---------------------
12.1) Trademark License. Somnus hereby grants Medtronic a royalty-free
-----------------
license to use all trademarks, trade names and logotypes of Somnus relating to
the Products solely in connection with the sale or other distribution,
promotion, advertising and/or maintenance of the Products. Medtronic shall
acquire no right, tide or interest in such Somnus trademarks, trade names and
logotypes, other than the license provided for above, and Medtronic shall not
use any Somnus trademarks, trade names and logotypes as part of Medtronic's
corporate or trade name or permit any third party under Medtronic 5 control to
do so without the prior written consent of Somnus. To the extent permitted by
local law, any statutory powers which would be granted to Medtronic by virtue of
its local use of Somnus' trademarks or its licensee status are excluded.
Medtronic shall in addition have the right to promote and sell the Products
under trademarks, trade names and logotypes of Medtronic selected by Medtronic,
which trademarks, trade names and logotypes shall be and shall remain the
property of Medtronic.
12.2) Trademark Infringement. Medtronic shall promptly notify Somnus of any
----------------------
use by any third party of Somnus' trademarks, trade names or logotypes or any
use by such third parties of similar marks that may constitute an infringement
or passing off of Somnus' trademarks, trade names or logotypes of which
Medtronic has knowledge. Somnus reserves the right in its sole discretion to
institute any proceedings against such third-party infringers and Medtronic
shall refrain from doing so. Medtronic agrees to cooperate fully with Somnus in
any action taken by Somnus against such third parties, provided that all
expenses of such action shall be borne by Somnus and all damages that may be
awarded or agreed upon in settlement of such action shall accrue to Somnus.
12.3) Termination of Use of Trademarks. Medtronic acknowledges Somnus'
--------------------------------
proprietary rights in and to Somnus' trademarks, trade names and logotypes, and
Medtronic hereby waives all right to any trademarks, trade names and logotypes
now or hereafter originated by Somnus. Medtronic shall not after the date of
this Agreement adopt, use or register any words, phrases or symbols that are
identical to or confusingly similar to any of Somnus' trademarks. Upon
termination of this Agreement, Medtronic shall cease using Somnus' trademarks,
trade names and logotypes in any manner, subject to Medtronic's right, if any,
to continue to sell Products under Section 10.3(c).
12.4) Patent Rights.
-------------
(a) Defense of Claims. Medtronic agrees that Somnus shall defend, or
-----------------
at its option settle, any suit instituted against Medtronic that is based
on an allegation that any Product constitutes an infringement of any patent
or any other intellectual property right protected under the laws of the
United States or any of the Territory. Somnus shall have sole control of
defense of any such action, including any appeals and negotiations for the
settlement or compromise thereof and shall have full authority to enter
into a binding settlement or compromise; provided that Somnus shall not
enter into any settlement or compromise that may adversely affect Medtronic
without
20
<PAGE>
Medtronic's consent, which consent shall not be unreasonably withheld.
Somnus shall indemnify, subject to the limitations set forth herein,
Medtronic against any final award of damages and costs made against
Medtronic and any settlement amounts as a result of any such action.
Medtronic agrees that Somnus shall be relieved of the foregoing obligations
unless Medtronic (i) notifies Somnus promptly in writing of such claim,
suit or preceding, (ii) gives Somnus authority to proceed as contemplated
herein, and (iii) at Somnus' expense, gives Somnus proper and full
information and assistance to settle and defend any such claim. Somnus
shall not be liable for any costs or expenses of Medtronic incurred without
its prior authorization.
(b) Limitation of Liability. Somnus shall have no liability of any
-----------------------
kind to Medtronic under Section 12.4(a) or based upon any other claim
Medtronic may have to the extent any such claim is based upon or arises out
of (a) the use of any Product in combination with an apparatus or device
not manufactured, supplied or approved by Somnus, (b)the use of any Product
in a manner for which it was not designed or intended to be used, or (c)
any modification of any Product by Medtronic or any third party that causes
it to become infringing.
(c) Replacement Product. Notwithstanding the foregoing, if it is
-------------------
adjudicatively determined that any Product infringes, or in Somnus' sole
opinion, may be found to infringe a third party's patent, or if the sale or
use of the Products is, as a result, enjoined, then Somnus shall, at its
option and expense, either: (i) procure for Medtronic the right under such
patent to sell or use, as appropriate, the Products; or (ii) replace the
Products with other noninfringing functionally equivalent products; or
(iii) modify the Products to make the Products functionally equivalent and
noninfringing, remove any prior version of the Products in Medtronic's
inventory and refund the aggregate payments made therefor by Medtronic,
less a reasonable sum for use and damage; or (iv) if the use of the
Products is prevented by injunction, discontinue Product sales under the
Agreement and remove any Products in Medtronic's inventory and refund the
aggregate payments paid therefor by Medtronic, less a reasonable sum for
use and damage.
12.5) Ownership. Somnus represents and warrants to Medtronic the following:
---------
Somnus owns or possesses licenses or other rights to use all Intellectual
Property used in the research, design, development, manufacture or sale of the
Products (the "Somnus Intellectual Property"), free and clear of any liens,
charges, security interests, mortgages, pledges, restrictions, or any other
encumbrances of any kind. To the knowledge of Somnus, the Somnus Intellectual
Property is valid and has not been challenged in any judicial or administrative
proceeding. To the knowledge of Somnus, Somnus has not failed to take any
necessary steps or appropriate actions to record its interests, or to protect
its rights, in the Somnus Intellectual Property. To the knowledge of Somnus, no
person or entity nor such person's or entity's business or products has
infringed, misused, misappropriated or conflicted with the Somnus Intellectual
Property or currently is infringing, misusing, misappropriating or conflicting
with the Somnus Intellectual Property. To the knowledge of Somnus, all
proprietary technical information developed by and belonging to Somnus that has
not been patented has been kept confidential.
21
<PAGE>
12.6) Protection of Somnus' Intellectual Property and Improvements. Somnus
------------------------------------------------------------
shall be responsible for filing and prosecuting all US and foreign patent,
copyright and mask work applications it deems necessary or appropriate to
protect the Somnus Intellectual Property.
ARTICLE 13
CERTAIN LIMITED LIABILITY
-------------------------
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS BY ANYONE. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
OTHER PARTY OR ANY OTHER PERSON FOR ANY SPECIAL OR INCIDENTAL DAMAGES, HOWEVER
CAUSED AND ON ANY THEORY OF LIABILITY ARISING OUT OF THIS AGREEMENT, AND WHETHER
OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE
LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY PROVIDED HEREIN. NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS
ARTICLE 13, THE FOREGOING LIMITATIONS OF LIABILITY SET FORTH IN THIS ARTICLE 13
SHALL NOT APPLY TO LIABILITY ARISING UNDER ARTICLE 9 OR SECTION 14.1.
ARTICLE 14
MISCELLANEOUS
-------------
14.1) Nondisclosure. The parties agree not to disclose or use (except as
-------------
permitted or required for performance by the party receiving such Confidential
Information of its rights or duties hereunder) any Confidential Information of
the other party obtained during the during the term of this Agreement until the
expiration of five years alter the receiving party's receipt of such
confidential information. Each party further agrees to take appropriate measures
to prevent any such prohibited disclosure by its present and future employees,
officers, agents, subsidiaries, or consultants during such period.
14.2) Public Announcement. In the event any party proposes to issue any
-------------------
press release or public announcement concerning any provisions of this Agreement
or the transactions contemplated hereby, such party shall so advise the other
parties hereto, and the parties shall thereafter use their best efforts to cause
a mutually agreeable release or announcement to be issued. Neither party will
publicly disclose or divulge any provisions of this Agreement or the
transactions contemplated hereby without the other party's written consent,
except as may be required by applicable law or stock exchange regulation, and
except for communications to such party's employees.
14.3) Complete Agreement. The Schedules and Exhibits to this Agreement
------------------
shall be construed as an integral part of this Agreement to the same extent as
if they had been set forth verbatim herein. This Agreement and the Investment
Agreement and the Schedules and Exhibits hereto and thereto constitute the
entire agreement between the parties hereto with
22
<PAGE>
respect to the subject matter hereof and supersede all prior agreements whether
written or oral relating hereto.
14.4) Waiver. Discharge. Amendment. Etc. The failure of any party hereto to
---------------------------------
enforce at any time any of the provisions of this Agreement shall not, absent an
express written waiver signed by the party making such waiver specifying the
provision being waived, be construed to be a waiver of any such provision, nor
in any way to affect the validity of this Agreement or any part thereof or the
right of the party thereafter to enforce each and every such provision. No
waiver of any breach of this Agreement shall be held to be a waiver of any other
or subsequent breach. This Agreement may be amended by Somnus and Medtronic by
mutual action approved by their respective Boards of Directors or their
respective officers authorized by such Board of Directors. Any amendment to this
Agreement shall be in writing and signed by Somnus and Medtronic.
14.5) Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the parties hereto and the successors or assigns of the parties
hereto; provided, that (i) the rights and obligations of Somnus herein may not
be assigned except to any person who succeeds to substantially all of the assets
and business of Somnus to which this Agreement relates, and (ii) the rights and
obligations of Medtronic herein may not be assigned except to any person who
succeeds to substantially all of that portion of Medtronic's business to which
this Agreement relates.
14.6) Notices. All notices or other communications to a party required or
-------
permitted hereunder shall be in writing and shall be delivered personally or by
facsimile (receipt confirmed electronically) to such party (or, in the case of
an entity, to an executive officer of such party) or shall be sent by a
reputable express delivery service or by certified mall, postage prepaid with
return receipt requested, addressed as follows:
if to Medtronic to:
Medtronic, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
Attention: General Counsel
FAX (612) 572-5459
with a copy to:
Medtronic, Inc.
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
Attention: Vice President Corporate Development and Associate General
Counsel
FAX (612) 572-5404
23
<PAGE>
if to Somnus to:
Somnus Medical Technologies, Inc.
995 Benecia Avenue
Sunnyvale, CA 94086
Attention: President and Chief Executive Officer
FAX (408) 773-9137
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Partner, Life Science Practice
FAX (415) 493-6811
Any party may change the above-specified recipient and/or mailing address
by notice to all other parties given in the manner herein prescribed. All
notices shall be deemed given on the day when actually delivered as provided
above (if delivered personally or by telecopy) or on the day shown on the return
receipt (if delivered by mall or delivery service).
14.7) Expenses. Except as expressly provided herein, Somnus and Medtronic
--------
shall each pay their own expenses incident to this Agreement and the preparation
for, and consummation of, the transactions provided for herein.
14.8) Governing Law. This Agreement shall be governed by and interpreted
-------------
in accordance with the laws of the State of California, including all matters of
construction, validity, performance and enforcement, without giving effect to
principles of conflict of laws.
14.9) Titles and Headings: Construction. The titles and headings to the
---------------------------------
Articles and Sections herein are inserted for the convenience of reference only
and are not intended to be a part of or to affect the meaning or interpretation
of this Agreement. This Agreement shall be construed without regard to any
presumption or other rule requiring construction hereof against the party
causing this Agreement to be drafted.
14.10) Illegality: Severability. In case any provision of this Agreement
------------------------
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
14.11) Relationship. This Agreement does not make either party the
------------
employee, agent or legal representative of the other for any purpose whatsoever.
Neither party is granted any right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf of or in the name of
the other party. In fulfilling its obligations pursuant to this Agreement, each
party shall be acting as an independent contractor.
24
<PAGE>
14.12) Benefit. Nothing in this Agreement, expressed or implied, is
-------
intended to confer on any person other than the parties hereto or their
respective successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
14.13) Survival. All of the representations, warranties, and covenants made
--------
in this Agreement, and all terms and provisions hereof intended to be observed
and performed by the parties after the termination hereof, shall survive such
termination and continue thereafter in full force and effect
14.14) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed as original and all of which
together shall constitute one instrument.
14.15) Execution of Further Documents. Each party agrees to execute and
------------------------------
deliver without further consideration any further applications, licenses,
assignments or other documents, and to perform such other lawful acts as the
other parry may reasonably require to fully secure and/or evidence the rights or
interests herein.
IN WITNESS WHEREOF, each of the parties has caused this Distribution
Agreement to be executed in the manner appropriate to each, as of the date first
above written.
SOMNUS MEDICAL TECHNOLOGIES, INC.
By /s/ STUART D. EDWARDS
--------------------------------------
Its __________________________________
MEDTRONIC, INC.
By /s/ MICHAEL D. ELLWEIN
--------------------------------------
Its Vice President
-----------------------------------
Attachments:
Exhibit A - Volumes/Transfer Prices/Quotas
25
<PAGE>
EXHIBIT A
---------
VOLUMES/TRANSFER PRICES/QUOTAS
[
*
]
[*]- CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
26
<PAGE>
EXHIBIT 10.5
DEVELOPMENT AND SUPPLY AGREEMENT
This DEVELOPMENT AND SUPPLY AGREEMENT ("Agreement"), effective as of JULY
15, 1996, (the "Effective Date"), by and between Somnus Medical Technologies,
Inc., having a principal place of business at 995 Benecia Avenue, Sunnyvale,
California 94086 ("Somnus"), and Apical Instruments, Inc., having a principal
place of business at 967 North Shoreline Boulevard, Mountain View, California
94043 ("Apical").
WHEREAS, Somnus and Apical desire that Apical perform development work on
behalf of Somnus with respect to radio frequency generators for use in ear,
nose, and throat applications, on the terms and conditions set forth herein; and
WHEREAS, Apical desires to manufacture and sell Products (as defined
herein) exclusively for and to Somnus, and Somnus is willing to purchase such
Products from Apical.
NOW, THEREFORE, Somnus and Apical agree as follows:
1. DEFINITIONS
The following terms shall have the following meanings herein:
1.1 "Affiliate" shall mean: (a) any entity owning, controlling, or
---------
controlled by, directly or indirectly, at least fifty percent (50%) of the stock
normally entitled to use for election of directors as a party; or (b) any entity
of at least fifty percent (50%) of whose stock normally entitled to vote for
election of directors is owned, controlling, or controlled by, directly or
indirectly, a party, or if such level of ownership or control exceeds that
which, is otherwise permissible in the country of residence of such entity, the
maximum ownership or control right permitted in such country.
1.2 "Generator(s)" shall mean a radio frequency (RF) generator meeting the
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specifications set forth in Exhibit A hereto.
1.3 "Deliverables" shall mean the items to be delivered by Apical to
------------
Somnus upon completion of the Development Tasks, as set forth in Article 2
below.
1.4 "Product" shall mean a Generator sold by Somnus, its Affiliates,
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sublicensees, and/or distributors, exclusive of a computer, monitor and an
enclosure for the Generator.
1.5 "Specifications" shall mean the technical and other specifications for
--------------
the Deliverables and Development Tasks, as set forth in Exhibit A.
1.6 "Technology" shall mean all tangible and intangible results and items
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arising out of, developed in connection with or constituting the results of the
Development Program, including all
[*] - CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
Deliverables, Generators, Products, ideas, inventions, discoveries, designs,
know-how, notes, memoranda, documentation, and copyrighted materials, and all
intellectual property rights constituting, embodied in, or pertaining to any of
the foregoing. It is understood that Technology shall not include know-how,
designs, or other information developed or acquired by Apical outside of the
Development Program.
1.7 "Term Sheet" shall mean that certain Memorandum of Terms executed by
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the parties on April 24, 1996, a copy of which is appended hereto as Exhibit B.
1.8 Rules of Construction. As used in this Agreement, all defined terms
---------------------
used in the singular shall include the plural, and vice versa, as the context
may require. The words "hereof," "herein," and "hereunder" and other words of
similar import refer to this Agreement as a whole. The word "including" when
used herein is to intended to be exclusive and instead shall mean "including,
without limitation," unless otherwise indicated. The descriptive Article,
Section and Paragraph numbers and headings are used for convenience and
reference only and do not constitute a part of and shall not be utilized in
interpreting this Agreement. This Agreement has been negotiated and drafted by
the parties and their respective counsel and shall be fairly interpreted in
accordance with its terms and without any rules of construction relating to
which party drafted the Agreement being applied in favor or against either
party.
2. PRODUCT DEVELOPMENT
2.1 Development Tasks.
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2.1.1 Performance. Apical shall use its best efforts to complete
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development of a commercially marketable Product by October 1, 1996 (the
"Development Program"), and shall complete the following development tasks
("Development Tasks") and deliver to Somnus the Deliverables in accordance with
the Development Task Schedule below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DEVELOPMENT TASK SCHEDULE
-------------------------
- ------------------------------------------------------------------------------------------------------------------------
DEVELOPMENT TASK COMPLETION DATE DELIVERABLE
---------------- --------------- -----------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[
*
]
</TABLE>
Apical agrees to conduct the Development Program in a prudent and
skillful manner with employees with proper training and skills, and in
accordance will all applicable U.S., state and local laws, rules, regulations,
and other requirements now or later in effect.
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE>
2.1.2 No Subcontractors. Apical shall not subcontract any aspect of
-----------------
its obligations under this Agreement in respect of the Development Tasks or
manufacturing of Generators without Somnus' prior written consent.
2.1.3 No Conflicts. During the term of this Agreement, Apical
------------
agrees not to conduct any work or services on its own behalf or for any other
party which is competitive with its obligations to Somnus hereunder. For
purposes of this paragraph, "competitive" work or services shall mean any
activity relating to the development or manufacture of RF products or technology
for use in mouth, nose or throat applications.
2.2 Compensation.
------------
2.2.1 Payments. In consideration for the activities of Apical
--------
hereunder, and subject to any applicable withholdings, Somnus shall pay to
Apical the amount specified below, in each case within fifteen (15) days of the
date Apical completes the corresponding Development Task:
DEVELOPMENT TASK AND PAYMENT SCHEDULE
-------------------------------------
<TABLE>
<CAPTION>
PAYMENT
-------
<S> <C>
[
*
-------
Total: ]
</TABLE>
2.2.2 Acknowledgment. The parties acknowledge that as of the
--------------
Effective Date, Somnus has paid, and Apical has received, [ *
], corresponding to that payment specified above in respect of
execution of the Term Sheet by the parties.
2.3 Delivery and Acceptance.
-----------------------
2.3.1 Delivery. Upon completion of each Development Task specified
--------
in Paragraph 2.1.1, Apical shall provide to Somnus the related Deliverables,
including documentation, within five (5) days of the completion date for the
corresponding Development Task, for evaluation by Somnus pursuant to Paragraph
2.3.2 below.
2.3.2 Acceptance. Upon delivery to Somnus of each Deliverable,
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including related documentation, Somnus shall evaluate such Deliverable for
conformity to its corresponding Specifications. Within thirty (30) days after
delivery of a Deliverable, Somnus shall provide Apical with written acceptance
thereof, or a statement of defects to be corrected. Apical shall promptly
correct such defects and return the corrected Deliverable(s) for retesting
and/or reevaluation, and Somnus shall within thirty (30) days after such
redelivery provide Apical with written acceptance or a statement of defects
relating thereto. Failure by Somnus to deliver a statement of defects within
the
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE>
thirty (30) day period shall constitute acceptance of the Deliverable. If
Somnus has not accepted any Deliverable by September 15, 1996, then Somnus may,
with written notice to Apical, elect to terminate this Agreement immediately for
default by Apical, without further opportunity to cure; provided, however, that
until Somnus notifies Apical of its election to terminate, Apical shall continue
to attempt to correct any stated defect(s) and provide conforming Deliverables.
2.4 Changes. Somnus shall have the right to request reasonable changes in
-------
or modifications ("Changes") to the Specifications during the Development
Program. If Changes will result in an increase in the cost of the Development
Tasks or Deliverables, the parties shall agree in writing upon an estimate of
additional time and material costs for the accomplishment of any Changes.
Apical shall not incur or expend costs in excess of the estimate in connection
with the Changes without Somnus's prior written consent. Apical shall provide
Somnus semi-monthly written reports regarding the progress and time and
materials costs associated with the Changes, and from time to time and at
Somnus's request, the parties shall meet to discuss Apical's progress, time, and
materials costs associated with such Changes. If Changes will effect the
projected completion date of the Development Program (i.e., September 15, 1996),
Apical shall promptly notify Somnus of the effect that such Changes would have
on the completion of the Development Tasks and Deliverables.
2.5 Development Task Reports. Apical shall provide Somnus with written
------------------------
monthly progress reports during the term of the Development Program. Such
reports shall be provided to Somnus within ten (10) days following the end of
each calendar month and shall summarize the progress with respect to the
Development Tasks during such month. On or before October 15, 1996, Apical
shall deliver to Somnus a draft written report summarizing in a form reasonably
acceptable to Somnus the performance of the Development Tasks. All such reports
shall be owned exclusively by Somnus and be Confidential Information, subject to
Article 11 herein.
2.6 Right of Access. Representatives of Somnus shall have the right to
---------------
visit Apical's facilities during normal working hours to observe the performance
of the Development Program, discuss the Development Program with representatives
of Apical, and inspect and copy all documents relevant to the Development
Program.
2.7 Warranty of Deliverables. Apical warrants that any Deliverable will
------------------------
perform in accordance and comply with its corresponding Specifications for a
period of twelve (12) months after its completion and final acceptance by
Somnus. Apical shall, at its expense, make all corrections and modifications
requested by Somnus to correct any failures to comply with this warranty which
may be discovered in the Technology and reported to Apical during such warranty
period, and Apical shall promptly deliver corrected versions to Somnus as soon
as practicable after such notice. EXCEPT FOR THE EXPRESS WARRANTIES ABOVE,
APICAL MAKES NO ADDITIONAL WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE,
WITH RESPECT TO THE DELIVERABLES, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
2.8 Technical Assistance. During the term of this Agreement, Apical shall
--------------------
make available to Somnus, at Somnus's request, ongoing technical assistance with
respect to the Technology
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<PAGE>
provided by Apical to Somnus in connection with the Development Program. This
technical assistance will be provided to Somnus at Apical's standard, reasonable
charges therefor, including reimbursement of travel and other expenses in
connection therewith.
2.9 Ownership. Somnus shall own all right, title, and interest in the
---------
Technology, and Apical agrees to deliver all Technology, including a detailed
written description of any intangible aspect thereof to Somnus, by the end of
the Development Program. Apical hereby irrevocably transfers, conveys and
assigns to Somnus its entire right, title, and interest in the Technology, and
any intellectual property thereafter conceived, reduced to practice or otherwise
developed during the term of this Agreement which relates to a Generator,
Product or Technology. Apical shall require each of its employees who will be
involved in the Development Program hereunder to enter into a confidentiality
and proprietary rights agreement, in a form acceptable to Somnus, irrevocably
assigning any and all interest such employees might have in any Technology to
Apical. Apical shall promptly and fully disclose to Somnus in writing any
Technology, and shall treat all such Technology as the Confidential Information
of Somnus, pursuant to Article 9 below. Somnus shall have the exclusive right
to apply for or register patents, copyrights, and such other proprietary
protection(s) as it deems appropriate. Apical agrees to execute such documents,
render such assistance, and take such other action as Somnus may reasonably
request, at Somnus's expense, to apply for, register, perfect, enforce, and
defend Somnus's rights in the Technology. Somnus shall have the exclusive right
to commercialize, prepare and sell products based upon Technology, and to
sublicense, prepare derivative works from, or otherwise use or exploit the
Technology. It is understood and agreed that in the event Apical incorporates
any know-how, designs, or other information other than Technology (the "Other
Technology") into a Product, it shall so notify Somnus, and Apical agrees to
grant, and hereby grants to Somnus a fully paid up, perpetual, irrevocable,
royalty-free, non-exclusive license, including the right to grant and authorize
sublicenses, to make, have made, use, sell, and otherwise exploit such Other
Technology as it relates to Products.
3. PRODUCT MANUFACTURE AND SALE
3.1 Manufacturing License. Subject to the terms and conditions herein,
---------------------
Somnus hereby grants to Apical, and Apical hereby accepts, a non-exclusive, non-
transferable manufacturing license under the Technology solely for the purpose
of making and selling Products to Somnus pursuant to this Agreement. This
restricted license shall terminate upon termination of this Agreement.
3.2 Purchase and Sale. Apical agrees to manufacture and sell to Somnus,
-----------------
and Somnus agrees to purchase from Apical, Somnus's requirements for Products
during the term of this Agreement. The parties agree that during the term of
this Agreement, Somnus shall submit purchase orders to Apical [*] accordance
with the terms hereof, and if such purchase orders are accepted by Apical
during the term hereof and this Agreement is not terminated pursuant to
Section 13.2 or 13.3, Somnus shall purchase and Apical shall supply any
Product so ordered. Unless otherwise agreed by the parties in writing, Apical
shall sell Products exclusively to Somnus.
[*] - CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
3.3 Initial Manufacturing Schedule. Without Somnus being required to
------------------------------
submit purchase orders therefor, but otherwise subject to the terms and
conditions herein, Apical shall manufacture and deliver Products to Somnus
according to the following Schedule:
<TABLE>
<CAPTION>
Delivery Date Number of Products
------------- ------------------
<S> <C>
[
*
]
</TABLE>
3.4 Forecasts. Following the successful completion of the Development
---------
Program and before [ * ] and quarterly thereafter, Somnus shall
provide Apical with a rolling forecast of Somnus's anticipated quarterly
requirements of Products for the following twelve (12) month period commencing
on the date of such forecast. Such forecast shall create a firm commitment on
Somnus to purchase the Products forecast for the first three (3) calendar months
of such forecast, but shall not create a binding obligation on Somnus for the
remainder of such twelve (12) month period. It is understood that Somnus shall
use reasonable efforts to make each forecast as accurate as possible.
3.5 Orders. Somnus may initiate purchases under this Agreement by
------
telephone contact, telex, fax or by submitting written purchase orders to Apical
at the address above. Any purchase order initiated by telephone, fax or telex
must be confirmed within ten (10) working days by a written purchase order. All
purchase orders shall contain: (a) a purchase order number and date; (b)
quantity of Product(s) to be purchased; (c) shipping instructions; (d) a
specified delivery date; (e) a destination and billing address (if different
from Somnus's address listed above); (f) the net unit price for the Product(s);
and (g) a signature made by an authorized Somnus representative.
3.6 Acceptance. Purchase orders shall be binding when accepted by Apical.
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Apical shall acknowledge each purchase order in writing within ten (10) business
days of receipt. Within such ten (10) day period, Apical may reject an order
which does not conform with the terms and conditions of this Agreement, or if
such order is for quantities substantially larger than prior orders which
Apical, using commercially reasonable efforts, cannot fulfill. Notice of
rejection must be sent to Somnus by telex or fax, followed by notification in
writing. If an order is neither confirmed nor rejected by Apical within ten
(10) business days of receipt, it shall be deemed to have been accepted.
3.7 Delivery Date. Unless otherwise agreed in writing by the parties,
-------------
Apical shall deliver Products to Somnus at the specified destination, as
provided in Section 3.8, no later than five (5) days after the date specified in
an accepted purchase order.
3.8 Shipping. All Products subject to this Agreement shall be suitably
--------
packed for shipment in containers adequate to insure safe arrival of the goods
at Somnus's designated delivery destination, marked for shipment to the address
specified in Somnus's purchase order or such other
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE>
address as Somnus may specify in writing, and delivered to a carrier or
forwarding agent chosen by Somnus. Apical shall mark all containers with
necessary lifting, handling and shipping information, purchase order numbers,
and date of shipment. An itemized packing list must accompany each shipment.
Somnus shall bear all costs for transportation, shipping and insurance expenses,
and in the event that Somnus requests special packaging or finishing for any
order, Somnus shall pay the incremental cost for such special packaging or
finishing; provided, however, that Apical agrees to include any special
documentation regarding the Products requested by Somnus at no additional
charge. Shipment will be F.O.B. Somnus's designated facility, Sunnyvale,
California. All shipping papers and/or invoices shall include the purchase
order number and serial numbers of Products shipped.
3.9 Terms and Conditions. This Agreement contains the exclusive terms and
--------------------
conditions which shall apply to all purchases of Products by Somnus. In
ordering and delivering Products, Somnus and Apical may use their standard
forms, but nothing in such forms shall amend or modify the terms of this
Agreement. In case of conflict between such forms and this Agreement, the terms
of this Agreement shall control.
3.10 Second Source. In the event Apical is unable to or fails to meet any
-------------
of Somnus's Product reasonable requirements in any quarter at any time during
the term of this Agreement, Somnus shall, at its sole discretion, have the
right, but not the obligation, to (i) select a second source to manufacture
Products for all or part of Somnus's Product requirements, and/or (ii) itself
undertake the manufacture of part or all of its Product requirements. In the
event Somnus either selects a second manufacturing source or itself undertakes
the manufacture of Products, Apical shall actively cooperate with and use its
best efforts to enable the second source and/or Somnus, as the case may be, to
begin and continue such manufacture as soon as is commercially practicable, and
to provide such assistance to such party as may be required or helpful in
manufacturing Products. In this regard, in the event Somnus requests in writing
that Apical provide manufacturing assistance in respect of the manufacture of
Products, Apical shall use its best efforts to promptly after receipt of such
request dispatch to the second source or Somnus, as the case may be, one or more
mutually agreed technical personnel to assist in establishing a Product
manufacturing operation. The parties agree that to effectuate the purpose of
this Agreement in the event that Apical fails to meet its supply obligations
hereunder, after Apical begins commercial manufacture of Products, personnel
designated by Somnus shall be given adequate opportunity to study and observe
the manufacture of Products by Apical at Apical's Product production facility
and other appropriate locations, at such reasonable times and for such
reasonable periods as may be reasonably requested by Somnus.
4. CANCELLATION AND RESCHEDULING
4.1 Changes. Somnus may reschedule for up to sixty (60) days, adjust the
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number of Product units ordered, or cancel all or a portion of a purchase order
previously accepted by Apical, provided Somnus provides Apical notice of such
rescheduling, adjustment, or cancellation at least forty five (45) days in
advance of the delivery date specified in the corresponding purchase order.
Apical shall use its best efforts to comply with all rescheduled delivery dates.
Requests for
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<PAGE>
rescheduling, adjustment or cancellation made by Somnus less than ten (10) days
prior to the specified delivery date may be accepted or rejected at Apical's
discretion. In the event that Somnus requests rescheduling, adjustment or
cancellation of an order for delivery less than twenty (20) days before the
specified delivery date, Apical may request that Somnus pay an inventory deposit
with respect to any materials which have been received or for which
noncancellable orders have been placed by Apical prior to Apical's receipt of
the notice of rescheduling, adjustment or cancellation.
4.2 Delayed Delivery. Apical shall promptly notify Somnus if any
----------------
circumstance arises which could result in delivery of a Product after the
specified delivery date in an accepted purchase order. If Somnus has not
received Products for which Apical accepted a purchase order more than twenty
(20) days following the specified delivery date, and the cause of such delay was
within the reasonable control of Apical, Somnus shall, in addition to other
remedies provided herein with respect to a failure by Apical to meet its supply
obligations, be entitled to cancel such order, in whole or part, with such
cancellation to be effective immediately upon Apical's receipt of notice to such
effect from Somnus. Somnus will reimburse Apical for all raw materials, work in
process and finished products effected by such cancellation, and Somnus will be
the owner of all such materials.
5. PRICING AND PAYMENT
5.1 Product Prices. Somnus shall pay to Apical [ *
--------------
] for each Product ordered and delivered, in accordance with Sections 5.3
and 5.4.
5.2 Taxes. All prices described herein are exclusive of federal, state
-----
and local excise, sales, use and similar taxes. Somnus shall be liable for and
shall pay all applicable taxes invoiced by Apical, unless Somnus provides Apical
with a properly executed tax exemption certificate prior to delivery of an
invoice setting forth any such taxes.
5.3 Payment. Apical shall issue Somnus individual invoices for each
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Product shipment. Each such invoice shall separately list the number of Product
units, the individual and total prices therefor, taxes, transportation, shipping
and insurance charges, and any special packaging or finishing charges. Somnus
shall pay each invoice within thirty (30) days of the date of such invoice or
the delivery date, whichever is later. Payment of an invoice shall not
constitute implied acceptance of Products listed thereon.
5.4 Payment Method. Somnus shall, at its discretion, make payment to
--------------
Apical for Products by check or by wire transfer to an account specified by
Apical. Accounts outstanding over thirty (30) days will be subject to a charge
of one and one-half percent (1.5%) per month, or the maximum interest allowed by
law, whichever is less.
6. PRODUCT QUALITY
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE>
6.1 Quality Assurance. Apical agrees to assure the quality level of
-----------------
Products through the use of a formal quality assurance program reasonably
acceptable to Somnus. Such program shall require Apical to prepare and maintain
written records sufficient to enable Somnus to trace the history of each Product
unit. Pursuant to such program, Apical shall place serial numbers on all
Products to enable the identification and tracing of individual Product units.
During the term of the Agreement, Somnus shall have the right to audit such
quality assurance program, at its expense, during regular business hours.
6.2 Inspection. Apical shall conduct a final inspection and quality
----------
control test on each Product prior to shipment to verify that such Product meets
and conforms with the Specifications. Each shipment of Products shall be
accompanied by a quality assurance analytical data sheet (the "Q.A. Data
Sheet").
6.3 Inspection and Acceptance. Somnus shall have the right and Apical
-------------------------
shall cooperate to the fullest extent practicable in giving Somnus an
opportunity to inspect the Products at all times and places, including during
the period of manufacture. However, no inspection or test made prior to final
inspection and acceptance at Somnus's facility shall relieve Apical from
responsibility for defects or other failure to supply conforming Products.
Final inspection and acceptance of Products shall be at Somnus's facility, and
shall be performed within ten (10) working days after Somnus receives the
Products.
6.4 Latent Defects. It is understood that Products may have defects
--------------
("defects" meaning that such Products fail to conform to the applicable
Specifications or otherwise fail to conform to the warranties given by Apical
herein) which would not be discoverable upon reasonable physical inspection or
testing (the "Latent Defects"). As soon as either Somnus or Apical becomes
aware of a Latent Defect in any Product, it shall immediately notify the other
party and, during the warranty period, at Somnus's election, such Products shall
be deemed nonconforming to the Specifications and rejected as of the date of
such notice, and the provisions of Article 8 shall apply to such Products.
6.5 Presence at Facility. During the term of this Agreement, Somnus shall
--------------------
have the right upon reasonable notice and during normal business hours to have
its representatives visit the facilities at which Products are being
manufactured, and to inspect such facilities and the records relating to the
manufacture of Products to verify Apical's compliance with the terms of this
Agreement and the warranties in Article 10 below, including Apical's manufacture
of Products in compliance with Good Manufacturing Practices ("GMP"), ISO 9000
requirements or other applicable rules and regulations.
7. PRODUCT CHANGES
7.1 Requested Modifications. Somnus may request or Apical may suggest
-----------------------
changes in the design or operation of the Products relating to improvements, or
the reliability or serviceability of the Products. The parties shall promptly
discuss such modifications in good faith and Apical shall make any modifications
requested by Somnus, provided Somnus agrees to pay the reasonable costs of
implementing such changes.
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<PAGE>
7.2 Mandatory Modifications. In the event any changes must be made in the
-----------------------
Products to comply with official requirements (including governmental regulation
or industrial standards), Apical shall make any such changes to Products. It is
understood that this may result in schedule changes, non-recurring expenses or
Product price adjustments which will be negotiated by the parties in good faith
at such time. With respect to Products changed to comply with such requirements
that have been ordered but not yet delivered, an appropriate adjustment of the
delivery date shall be agreed by the parties.
7.3 Validation Units. In the event any change effecting form, fit,
----------------
function, safety, reliability or performance of a Product is made, at Somnus's
request, Apical shall ship to Somnus one or more validation units incorporating
such changes. Within thirty (30) days after receipt of such validation unit(s),
Somnus shall notify Apical of whether it approves or disapproves of the proposed
changes. Apical shall not make any proposed change(s) until the end of such
thirty (30) day period, or until Somnus provides notice of its approval of such
change(s), whichever occurs earlier. At Somnus's request, Apical shall stop all
further manufacture of Products until such approval is given by Somnus.
8. PRODUCT WARRANTY
8.1 Limited Warranty. Apical hereby warrants to Somnus that:
----------------
8.1.1 on the date of shipment, all Products sold by Apical to
Somnus hereunder are new, will comply with the Specifications for such Products
and any further specifications, standards and/or criteria agreed upon by the
parties, and conform fully with the Q.A. Data Sheet provided for the particular
Product according to Section 6.2 hereof;
8.1.2 Products purchased hereunder shall be free from defects in
material and workmanship for a period of twelve (12) months from the date of
shipment to Somnus;
8.1.3 all of the Products sold hereunder shall have been
manufactured, packaged, stored and shipped in conformance with all applicable
GMP, ISO 9000 requirements or other applicable rules and regulations which are
in force or hereinafter adopted by the U.S. Food and Drug Administration or any
successor agency thereto, or any corresponding foreign regulatory body
(individually and collectively referred to hereinafter as "FDA"), as set forth
in the Specifications;
8.1.4 title to all Products sold hereunder shall pass to Somnus as
provided herein free and clear of any security interest, lien, or other
encumbrance;
8.1.5 Apical shall meet Somnus's required shipment and/or delivery
schedule(s) as provided in purchase orders submitted in accordance with the
terms herein; and
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<PAGE>
8.1.6 the Products sold to Somnus hereunder shall have been
manufactured, packaged and stored in facilities which are approved by the FDA at
the time of such manufacture, packaging and storage, to the extent such approval
is required by law.
8.2 Effect of Warranty.
------------------
8.2.1 Options. If any Product purchased hereunder does not meet
-------
the warranties specified herein or otherwise applicable, Somnus may, at its
option (i) require Apical to replace or correct at no cost to Somnus any
defective or nonconforming Product(s), (ii) return any nonconforming Product(s)
to Apical at Apical's expense and recover from Apical the full market price
thereof, or (iii) replace or correct the defective or nonconforming Product(s)
itself and charge Apical with the reasonable cost of such correction. The
foregoing remedies are in addition to all other remedies at law or in equity or
under this Agreement and shall not be deemed to be exclusive thereof. All
warranties and remedies available hereunder to Somnus shall also be available to
Somnus's Affiliates, licensees, distributors and customers.
8.2.2 No Waiver. No inspection or acceptance, approval or
---------
acquiescence by Somnus with respect to nonconforming Products shall relieve
Apical from any portion of its warranty obligation, nor shall waiver by Somnus
of any Specification requirement for one or more Products constitute a waiver of
such requirements for remaining Products unless expressly agreed by Somnus in
writing.
8.3 Warranty Procedures. Subject to Section 8.2 above, Somnus may send
-------------------
Products with defects covered by the foregoing warranties to Apical's repair
center at an address specified by Apical from time to time. Somnus shall
request authorization from Apical prior to the return of each defective Product
for repair or replacement by Apical. Upon such request, Apical shall provide
Somnus with a Material Return Authorization (MRA) tracer number to be
prominently displayed on the shipping container for the defective Product. Once
Somnus receives an MRA number for any defective Product, Somnus may ship such
Product to Apical's designated repair facility, at Apical's expense, in its
original shipping container or in a container of equivalent protective
constitution. If such defective Product is received by Apical during the
applicable warranty period, Apical shall, at its sole option and expense, repair
or replace such Product, employing at its option, new or used parts or Products,
and shall ship the repaired or replaced Product to Somnus, freight prepaid.
8.4 Exclusions. The limited warranties set forth in Section 8.1 above
----------
shall not apply to defects to a Product which result from normal wear and tear
or improper, unqualified or unauthorized repair of Products.
8.5 Disclaimer. EXCEPT FOR THE ABOVE LIMITED WARRANTIES, APICAL MAKES NO
----------
WARRANTIES WITH RESPECT TO THE PRODUCTS, EXPRESS, IMPLIED, STATUTORY, OR
OTHERWISE IN ANY PROVISION OF THIS AGREEMENT, AND APICAL SPECIFICALLY DISCLAIMS
ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
-11-
<PAGE>
8.6 Maintenance. Somnus shall be responsible for performing all
-----------
maintenance with respect to the Products.
9. CONFIDENTIALITY
9.1 Confidential Information. Pursuant to this Agreement, Somnus may
------------------------
disclose to Apical certain proprietary technical or business information or
materials ("Confidential Information"). Apical agrees that it will not use any
Confidential Information received from Somnus except for the purposes of this
Agreement. Apical agrees not to disclose any Confidential Information of Somnus
to third parties, and to maintain and to use its best efforts to prevent
unauthorized disclosure or use of the Confidential Information and to prevent
the same from falling into the public domain or the possession of unauthorized
persons. Apical agrees to disclose to its employees only such Somnus
Confidential Information as is necessary to each employee's responsibilities in
performing the acts allowed by this Agreement. Apical shall immediately advise
Somnus of any disclosure, loss or use of Confidential Information in violation
of this Agreement. Apical agrees that for a period of seven (7) years from the
Effective Date it will hold Somnus Confidential Information in strict confidence
and not disclose to any third party any such Confidential Information except as
expressly agreed upon in writing by Somnus.
9.2 Exclusions. Confidential Information shall not include information:
----------
9.2.1 that becomes lawfully known or available to Apical from a
source other than Somnus without breach of this Agreement;
9.2.2 that was already known to Apical, as evidenced by written
records, before its disclosure by Somnus to Apical;
9.2.3 that is within, or later falls within, the public domain
without breach of this Agreement by Apical;
9.2.4 publicly disclosed with the written approval of Somnus; or
9.2.5 disclosed pursuant to a requirement or demand of a lawful
governmental or judicial authority, but only to the extent required by operation
of law, regulation or court order.
10. TRADEMARKS
10.1 Somnus, in its sole discretion, may select the trademarks, trade names
and trade dresses to be used in connection with each Product, and all such
trademarks, trade names and trade dresses shall be and become the exclusive
property of Somnus. Apical shall not adopt any trademark, trade name or trade
dress that may be confusingly similar therewith. Apical shall acquire no
interest or rights in and to any trademarks, trade names and trade dresses
selected or used by Somnus.
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<PAGE>
Somnus shall have the right to remove any Apical trademarks incorporated in,
marked on, or fixed to the Products.
11. REPRESENTATIONS AND WARRANTIES
11.1 Somnus. Somnus represents and warrants on an continuing basis that:
------
(i) it has the right to enter this Agreement, is a corporation duly organized,
validly existing, and in good standing under the laws of the state in which it
is incorporated, (ii) has the power and authority to execute and deliver this
Agreement and to perform its obligations hereunder, (iii) has by all necessary
corporate action duly and validly authorized the execution and delivery of this
Agreement and the performance of its obligations hereunder.
11.2 Apical. Apical represents and warrants on an continuing basis that:
------
(i) Apical has the right to enter this Agreement, is a corporation duly
organized, validly existing and in good standing under the laws of the state in
which it is incorporated; (ii) has the power and authority, to execute and
deliver this Agreement and to perform its obligations hereunder; (iii) it has by
all necessary corporate action duly and validly authorized the execution and
delivery of this Agreement and the performance of its obligations hereunder;
(iv) any employee or other personnel affiliated with Apical who will perform
Development Tasks or other work related to or in connection with Development
Program, have access to Technology, or manufacture Products has executed a
proprietary information and technology agreement in favor of Apical, pursuant to
which such employee or other personnel is obligated to assign his/her entire
right, title, and interest in and to any invention, discovery, technology, or
related intellectual property conceived of, reduced to practice or otherwise
developed in the course of their employment to Apical; and (v) it has not and
will not during the term of this Agreement enter into any agreement which
conflicts with or which will result in any breach of, or constitute a default
under, any note, security agreement, commitment, contract or other agreement,
instrument or undertaking to which Apical is a party.
12. INDEMNITY
12.1 Somnus Indemnity. Somnus shall defend, indemnify and hold Apical, its
----------------
officers, directors, employees and agents (each an "Apical Indemnitee") harmless
from any and all damages, liabilities, costs and expenses (including, but not
limited to, reasonable attorneys' fees) incurred by an Apical Indemnitee as a
result of any claim, action, suit on proceeding by a third party based on any
breach or alleged breach of any of Somnus's representations and warranties in
Section 11.1, from injury to or death of any person, or damage to property
arising out of or in connection with the distribution or use of any Product
manufactured by Somnus; provided, however, that Somnus shall have no obligation
to indemnify any Apical Indemnitee for any damage, liability, cost or expense to
the extent caused by any negligent or wilful act or omission by or on behalf of
Apical. Somnus shall defend, indemnify and hold any Apical Indemnitee harmless
from any and all damages, liabilities, costs and expenses (including, but not
limited to, reasonable attorneys' fees) that may be asserted against any such
Indemnitee by any Somnus customer or any other third party in respect of any
Somnus act
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<PAGE>
or omission, or arising from compliance by Apical with Somnus designs,
specifications, instructions or requirements (but only to the extent that any
such claim or liability does not arise from a defect in workmanship or
components used by Apical), or from the incorporation of the Products into any
other device, provided that any such claim or other liability is not
attributable to the Product incorporated into such device.
12.2 Apical Indemnity. Apical shall defend, indemnify and hold Somnus, its
----------------
officers, directors, employees and agents (each a "Somnus Indemnitee") harmless
from any and all damages, liabilities, costs and expenses (including, but not
limited to, reasonable attorneys' fees) incurred by a Somnus Indemnitee or any
Somnus customer, representative, distributor, or dealer arising out of any
claim, action, suit or proceeding by a third party based on any breach or
alleged breach of any of Apical's representations and warranties in Section
11.2, any failure of the Products manufactured by Apical to meet the
Specifications, or arising out of or in connection with Apical's performance of
this Agreement; provided, however, that Apical shall have no obligation to
indemnify any Somnus Indemnitee or customer, distributor, dealer or
representative of Somnus for any damage, liabilities, costs or expenses to the
extent caused by any negligent or wilful act or omission by or on behalf of
Somnus.
12.3 Procedure. In the event that a party, or any of its Affiliates,
---------
directors, officers, employees or agents (each an "Indemnitee") intends to claim
indemnification under this Article 12, such Indemnitee shall notify the other
party (the "Indemnitor") in writing of any alleged loss, claim, damage,
liability or other action (individually or collectively, a "Liability") in
respect of which the Indemnitee intends to claim indemnification hereunder. The
failure by any Indemnitee to deliver written notice to the Indemnitor within a
reasonable time after becoming aware of any Liability for which indemnification
is later sought hereunder, if prejudicial to the Indemnitor's ability to defend
against such Liability, shall relieve Indemnitor of any obligation to such
Indemnitee under this Article 12. The Indemnitor shall have the right to
control the conduct of any action, defense, or other proceeding, including
settlement, in respect of indemnification sought hereunder for any Liability,
and the Indemnitee shall cooperate fully with the Indemnitor and its legal
representatives in the investigation and conduct of any action, defense,
settlement or other proceeding covered by this Article 12. An Indemnitee shall
not, except at its own cost, voluntarily make any payment or incur any expense
with respect to any Liability, or make any admission of liability or attempt to
settle any claim in respect of a Liability without the prior written consent of
the Indemnitor, which consent the Indemnitor shall not be required to give.
13. TERM AND TERMINATION
13.1 Term. This Agreement shall commence on the Effective Date and shall
----
have a term of one (1) year from the first commercial distribution of a Product,
unless terminated earlier as provided herein. This Agreement may be extended by
written mutual agreement of the parties.
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<PAGE>
13.2 Termination for Cause. Either party may, without penalty, terminate
---------------------
this Agreement or cancel any purchase order or portion thereof effective upon
written notice to the other party in the event of one of the following events:
13.2.1 The other party materially breaches this Agreement, and such
breach remains uncured for thirty (30) days following written notice of breach
by the nonbreaching party, unless such breach is incurable, in which event
termination shall be immediate upon receipt of written notice;
13.2.2 Any cause as set forth in Section 15.5 delays the other
party's performance for more than sixty (60) days; or
13.2.3 A petition for relief under any bankruptcy statute is filed
by or against the other party, or the other party makes an assignment for the
benefit of creditors, or a receiver is appointed for all or a substantial part
of the other party's assets, and such petition, assignment or appointment is not
dismissed or vacated within sixty (60) days.
13.3 Permissive Termination. Somnus shall have the right to terminate the
----------------------
Development Program or this Agreement for any reason, or no reason, upon thirty
(30) days notice to Apical, and, after completion of the Development Program,
Apical may terminate this Agreement for any reason, or no reason, upon thirty
(30) days notice to Somnus.
13.4 Effect of Termination or Expiration.
-----------------------------------
13.4.1 Cessation of Development Program. If Somnus terminates
--------------------------------
the Agreement prior to the completion of the Development Program, Apical will
immediately cease making expenditures attributable to the Development Program
upon receipt of Somnus's notice of intent to terminate. Somnus shall reimburse
Apical for all services actually performed prior to its receipt of notice of
termination. Within thirty (30) days of the effective date of termination,
Apical shall provide Somnus a final written report of all costs incurred and
shall reimburse Somnus for any funds advanced in excess of total costs incurred.
13.4.2 Accrued Right and Obligations. In the event of expiration
-----------------------------
of this Agreement, the provisions hereof shall continue to apply to (i) all
purchase orders accepted by Apical prior to the effective date of expiration,
and (ii) Products ordered on such purchase orders. Except as provided herein,
termination or expiration of this Agreement shall not relieve or release either
party from making payments for obligations accrued prior to such termination.
In the event Apical terminates this Agreement for cause, such payments by Somnus
shall include costs of all raw materials purchased by Apical for use in
manufacturing Products or for which noncancellable orders were placed prior to
the receipt of any notice of termination by Apical, work in progress relating to
Products, and finished Products made by Apical. In the event Somnus terminates
this Agreement for cause other than for Apical's failure to meet its Product
supply obligation hereunder, Somnus will purchase from Apical at Apical's actual
cost such raw materials, work in progress relating to Products, and finished
Products made by Apical prior to the effective date of such termination. In the
event Somnus terminates this Agreement because of Apical's failure to meet its
supply obligations hereunder, Somnus shall be
-15-
<PAGE>
relieved of its obligation to pay Apical for Products ordered by purchase orders
accepted by Apical, and Somnus shall have no obligation with respect to (i) raw
materials ordered by Apical in respect of such Products and (ii) work in
progress relating to Products.
13.4.3 Return of Confidential Information. Upon any termination,
----------------------------------
but not expiration, of this Agreement, Apical shall promptly return to Somnus
any Confidential Information received from Somnus prior to such termination, and
Apical shall no longer be entitled to use any such Confidential Information for
any purpose.
13.4.4 Assistance by Apical. In the event of any termination of
--------------------
this Agreement during the term hereof, at Somnus's request and expense, Apical
shall use its best efforts to assist Somnus, as it may elect at its sole
discretion, to (i) locate and establish a second source for the manufacture of
Products meeting the Specifications, and/or (ii) initiate and thereafter
continue to itself manufacture all or a part of its Product requirements, as
provided in Section 3.10.
13.5 Survival. Sections 2.7, 2.9, 5.2, 13.4 and 13.5, and Articles 8, 9,
--------
11, 12, 14 and 15 shall survive the termination of this Agreement for any
reason.
14. ARBITRATION
If a dispute arises between the parties relating to the interpretation or
performance of this Agreement, or the grounds for the termination hereof,
representatives of the parties with decision-making authority shall meet to
attempt in good faith to negotiate a resolution of the dispute prior to pursuing
other available remedies. If within thirty (30) days after such meeting the
parties have not succeeded in negotiating a resolution of the dispute, and
unless otherwise mutually agreed, such dispute shall be submitted to final and
binding arbitration under the then current Commercial Arbitration Rules of the
American Arbitration Association ("AAA"), by one (1) arbitrator in Santa Clara
County, California. Such arbitrator shall be selected by the mutual agreement
of the parties or, failing such agreement, shall be selected according to the
aforesaid AAA rules. The arbitrator will be instructed to prepare and deliver a
written, reasoned opinion stating his decision within thirty (30) days of the
completion of the arbitration. Such arbitration shall be concluded within nine
(9) months following the filing of the initial request for arbitration. The
parties shall bear the costs of arbitration equally and shall bear their own
expenses, including attorneys' and other professional fees. The decision of the
arbitrator shall be final and non-appealable and may be enforced in any court of
competent jurisdiction.
15. MISCELLANEOUS
15.1 Governing Law and Jurisdiction. This Agreement shall be governed by
------------------------------
the laws of the State of California, without reference to principles of
conflicts of laws.
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<PAGE>
15.2 Compliance with Laws. Apical shall perform this Agreement in
--------------------
compliance with all applicable U.S. and foreign national, state and local laws,
rules and regulations. Apical shall indemnify Somnus and its customers for loss
or damage sustained because of Apical's noncompliance with any such law, rule or
regulation. Apical shall furnish to Somnus any information requested or
required by Somnus during the term of this Agreement or any extensions hereof to
enable Somnus to comply with the requirements of any U.S. or foreign federal,
state and/or government agency.
15.3 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
-----------------------
INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES OF THE OTHER PARTY
ARISING OUT OF THIS AGREEMENT, UNDER ANY THEORY OF LIABILITY.
15.4 Inspections by Government Agencies. With respect to any adverse
----------------------------------
findings affecting Products, Apical shall promptly notify Somnus of any
inspections by U.S. and foreign national, federal, state or local regulatory
representatives (including, without limitation, FDA, EPA, EEOC, OSHA, and
corresponding or similar foreign agencies or entities, state agencies or
building code inspectors) of any facility at which a Product is being or will be
manufactured and shall provide Somnus with the results of any such inspections,
including actions taken by Apical or any other entity to remedy conditions cited
in such inspections. Without limiting the generality of the foregoing, Apical
shall provide copies of any written inspection reports issued by such agencies
and all correspondence between Apical and the agency involved. Apical shall
permit such regulatory agencies to conduct whatever inspections of the
facilities at which Products are to be manufactured as such agencies may request
in connection with Somnus's obtaining approval to manufacture and market the
Products, and shall cooperate fully with any such regulatory entity, domestic or
foreign as the case may be, during any such inspections. Apical will give
Somnus prompt written notice of any inspection relating to Products and allow
representatives of Somnus to be present at such facilities during any such
inspection.
15.5 Force Majeure. Neither party shall be held responsible for any delay
-------------
or failure in performance hereunder caused by strikes, embargoes, unexpected
government requirements, civil or military authorities, acts of God, earthquake,
or by the public enemy or other causes reasonably beyond such party's control
and without such party's fault or negligence.
15.6 Independent Contractors. Apical shall perform its obligations
-----------------------
hereunder as an independent contractor and shall be solely responsible for its
own financial obligations. Nothing contained herein shall be construed to imply
a joint venture or principal and agent relationship between the parties, and
neither party shall have any right, power or authority to create any obligation,
express or implied, on behalf of the other in connection with the performance
hereunder. Apical will not act as an agent of Somnus and Apical's employees
shall not be deemed to be employees of Somnus for the purpose of any employee
benefit program, tax withholding, FICA taxes, unemployment benefits or
otherwise.
15.7 Confidentiality of Agreement. Except as required by law, Apical shall
----------------------------
not disclose the contents or any term of this Agreement to any person or entity
without the prior written consent of Somnus.
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<PAGE>
15.8 Further Assurances. At any time or from time to time on and after the
------------------
date of this Agreement, Apical shall at the request of Somnus (i) deliver to
Somnus such records, data or other documents consistent with the provisions of
this Agreement, and (ii) execute, and deliver or cause to be delivered, all such
assignments, consents, documents or further instruments of transfer or license,
and (iii) take or cause to be taken all such other actions, as Somnus may
reasonably deem necessary or desirable in order for Somnus to obtain the full
benefits of this Agreement and the transactions contemplated hereby.
15.9 Notices. All notices or reports permitted or required under this
-------
Agreement shall be in writing and shall be delivered in person, mailed by first
class mail, postage prepaid, (registered or certified), or sent by telecopy, to
the party to receive the notice at the address or telecopy number listed below,
or such other address as either party may specify in writing. All such notices
shall be effective upon receipt.
If to Somnus: Somnus Medical Technologies, Inc.
21070 Homestead Road, Suite 205
Cupertino, California 95014
FAX: (408) 773-9137
Attention: President
If to Apical: Apical Instruments, Inc.
967 North Shoreline Boulevard
Mountain View, California 94043
FAX: (415) 967-3371
Attention: President
15.10 No Use of Names. Neither party will use the name of the other in
---------------
its advertising or promotional materials without the prior written consent of
such other party.
15.11 No Implied License. Except as expressly provided herein, nothing
------------------
contained in this Agreement shall be implied to grant Apical any license with
the respect to any Confidential Information, Deliverables, Products or
Technology.
15.12 Assignment. Apical shall not assign this Agreement or any rights
----------
hereunder without the prior written consent of Somnus. Somnus may assign this
Agreement without restriction.
15.13 Severability. If any provision(s) of this Agreement shall be
------------
held invalid, illegal or unenforceable by a court of competent jurisdiction to
the maximum extent possible, this Agreement shall continue in full force and
effect without said provision.
15.14 Modification; Waiver. This Agreement may not be altered, amended
--------------------
or modified in any way except by a writing signed by both parties. The failure
of a party to enforce any provision of
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<PAGE>
the Agreement shall not be construed to be a waiver of the right of such party
to thereafter enforce that provision or any other provision or right.
15.15 Entire Agreement. This Agreement and the exhibits hereto represent
----------------
and constitute the entire agreement between the parties and supersede all prior
agreements and understandings with respect to the matters covered by this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their authorized representatives and delivered in duplicate
originals as of the Effective Date.
SOMNUS MEDICAL TECHNOLOGIES, INC. APICAL INSTRUMENTS, INC.
By: /s/ Stuart D. Edwards By: /s/ Bruno Strul
------------------------------- -------------------------------
Print Name: STUART D. EDWARDS Print Name: BRUNO STRUL
----------------------- -----------------------
Title: President & CEO Title: PRESIDENT
---------------------------- ----------------------------
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<PAGE>
EXHIBIT A
---------
GENERATOR SPECIFICATIONS
Each Generator shall meet the following specifications:
[
*
]
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
*
[*]- CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
-2-
<PAGE>
EXHIBIT B
---------
MEMORANDUM OF TERMS
-3-
<PAGE>
Page 1
April 18, 1996
Bruno Strul
Re: Somnus Letter of Intent
Dear Bruno:
As you know, Somnus Medical Technology, Inc. (hereafter "Somnus") would
like to enter into a Development and Manufacturing Agreement with Apical
Instruments, Inc. (hereafter "Apical"), to have Apical develop and manufacture a
proprietary RF generator. The purpose of this Letter of Intent is to establish
a framework in order to proceed towards a definitive agreement between Somnus
and Apical.
1) The parties have initiated discussions regarding a Development and
Manufacturing Agreement (the "Proposed Transaction") and agree that they shall
proceed to negotiate a definitive agreement covering the Proposed Transaction
culminating in a final agreement (the "Agreement") with the intent to finalize
and execute the Agreement no later than April 23, 1996, or such later date as
the parties may mutually agree; provided, however, that either party may
discontinue such negotiations at any time by written notice for any reason
whatsoever. The parties agree that the Business Proposal dated April 4, 1996,
attached to this Letter of Intent, summarizes the current status of the
discussions between representatives of Somnus and Apical, and the business terms
for the Agreement. Although it is the intent of the parties that their
negotiations initially proceed based upon on the Business Proposal, the parties
acknowledge that the terms contained in the Business Proposal have not been
agreed to by the parties and are subject to change in the course of the planned
negotiations.
2) The parties further agree not to disclose at any time to any third
party, whether by way of press release, announcement or in any other matter,
without the prior written consent of the other party, the existence, intent or
terms of this Letter of Intent, or the occurrence or content of any discussions,
negotiations or investigations which have occurred or which may occur regarding
the Proposed Transaction.
3) Any provisions of the Proposed Transaction shall not be binding on
either party or be deemed to create any legal rights or obligations between
Somnus and Apical, but rather are only intended to facilitate negotiations and
preparations of the Agreement embodying the final understanding of the parties.
Neither party shall have any liability whatsoever to the other party where its
discontinuance of such negotiations by written statement at any time prior to
April 23, 1996 or its decisions for any reason not to enter into the Agreement.
The Agreement shall be subject to all required corporate approvals at Somnus and
Apical. Each party shall bear its own
<PAGE>
Page 2
expenses in connection with the negotiation and consummation of the Proposed
Transaction and any actions taken by either party in reliance on this Letter of
Intent shall be at such parties so risk an expense.
Please contact me directly at (408) 773-9121 should you have any questions
regarding the content of this letter. Otherwise, please indicate the concurrence
of Apical as the basis on which we will proceed to negotiate the Agreement as
set forth below by executing both copies of this letter in the space provided
below and returning one copy to me at your earliest convenience. I look forward
to the successful completion of the negotiations contemplated by this letter.
Very truly yours
Stuart Edwards
President & CEO
Somnus Medical Technology, Inc.
Agreed and Accepted:
APICAL INSTRUMENTS, INC.
Date:
- ------------------------------- -------------------------
Bruno Strul, President and CEO
<PAGE>
Page 3
Business Proposal
April 4, 1996
1. Apical shall complete the development of a commercially deliverable RF
generator suitable for mass manufacturing (hereafter the "Commercial Generator")
shall be completed by __________________. The following milestones will be met:
A.
B.
C.
The Commercial Generator shall meet the following specification:
[*]
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
Page 4
[*]
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
Page 5
[*]
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
Exhibit 10.6
MRA
MUSKET RESEARCH ASSOCIATES INC.
CONFIDENTIAL
------------
JUNE 6, 1996
Stuart D. Edwards
President and CEO
Somnus Medical Technologies, Inc.
995 Benicia Avenue
Sunnyvale, CA 94086
Dear Stu:
Musket Research Associates, Inc. (MRA) would like to be retained as a
nonexclusive finder/advisor in connection with the proposed private placement of
Series B Convertible Preferred Somnus Medical Technologies, Inc. ("Somnus"), or
any financing for Somnus which arises out of that effort. The specific services
to be provided by MRA and fees to be received will be:
1. MRA shall (i) analyze the financial performance and projections of the
Company and assist in determining an appropriate valuation range for the new
equity capital; (ii) assist in the development of presentation materials for
investor solicitations.
2. (a) Contact qualified investors and, if acceptable to you or your
representative, send the necessary documents ourselves or through your office.
Documents sent by you at our request should be accompanied by a cover letter
and/or a business card from MRA, or, if these are not available, a specific
reference to our introduction. After appropriate screening, set up and
accompany you to meetings with interested parties as often as scheduling allows.
Manage ongoing discussions and coordinate the closings with the investors
solicited, or caused to be solicited by MRA.
(b) MRA acknowledges that the offering will be made pursuant to the private
offering exemption from registration under Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder, and that Somnus securities are to be
sold only to "accredited investors" (as defined in the SEC's Regulation D) who
also satisfy any applicable securities law. Before each closing, Somnus will
validate these "accredited investors" via the traditional suitability
questionnaire, copies of which will be provided to MRA.
(c) Prior to sending any descriptive materials to potential investors, MRA
will provide to Somnus a list of these investors so that Somnus can make the
appropriate securities law filings, if any, in such jurisdictions. MRA will send
materials previously approved by Somnus when cleared to do so by an Somnus
representative and will not be responsible for assuring that such jurisdictional
filings have been made beforehand. MRA will not make any general solicitation in
connection with the financing and will conduct its obligations hereunder in a
manner consistent with the requirements of Rule 506.
<PAGE>
CONFIDENTIAL
(d) The potential investors contacted by MRA are subject to acceptance by
Somnus in its sole and absolute discretion, and Somnus is under no obligation to
sell any of its capital stock to such parties. MRA shall be deemed an
independent contractor and shall have no right, power or authority to create any
obligations on behalf of Somnus.
3. (a) Somnus agrees to pay MRA finder's fees of 7% of the aggregate proceeds
received by Somnus from the sale of Series B Preferred Stock, or any other debt
or equity instrument arising out of this financing effort, to parties solicited
by or cause to be solicited by MRA ("MRA Contacts"). MRA Contacts will be
determined by the mailings made directly by MRA, at its request, or at the
request of these solicited parties. MRA Contacts will be listed on Schedule A of
this contract and will be updated as new mailings are authorized.
(b) Schedule A investors will specifically exclude (i) current Somnus
investors, and (ii) parties being actively solicited directly by Somnus or one
of its representatives, not previously contacted by MRA and approved by the
Company as a Schedule A investor. A complete listing of these two exclusion
groups will be provided to MRA by Somnus as soon as possible but not later than
the time of signing of this contract and will be attached hereto as Schedule B.
Somnus is authorized to and will update MRA periodically as to any additions it
has made to Schedule B. At Somnus's sole discretion, it may authorize a switch
of an investor listed on Schedule B to Schedule A, carrying with it the
obligation to pay the fees outlined in Section 3(a) above.
4. The Company will inform MRA immediately if it engages any additional finders
on this financing, including at such notice a complete description of any fee
agreement with such additional finder. If the Company agrees to pay fees in
excess of those stated above, the fees payable to MRA will increase to the same
level, at the sole discretion of MRA.
5. MRA will receive consideration for a similar finder's agreement in the event
of future private financings by Somnus. If MRA is not invited to participate in
-------
such financings as a finder, MRA will still be entitled to receive fees from
Somnus amounting to 3% of the aggregate funds invested in or loaned to Somnus by
investors MRA brought into the current financing (and compensated for as per
Section 3 above) for a period of two years after the final closing of the
current financing.
6. MRA will be allowed, in its sole discretion, to substitute not less than 25%
of the cash fees owed to it by Somnus, as per Sections 3, 4, and 5 above, for
equity or debt instruments in Somnus, in whatever form and at whatever value as
was paid by the investors contacted by MRA shall be bound by similar
terms and conditions as such investors and provided further that such issuance
to MRA shall comply with applicable state securities laws and shall not preclude
Somnus's reliance on Rule 506 with respect to the financing. MRA hereby
represents that it is an "accredited investor" for purposes of Regulation D. All
payments due to MRA will be made will be made within 10 days of the closing of
the financing for which they are payable. Cash or equity will be made out
directly to Musket Research Associates, Inc. unless otherwise specified.
<PAGE>
CONFIDENTIAL
7. Whether or not the financing contemplated herein is consummated, the Company
will reimburse MRA for its reasonable out-of-pocket expenses incurred from this
financing, provided such expenses have been approved in advance by Somnus, such
approval to not be unreasonably withheld. An initial nonrefundable payment of
$10,000 as an advance against these expenses will be paid to MRA upon the
execution of this contract. Somnus-approved expenses incurred by MRA prior to
closing will be submitted for reimbursement by Somnus and should be paid within
two weeks of receipt.
8. Investors for which MRA is compensated as per Sections 3, 4, and 5 above
will be listed on Schedule C of this contract. For each one percent of the
shares actually sold in the Company's IPO that are purchased by investors or
parties or directly affiliated with the investors listed on Schedule C, MRA will
be granted 1000 options or warrants to purchase Somnus common stock at a price
equivalent to the actual IPO price. Such options or warrants will expire 5
(five) years after grant and carry antidilution provisions and piggyback
registration rights.
9. This engagement may be terminated by Somnus or MRA at any time without
cause, upon written notice to that effect by the other party. However, MRA shall
be entitled to success fees, as described in Sections 3, 4 and 5 above, in the
event that, at any time prior to the expiration of two years after termination
of this agreement, a financing, loan, credit facility, or other investment is
consummated by Somnus with an investor listed on Schedule A at the time of
termination. Section 8 will have no termination clauses or expiration will have
no termination clauses or expiration dates.
10. The company agrees to indemnify MRA under the terms set forth in Exhibit 1,
which is included herein by reference.
Sincerely,
/s/David B. Musket
- --------------------
David B. Musket
President
Musket Research Associates
Agreed and Accepted:
/s/Stuart D. Edwards
- ------------------------------------------
Stuart D. Edwards Date
President and Chief Executive Officer
Somnus Medical Technologies, Inc.
<PAGE>
CONFIDENTIAL
EXHIBIT 1
---------
SOMNUS MEDICAL TECHNOLOGIES, INC. ("SOMNUS") agrees to indemnify and hold
harmless Musket Research Associates, Inc. ("MRA") and each of MRA's officers,
directors, agents, employees and controlling persons (within the meaning of each
of Section 20 of the Securities Exchange Act 1934, as amended, and Section 15 of
the Securities Act of 1933, as amended)(each of the foregoing, including MRA,
being hereinafter referred to as an "Indemnified Person") to the fullest extent
permitted by law from and against any and all losses, claims, damages, expenses
(including reasonable fees and disbursements for counsel), actions (including
shareholder derivative actions), proceedings, investigations (whether formal or
informal, or in tort, contract or otherwise), inquiries or threats thereof (all
of the foregoing being hereinafter referred to as "Liabilities"), based upon,
relating to or arising out of MRA's engagement hereunder (including conduct
prior to the date hereof) or any Indemnified Person's role therein including,
without limitation, any liabilities relating to or arising out of the engagement
by SOMNUS of any other financial advisor or investment banker: provided,
--------
however, that SOMNUS shall not be liable under this paragraph to the extent that
- -------
it is finally judicially determined by a court of competent jurisdiction that
such Liabilities resulted from the willful misconduct or gross negligence of the
Indemnified Person seeking indemnification. In connection with SOMNUS'
obligation to indemnify for expenses as set forth above, SOMNUS further agrees
to advance or reimburse each Indemnified Person for such expenses (including
reasonable fees for counsel) as they are incurred by such Indemnified Person:
provided, however, that if any Indemnified Person is reimbursed hereunder for
- -----------------
any expenses, such reimbursement of expenses shall be refunded by the
Indemnified Person who received such expenses to the extent it is finally
judicially determined by a court of competent jurisdiction that the Liabilities
in question resulted from the willful misconduct or gross negligence of such
Indemnified Person.
MRA confirms that it shall have due regard to any reasonable request which
SOMNUS may make in relation to the defense of any claim subject to SOMNUS
indemnifying and securing MRA, in a manner satisfactory to MRA against any and
all reasonable costs, charges, and expenses incurred by it in complying with any
such request.
If the indemnification or reimbursement provided for hereunder is finally
judicially determined by a court of competent jurisdiction to be unavailable to
an Indemnified Person in respect to any Liabilities (other than as a consequence
of a final judicial determination by such a court of willful misconduct or gross
negligence of such Indemnified Person), then SOMNUS agrees, in lieu of
indemnifying such Indemnified Person, to contribute to the amount paid or
payable by such Indemnified Person as a result of such Liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received, or
sought to be received, by SOMNUS on the one hand and by such Indemnified Person
on the other from the transaction in connection with which MRA has been engaged,
or (ii) if (but only if) the allocation provided in clause (i) of this sentence
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in such clause (i) of this
sentence is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in such clause
(i) but also the relative fault of SOMNUS and of such Indemnified Person:
provided, however, that in no event shall the aggregate amount contributed by
- -----------------
the Indemnified Person exceed the amount of fees actually received by his or its
affiliate or employer pursuant to such engagement. The relative benefits
received or sought to be received by SOMNUS on the one hand and by MRA on the
other shall be deemed to be in the same proportion as (i) the gross proceeds
raised in the transactions subject to this Agreement bears to (ii) the fees paid
or payable to MRA hereunder.
<PAGE>
CONFIDENTIAL
MRA
MUSKET RESEARCH ASSOCIATES INC.
SOMNUS
SCHEDULE A INVESTORS
--------------------
Approved by /s/ Stuart D. Edwards
----------------------
Date 6/13/96
-----------------------------
INVESTORS ELIGIBLE FOR FULL MRA FEES
Easton Capital
Essex (Boston)
First Eagle
HPB
INVESCO
Iridian Asset Management
Kingdon Capital
Medical Venture Management AS
Rose & Co.
The Travelers Companies
Welch & Forbes
Westfield Capital
Zeisger Capital
and all parties and entities affiliated with any group listed above.
125 CAMBRIDGEPARK DRIVE - 1ST FLOOR - CAMBRIDGE, MA 02140 617-441-8800
FAX 617-441-0855
<PAGE>
MRA
MUSKET RESEARCH ASSOCIATES INC.
SOMNUS SCHEDULE INVESTORS
Approved by /s/ Stuart D. Edwards
----------------------
Date 9/5/96
----------------------------
INVESTORS ELIGIBLE FOR FULL MRA FEES
Easton Capital/ES Partners
Essex (Boston)
First Eagle
HPB
Elliot Hahn
Rob Hess
Steve Hochberg
INVESCO
Iridian Asset Management
Kingdon Capital
Frank Litvack
Patrick McBrayer
MedCap/ProMed
Medical Venture Management AS/Viking Medical Ventures
Moss Forest
Norwest
Och-Ziff
Rose & Co.
John Simon
Third Point Partners
The Travelers Companies
Welch & Forbes
Westfield Capital
Zesiger Capital
and all parties and entities affiliated with any group listed above.
125 CAMBRIDGEPARK DRIVE - 1ST FLOOR - CAMBRIDGE, MA 02140 617-441-8800
FAX 617-441-0855
<PAGE>
MRA
MUSKET RESEARCH ASSOCIATES INC.
Approved
SOMNUS SCHEDULE B INVESTORS /s/ Stuart D. Edwards
9/5/96
Investors NOT Eligible for any MRA Fees
All existing Somnus investors
Joe Cifulillo
Hardwin Mead
Schwartz Communications
Dennis Sheehan
and all parties and entities affiliated with any group listed above.
125 CAMBRIDGEPARK DRIVE - 1ST FLOOR - CAMBRIDGE, MA 02140
617-441-8600 - FAX 617-441-0855
<PAGE>
Exhibit 10.7
BLDG: ARQUES 1
OWNER: 500
PROP: 275
UNIT: 1
TENANT: 27503
LEASE AGREEMENT
THIS LEASE, made this 4th day of February, 1997 between JOHN ARRILLAGA,
----- -------- -- -----------------
Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as
- --------------------------------------------------------------------------------
amended, and RICHARD T. PEERY, Trustee or his Successor Trustee, UTA dated
- ---------------------------------------------------------------------------
7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended ------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------, hereinafter called Landlord, and SOMNUS MEDICAL TECHNOLOGIES,
- ---------------------------------------- -------------------------------
INC., a Delaware corporation --------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------------, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises ("the "Premises") outlined in red on Exhibit
"A", attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 20,000+ square foot, single-story
-
building located at 285 N. Wolfe Road, Sunnyvale, California
94086. Said Premises is more particularly shown within the
area outlined in Red on Exhibit A attached hereto. The
---------
entire parcel, of which the Premises is a part, and
exclusive parking appurtenant thereto, is shown within the
area outlined in Green on Exhibit A attached. The Premises
---------
shall be improved as shown on Exhibit B to be attached
---------
hereto, and is leased on an "as-is" basis, in its present
condition, and in the configuration as shown in Red on
Exhibit B to be attached hereto.
---------
The word "Premises" as used throughout this lease is hereby defined to
include the use of landscaped areas, sidewalks and driveways in front of or
adjacent to the Premises, and the nonexclusive use of the area directly
underneath or over such sidewalks and driveways. The gross leasable area of the
shall be measured from outside of exterior walls to outside of exterior walls,
and shall include any atriums, covered entrances or egresses and covered
building loading areas.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
-------
office, light manufacturing, research and development, and storage and other
- ----------------------------------------------------------------------------
uses necessary for Tenant to conduct Tenant's business, provided that such uses
- -------------------------------------------------------------------------------
shall be in accordance with all applicable governmental laws and ordinances,
- ----------------------------------------------------------------------------
and for no other purpose. Tenant shall not do or permit to be done in or about
the Premises nor bring or keep or permit to be brought or kept in or about the
Premises anything which is prohibited by or will in any way increase the
existing rate of (or otherwise affect) fire or any insurance covering the
Premises or any part thereof, or any of its contents, or will cause a
cancellation of any insurance covering the Premises or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises which will in any way obstruct or interfere with the rights
of other tenants or occupants of the Premises or neighboring premises or Injure
or annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. No sale by auction shall be
permitted on the Premises. Tenant shall not place any loads upon the floors,
walls, or ceiling which endanger the structure, or place any harmful fluids or
other materials in the drainage system of the building, or overload existing
electrical or other mechanical systems. No waste materials or refuse shall be
dumped upon or permitted to remain upon any part of the Premises or outside of
the building in which the Premises are a pan, except in trash containers placed
inside exterior enclosures designated by Landlord for that purpose or Inside of
the building proper where designated by Landlord. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain outside the
Premises. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door partition or wall which may appear unsightly from
outside the Premises. No loudspeaker or other device, system or apparatus which
can be heard outside the Premises shall be used in or at the Premises without
the prior written consent of Landlord. Tenant shall not commit or suffer to be
committed any waste in or upon the Premises. Tenant shall indemnify, defend and
hold Landlord harmless against any loss, expense. damage. reasonable attorneys'
fees, or liability arising out of failure of Tenant to comply with any
applicable law that governs Tenant's use of the Premises. Tenant shall comply
with any covenant, condition, or restriction ("CC&R's") affecting the Premises.
The provisions of this paragraph are for the benefit of Landlord only and shall
not be construed to be for the benefit of any tenant or occupant of the
Premises.
2. TERM*
A. The term of this Lease shall be for a period of FIVE ( 5 ) years and
------- ---
SEVENTEEN (17) days (unless sooner terminated as hereinafter provided) and,
subject to Paragraphs 2Band 3. Shall commence on the 15/th/ day of March
------- -------
1997 and end on the 31st day of March , 2002 .
--- -------- ------- ------
B. Possession of the Premises shall be deemed tendered and the term of the
Lease shall commence on March 15, 1997, or when the first of the following
occurs:
(a) One day after a Certificate of Occupancy is granted by the proper
governmental agency, or, if the governmental agency having jurisdiction over the
area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification by Landlord's
architect or contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(c) When the Tenant Improvements have been substantially completed for
------------------------------------------------------------------
Tenant's use and occupancy, in accordance and compliance with Exhibit B of this
- -------------------------------------------------------------------------------
Lease Agreement; or
- -------------------------------------------------------------------------------
(d) As otherwise agreed in writing.
* It is agreed in the event said Lease commences on a date other than the
first day first day of the month the term of the Lease will be extended to
account for the number of days in the month the term of the Lease will be
extended to account for the number of days in the partial month. The Basic
Rent during the resulting partial month will be prorated (for the number of
days in the partial month) at the Basic Rent rate scheduled for the
projected commencement date as shown in Paragraph 39.
Page 1 of 8
<PAGE>
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said term, as
hereinbefore specified, this lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents
be liable to Tenant for any loss or damage resulting therefrom; but in that
event the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlord's delivery
of possession, as specified in Paragraph 2B, above. The above is, however,
subject to the provision that the period of delay of delivery of the Premises
shall not exceed 60 days from the commencement date herein (except those
--------
delays caused by Acts of God, strikes, war, utilities, governmental bodies,
weather, unavailable materials, and delays beyond Landlord's control shall be
excluded in calculating such period) in which instance Tenant, at its option,
may, by written notice to Landlord, terminate this lease.
4. RENT
A. BASIC RENT. Tenant agrees to pay to Landlord at such place as Landlord
may designate without deduction, offset, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of TWO
----
MILLION ONE HUNDRED EIGHTEEN THOUSAND NINETY SIX AND 77/100-----------------
- ------------------------------------------------------------ DOLLARS
($ 2,118,096.77-------) in lawful money of the United States of America,
--------------------
payable as follows:
See Paragraph 39 for Basic Rent Schedule
B. Time for Payment. Full monthly rent is due in advance on the first day
of each calendar month. In the event that the term of this Lease commences on
a date other than the first day of a calendar month, on the date of commencement
of the term hereof Tenant shall pay to Landlord as rent for the period from such
date of commencement to the first day of the next succeeding calendar month that
proportion of the monthly rent hereunder which the number of days between such
date of commencement and the first day of the next succeeding calendar month
bears to thirty (30). In the event that the term of this Lease for any reason
ends on a date other than the last day of a calendar month, on the first day of
the last calendar month of the term hereof Tenant shall pay to Landlord as rent
for the period from said first day of said last calendar month to and including
the last day of the term hereof that proportion of the monthly rent hereunder
which the number of days between said first day of said last calendar month and
the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof, Tenant agrees to pay Landlord. In addition to the
delinquent rental due, a late charge for each rental payment in default ten
(10) days. Said late charge shall equal ten percent (10%) of each rental payment
so in default.
D. Additional Rent Beginning with the commencement date of the term of
this Lease, Tenant shall pay to Landlord or to Landlord's designated agent in
addition to the Basic Rent and as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in Paragraph 9,
and
(b) All insurance premiums relating to the Premises, as set forth in
Paragraph 12, and
(c) All charges, costs and expenses which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including reasonable attorneys' fees and legal expenses, that may accrue thereto
in the event of Tenant's failure to pay such amounts, and all damages,
reasonable costs and expenses which Landlord may incur by reason of default of
Tenant or failure on Tenant's part to comply with the terms of this Lease. In
the event of nonpayment by Tenant of Additional Rent, Landlord shall have all
----------------------------------------------------------------
the rights and remedies with respect thereto as Landlord has for nonpayment of
- ------------------------------------------------------------------------------
rent.
- ----
The Additional Rent due hereunder shall be paid to Landlord or Landlord's
agent (i) within five days for taxes and insurance and within thirty (30) days
for all other Additional Rent items after presentation of invoice from Landlord
or Landlord's agent sitting forth such Additional Rent and/or (ii) at the option
of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata
share of an amoount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimated amount shall
be reconciled within 120 days of the end of each calendar year or more
frequently if Landlord elects to do so at Landlord's sole and absolute
discretion as compared to Landlord's actual expenditure for said Additional Rent
items, with Tenant paying to Landlord upon demand, any amount of actual expenses
expended by Landlord In excess of said estimated amount, or Landlord crediting
to Tenant (providing Tenant Is not in default in the performance of any of the
terms, covenants and conditions of this Lease) any amount of estimated payments
made by Tenant In excess of Landlord's actual expenditures for said Additional
Rent items.
E. Fixed Management Fee. Beginning with the Commencement Date of the Term
--------------------
of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee ("Management Fee") equal to 2%
of the Basic Rent due for each month during the Lease Term.
The respective obligations of Landlord and Tenant under this paragraph
shall survive the expiration or other termination of the term of this Lease, and
If the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
F. Piece of Payment of Rent and Additional Rent. All Basic Rent hereunder
and all payments hereunder for Additional Rent shall be pad to Landlord at the
office of Landlord at PEERY/ARRILLAGA, FILE 1504, BOX 60000, SAN FRANCISCO, CA
---------------------------------------------------------
94160
- -------------------------------------------------------------------------------
________________________________________________________________________________
or to such other person or to such other place as Landlord may from time to time
designate in writing.
G. Security Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of SEVENTY FOUR THOUSAND AND NO/100--
----------------------------------
- ----Dollars ($74,000.00-----------------)
- ----------------------------------------
Said sum shall be held by Landlord as a Security Deposit for the faithful
performance by Tenant of all of the terms, covenants and conditions of this
Lease to be kept and performed by Tenant during the term hereof. If Tenant
defaults with respect to any provision of this Lease, including, but not limited
to, the provisions relating to the payment of rent and any of the monetary sums
due herewith, Landlord may (but shall not be required to) use, apply or retain
all or any part of this Security Deposit for the payment of any other amount
which Landlord may spend by reason of Tenant's default or to compensate Landlord
for
* $37,000.00 due upon Lease execution.
$37,000.00 Promissory Note due 03/01/98.
Page 2 of 8
<PAGE>
any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said Deposit is so used or applied, Tenant shall,
within ten (10) days after written demand therefor, deposit cash with Landlord
in the amount sufficient to restore the Security Deposit to its original amount.
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep this Security Deposit separate from its general
funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant
fully and faithfully performs every provision of this Lease to be performed by
it, the Security Deposit or any balance thereof shall be returned to Tenant (or
at Landlord's option, to the last assignee of Tenant's interest hereunder) at
the expiration of the Lease term and after Tenant has vacated the Premises. In
the event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Deposit to Landlord's successor in interest whereupon Tenant
agrees to release Landlord from liability for the return of such Deposit or the
accounting therefor. The use of disposition or the Security Deposit shall be
subject to the provision of California Civil Code Section 1950.7.
5. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
or such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Least term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or
nonconforming accoustical ceiling tiles replaced; all windows washed; the
airconditioning and heating systems serviced by a reputable and licensed service
firm and in good operating condition and repair, the plumbing and electrical
systems and lighting in good order and repair, including replacement of any
burned out or broken light bulbs or ballasts; the lawn and shrubs in good
condition including the replacement of any dead or damaged plantings; the
sidewalk, driveways and parking areas in good order, condition and repair;
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except moveable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord within sixty
(60) days before the end of the term of this Lease whether Landlord desires to
have the Premises or any part or parts thereof restored to their condition and
configuration as when the Premises were delivered to Tenant and if Landlord
shall so desire, then Tenant shall restore said Premises or such part or parts
thereof before the end of this Lease at Tenant's sole cost and expense. Tenant,
on or before the end of the term of sooner termination of this Lease, shall
remove all of Tenant's personal property and trade fixtures from the Premises,
and all property not so removed on or before the end of the term or sooner
termination of this Lease shall be deemed abandoned by Tenant and title to same
shall thereupon pass to Landlord without compensation to Tenant. Landlord may,
upon termination of this Lease, remove all moveable furniture and equipment so
abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such
removal at Tenant's sole cost. If the Premises be not surrendered at the end of
the term or sooner termination of this Lease, Tenant shall indemnify Landlord
against loss or liability resulting from the delay by Tenant in so surrendering
the Premises including, without limitation, any claims made by any succeeding
tenant founded on such delay. Nothing contained herein shall be construed as an
extension of the term hereof or as a consent of Landlord to any holding over by
Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant
or a mutual cancellation of this Lease shall not work as a merger and, at the
option of Landlord, shall either terminate all or any existing subleases or
subtenancies or operate as an assignment to Landlord of all or any such
subleases or subtenancies. See Paragraph 46.
6. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant (such consent not to be
unreasonably withheld), but at the cost of Tenant, and any addition to, or
alteration of, the Premises, except moveable furniture and trade fixtures, shall
at once become a part of the Premises and belong to Landlord. Landlord reserves
the right to approve all contractors and mechanics proposed by Tenant to make
such alterations and additions. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All heating, lighting,
electrical, airconditioning, floor to ceiling partitioning, drapery, carpeting,
and floor installations made by Tenant, together with all property that has
become an integral part of the Premises, shall not be deemed trade fixtures.
Tenant agrees that it will not proceed to make such alteration or additions,
without having obtained consent from Landlord to do so, and until five (5) days
from the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material suppliers for payment
for Tenant's improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work. Tenant shall, if
required by Landlord, secure at Tenant's own cost and expense, a completion and
lien indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises for
work claimed to have been done for, or materials claimed to have been furnished
to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10)
days after the filing thereof, at the cost and expense of Tenant. Any exceptions
to the foregoing must be made in writing and executed by both Landlord and
Tenant. See Paragraph 46.
7. TENANT MAINTENANCE Subject to Paragraph 21, Tenant shall, at its sole cost
and expense, keep and maintain the Premises (including appurtenances) and every
part thereof in a high standard of maintenance and repair, or replacement, and
in good and sanitary condition. Tenant's maintenance and repair responsibilities
herein referred to include, but are not limited to, janitorization, all windows
(interior and exterior), window frames, plate glass and glazing (destroyed by
accident or act of third parties), truck doors, plumbing systems (such as water
and drain lines, sinks, toilets, faucets, drains, showers and water fountains),
electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps,
bulbs, tubes and ballasts), heating and airconditioning systems (such as
compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks,
boilers, heaters, supply and return grills), structual elements and exterior
surfaces of the building, store fronts, roofs, downspouts, all interior
improvements within the premises including but not limited to wall coverings,
window coverings, carpet, floor coverings, partitioning, ceilings, doors (both
interior and exterior), including closing mechanisms, latches, locks, skylights
(if any) automatic fire extinguishing systems, and elevators and all other
interior improvements of any nature whatsoever, and all exterior improvements
including but not limited to landscaping, sidewalks, driveways, parkings lots
including striping and sealing, sprinkler systems, lighting, ponds, fountains,
waterways, and drains. Tenant agrees to provide carpet shields under all rolling
chairs or to otherwise be responsible for wear and tear of the carpet caused by
such rolling chairs if such wear and tear exceeds that caused by normal foot
traffic in surrounding areas. Areas of excessive wear shall be replaced at
Tenant's sole expense upon Lease termination. Tenant hereby waives all rights
under, and benefits of, Subsection 1 of Section 1932 and Section 1941 and 1942
of the California Civil Code and under any similar law, statute or ordinance now
or hereafter in effect, in the event any of the above maintenance
responsibilities apply to any other tenant(s) of Landlord where there is common
usage with other tenant(s), such maintenance responsibilities and charges shall
be allocated to the leased Premises by square footage or other equitable basis
as calculated and determined by Landlord. See Paragraph 51.
8. UTILITIES Tenant shall pay promptly, as the same become due, all charges
for water, gas, electricity, telephone, telex and other electronic communication
service, sewer service, waste pick-up and any other utilities, materials or
services furnished directly to or used by Tenant on or about the Premises during
the term of this Lease, including, without limitation, any temporary or
permanent utility surcharge or other exactions whether or not hereinafter
imposed. In the event the above charges apply to any other tenant(s) of Landlord
where there is common usage with other tenant(s), such charges shall be
allocated to the leased Premises by square footage or other equitable basis as
calculated and determined by Landlord.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
9. TAXES
A. As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord, or if Landlord so directs, directly to the Tax
Collector, all Real Property Taxes relating to the Premises. In the event the
Premises leased hereunder consist of only a portion of the entire tax parcel,
Tenant shall pay to Landlord Tenant's proportionate share of such real estate
taxes allocated to the leased Premises by square footage or other reasonable
basis as calculated and determined by Landlord. If the tax billing pertains 100%
to the leased Premises, and Landlord chooses to have Tenant pay said real estate
taxes directly to the Tax Collector, then in such event it shall be the
responsibility of Tenant to obtain the tax and assessment bills and pay, prior
to delinquency, the applicable real property taxes and assessments pertaining to
the leased Premises, and failure to receive a bill for taxes and/or assessments
shall not provide a basis for cancellation of or nonresponsibility for payment
of penalties for nonpayment or late payment by Tenant. The term "Real Property
Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest required to pay
any general or special assessments for public improvements and any increases
resulting from reassessments caused by any change in ownership of the Premises)
now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct power to tax or levy assessments, which are
levied or assessed against, or with respect to the value, occupancy or use of,
all or, any portion of the Premises (as now constructed or as may at any time
hereafter be constructed, altered, or otherwise changed) or Landlord's interest
therein; any improvements located within the Premises (regardless of ownership);
the fixtures, equipment and other property of Landlord, real or personal, that
are an integral part of and located in the Premises; or parking areas, public
utilities, or energy within the Premises; (ii) all charges, levies or fees
imposed by reason of environmental regulation or other governmental control of
the Premises; and (iii) all costs and fees (including
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reasonable attorneys' fees) incurred by Landlord in reasonably contesting any
Real Property Tax and in negotiating with public authorities as to any Real
Property Tax. If at any time during the term of this Lease the taxation or
assessment of the Premises prevailing as of the commencement date of this Lease
shall be altered so that in lieu of or in addition to any Real Property Tax
described above there shall be levied, assessed or imposed (whether by reason of
a change in the method of taxation or assessment, creation of a new tax or
charge, or any other cause) an alternate or additional tax or charge (i) on the
value, use or occupancy of the Premises or Landlord's interest therein or (ii)
on or measured by the gross receipts, income or rentals from the Premises, on
Landlord's business of leasing the Premises, or computed in any manner with
respect to the operation of the Premises, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real Property
Taxes" for purposes of this Lease. If any Real Property Tax is based upon
property or rents unrelated to the Premises, then only that part of such Real
Property Tax that is fairly allocable to the Premises shall be included within
the meaning of the term "Real Property Taxes". Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources.
B. Taxes on Tenant's Property Tenant shall be liable for and shall pay ten
days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based on such increased assessment, which Landlord shall have the right to
do regardless of the validity thereof, but only under proper protest if
requested by Tenant, Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event
Tenant shall have the right, in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to recover the
amount of such taxes so paid under protest, and any amount so recovered shall
belong to Tenant. See Paragraph 49.
10. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with combined single limit coverage of not less than Two Million Dollars
($2,000,000) per occurrence, for bodily injury and property damage occurring in,
on or about the Premises, including parking and landscaped areas. Such insurance
shall be primary and noncontributory as respects any insurance carried by
Landlord. The policy or policies effecting such insurance shall name Landlord as
additional insureds, and shall insure any liability of Landlord, contingent or
otherwise, as respects acts or omissions of Tenant, its agents, employees or
invitees or otherwise by any conduct or transactions of any of said persons in
or about or concerning the Premises, including any failure of Tenant to observe
or perform any of its obligations hereunder, shall be issued by an insurance
company admitted to transact business in the State of California; and shall
provide that the insurance effected thereby shall not be canceled, except upon
thirty (30) days' prior written notice to Landlord. A certificate of
insurance of said policy shall be delivered to Landlord. If, during the term of
this Lease, in the considered opinion of Landlord's Lander, insurance advisor,
or counsel, the amount of insurance described in this Paragraph 10 is not
adequate, Tenant agrees to increase said coverage to such reasonable amount as
Landlord's Lender, insurance advisor, or counsel shall deem adequate.
11. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any of
such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with all
laws.
12. PROPERTY INSURANCE Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (excluding routine maintenance and repairs and
incidental damage or destruction caused by accidents or vandalism for which
Tenant is responsible under Paragraph 7) in the amount of the full replacement
value thereof, providing protection against those perils included within the
classification of "all risks" insurance and flood and/or earthquake insurance,
if available, plus a policy of rental income insurance in the amount of one
hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as
Additional Rent. If such insurance cost is increased due to Tenant's use of the
Premises, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Premises.
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing party, from any liability for loss
or damage caused by fire or any of the extended coverage casualties included in
the releasing party's insurance policies, irrespective of the cause of such fire
or casualty; provided, however, that if the insurance policy of either releasing
party prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited, the insured
party affected shall promptly notify the other party thereof.
13. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises by or from any
cause whatsoever, including, without limitation, gas, fire, oil, electricity or
leakage of any character from the roof, walls, basement or other portion of the
Premises but excluding, however, the willful misconduct or negligence of
Landlord, its agents, servants, employees, invitees, or contractors of which
negligence Landlord has knowledge and reasonable time to correct. Except as to
injury to persons or damage to property to the extent arising from the willful
misconduct or the negligence of Landlord, its agents, servants, employees,
invitees, or contractors Tenant shall hold Landlord harmless from and defend
Landlord against any and all expenses, including reasonable attorneys' fees, in
connection therewith, arising out of any injury to or death of any person or
damage to or destruction of property occurring in, on or about the Premises, or
any part thereof, from any cause whatsoever
14. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or
the admission of Tenant in any action against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such law, statute, ordinance
or governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall, at its
sole cost and expense, comply with any and all requirements pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering
requirements pertaining to said Premises, of any insurance organization or
company, necessary for the maintenance of reasonable fire and public liability
Insurance covering the Premises.
15. LIENS Tenant shall keep the Premises free from any liens arising out of any
work performed, materials furnished or obligation incurred by Tenant. In the
event that Tenant shall not, within ten (10) days following written notice of
the imposition of such lien, cause the same to be released of record, Landlord
shall have, in addition to all other remedies provided herein and by law, the
right, but no obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien. All
sums paid by Landlord for such purpose, and all expenses incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand with
interest at the prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or hypothecate
the leasehold estate under this Lease, or any interest therein, and shall not
sublet the Premises, or any part thereof, or any right or privilege appurtenant
thereto, or suffer any other person or entity to occupy or, use the Premises, or
any portion thereof, without, in each case, the prior written consent of
Landlord which consent will not be unreasonably withheld. As a condition for
granting this consent to any assignment, transfer, or subletting, Landlord shall
require Tenant to pay to Landlord, as Additional Rent, all rents for
and additional consideration due Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred, and/or subleased space provided, however, that before
such excess rent is paid to Landlord, Tenant shall first be entitled to recover
from such excess rent the amount of any reasonable leasing commissions paid by
Tenant to third parties not affiliated with Tenant. Tenant shall by thirty (30)
days written notice, advise Landlord of its intent to assign or transfer
Tenant's interest in the Lease or sublet the Premises or any portion thereof for
any part of the term hereof. Within thirty (30) days after receipt of said
written notice, Landlord may, in its sole discretion, elect to terminate this
Lease as to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate. If no such notice to terminate is given to Tenant within said thirty
(30) day period, Tenant may proceed to locate an acceptable sublessee, assignee,
or other transferee for presentment to Landlord for Landlord's approval, all in
accordance with the terms, covenants, and conditions of this paragraph 16. If
Tenant intends to sublet the entire Premises and Landlord elects to terminate
this Lease, this Lease shall be terminated on the date specified in Tenant's
notice. If, however, this Lease shall terminate pursuant to the foregoing with
respect to less than all the Premises, the rent, as defined and reserved
hereinabove shall be adjusted on a pro rata basis to the number of square feet
retained by Tenant, and this Lease as so amended shall continue in full force
and effect. In the event Tenant is allowed to assign, transfer or sublet the
whole or any part of the Premises with the prior written
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consent of Landlord, no assignee, transferee or subtenant shall assign or
transfer this Lease, either in whole or in part, or sublet the whole or any part
of the Premises, without also having obtained the prior written consent of
Landlord. A consent of Landlord to one assignment, transfer, hypothecation,
subletting, occupation or use by any other person shall not release Tenant from
any of Tenant's obligations hereunder or be deemed to be a consent to any
subsequent similar or dissimilar assignment, transfer, hypothecation,
subletting, occupation or use by any other person. Any such assignment,
transfer, hypothecation, subletting, occupation or use without such consent
shall be void and shall constitute a breach of this Lease by Tenant and shall,
at the option of Landlord exercised by written notice to Tenant, terminate this
Lease. The leasehold estate under this Lease shall not, nor shall any interest
therein, be assignable for any purpose by operation of law without the written
consent of Landlord. As a condition to its consent, Landlord shall require
Tenant to pay all expenses in connection with the assignment, and Landlord shall
require Tenant's assignee or transferee (or other assignees or transferees) to
assume in writing all of the obligations under this Lease and for Tenant to
remain liable to Landlord under the Lease. Notwithstanding-the above, -in no
event will Landlord consent to a sub-sublease.
17. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease. See Paragraph 50.
18. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies) have, the right to enter
the Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to make repairs or provide any services to a contiguous tenant(s); to
submit the Premises to prospective purchasers, mortgagers or tenants; to post
notices of nonresponsibility; and to alter, improve or repair the Premises or
other parts of the building, all without abatement of rent, and may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however that the business of Tenant shall be interfered with to the least extent
that is reasonably practical. Any entry to the Premises by Landlord for the
purposes provided for herein shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into or a detainer of the Premises or
an eviction, actual or constructive, of Tenant from the Premises or any portion
thereof. See Paragraph 47.
19. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this Lease,
the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of Landlord
to refuse to accept an assignment upon commencement of or in connection with a
bankruptcy, liquidation, reorganization or insolvency action or an assignment of
Tenant for the benefit of creditors or other similar act. Nothing contained in
this Lease shall be construed as giving or granting or creating an equity in the
demised Premises to Tenant. In no event shall the leasehold estate under this
Lease, or any interest therein, be assigned by voluntary or involuntary
bankruptcy proceeding without the prior written consent of Landlord. In no event
shall this Lease or any rights or privileges hereunder be an asset of Tenant
under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or representation made
under this Lease shall constitute a default hereunder by Tenant upon expiration
of the appropriate grace period hereinafter provided. Tenant shall have a period
of five (5) days from the date of written notice from Landlord within which to
cure any default in the payment of rental or adjustment thereto. Tenant shall
have a period of thirty (30) days from the date of written notice from Landlord
within which to cure any other default under this Lease; provided, however, that
if the nature of Tenant's failure is such that more than thirty (30) days is
reasonably required to cure the same, Tenant shall not be in default so long as
Tenant commences performance within such thirty (30) day period and thereafter
prosecutes the same to completion. Upon an uncured default of this Lease by
Tenant, Landlord shall have the following rights and remedies in addition to any
other rights or remedies available to Landlord at law or in equity:
(a) The rights and remedies provided for by California Civil Code Section
1951.2, including but not limited to, recovery of the worth at the time of award
of the amount by which the unpaid rent for the balance of the term after the
time of a ward exceeds the amount of rental loss for the same period that Tenant
proves could be reasonably avoided, as computed pursuant to subsection (b) of
said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of
Section 1951.2 of the California Civil Code of the amount of rental loss that
could be reasonably avoided shall be made in the following manner: Landlord and
Tenant shall each select a licensed real estate broker in the business of
renting property of the same type and use as the Premises and in the same
geographic vicinity. Such two real estate brokers shall select a third licensed
real estate broker, and the three licensed real estate brokers so selected shall
determine the amount of the rental loss that could be reasonably avoided from
the balance of the term of this Lease after the time of award. The decision of
the majority of said licensed real estate brokers shall be final and binding
upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section which
allows Landlord to continue the Lease in effect and to enforce all of its rights
and remedies under this Lease, including the right to recover rent as it becomes
due, for as long as Landlord does not terminate Tenant's right to possession;
acts of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law the right and power, to enter the
Premises and remove therefrom all persons and property, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and apply such proceeds therefrom pursuant to
applicable California law. Landlord, may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its reasonable
sole discretion may deem advisable, with the right to make alterations and
repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to indebtedness other than rent due
hereunder, the reasonable cost of such subletting, including, but not limited
to, reasonable attorneys' fees, and any real estate commissions actually paid,
and the cost of such reasonable alterations and repairs incurred by Landlord and
the amount, if any, by which the rent hereunder for the period of such
subletting (to the extent such period does not exceed the term hereof) exceeds
the amount to be paid as rent for the Premises for such period or (ii) at the
option of Landlord, rents received from such subletting shall be applied first
to payment of indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs of such subletting and of such
alterations and repairs; third to payment of rent due and unpaid hereunder; and
the residue, if any, shall be held by Landlord and applied in payment of future
rent as the same becomes due hereunder. If Tenant has been credited with any
rent to be received by such subletting under option (i) and such rent shall not
be promptly paid to Landlord by the subtenant(s), or if such rentals received
from such subletting under option (ii) during any month be less than that to be
paid during that month by Tenant hereunder, Tenant shall pay any such deficiency
to Landlord. Such deficiency shall be calculated and paid monthly. No taking
possession of the Premises by Landlord, shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention be given
to Tenant. Notwithstanding any such subletting without termination, Landlord may
at any time hereafter elect to terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application by
Landlord, to take possession to the Premises and to apply any rental collected
from the Premises and to exercise all other rights and remedies granted to
Landlord pursuant to subparagraph d above.
20. ABANDONMENT. Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease (except that Tenant may vacate so long as it pays
rent, provides an on-site security guard during normal business hours from
Monday through Friday, and otherwise performs its obligations hereunder). and if
Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by
the process of law, or otherwise, any personal property belonging to Tenant and
left on the Premises shall be deemed to be abandoned, at the option of Landlord,
except such property as may be mortgaged to Landlord.
21. DESTRUCTION. In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental
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damage and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7. Landlord must either, at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or
(b) Terminate this Lease, (providing that the Premises is damaged to
the extent of 33 1/3% or more of the replacement cost)
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to their condition prior
to the damage or destruction. Tenant shall be entitled to a reduction in rent
while such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises. If
Landlord initially estimates that the rebuilding or restoration will exceed 180
days or if Landlord does not complete the rebuilding or restoration within one
hundred eighty (180) days following the date of destruction (such period of time
to be extended for delays caused by the fault or neglect of Tenant or because of
Acts of God, acts of public agencies, labor disputes, strikes, fires, freight
embargos, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or Subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the
California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than 33 1/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
by injured or not. Notwithstanding anything to the contrary herein, Landlord may
terminate this Lease in the event of an uninsured event or if insurance proceeds
are insufficient to cover one hundred percent of the rebuilding costs net of the
deductible, unless Tenant, within ten (10) days after receipt of written notice
from Landlord, agrees to pay for 100% of any such deficiency.
22. EMINENT DOMAIN If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill, shall be and remain
the property of Tenant.
If any action or proceeding is commenced for such taking of the Premises or
any part thereof, or if Landlord is advised in writing by any entity or body
having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, then Landlord shall have the right to terminate
this Lease by giving Tenant written notice thereof within sixty (60) days of the
date of receipt of said written advice, or commencement of said action or
proceeding, or taking conveyance, which termination shall take place as of the
first to occur of the last day of the calendar month next following the month in
which such notice is given or the date on which title to the Premises shall vest
in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant can
no longer reasonably conduct its business, Tenant shall have the privilege of
terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of the
Premises not so taken or conveyed, and the rent herein shall be apportioned as
of the date of such taking or conveyance so that thereafter the rent to be paid
by Tenant shall be in the ratio that the area of the portion of the Premises not
so taken or conveyed bears to the total area of the Premises prior to such
taking.
23. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the
Premises or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any further
liability upon any of the terms, covenants or conditions (express or implied)
herein contained in favor of Tenant, and in such event, insofar as such transfer
is concerned, Tenant agrees to look solely to the responsibility of the
successor in interest of such transferor in and to the Premises and this Lease.
This Lease shall not be affected by any such sale or conveyance, and Tenant
agrees to attorn to the successor in interest of such transferor. See Paragraph
48.
24. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale. Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
25. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten
(10) days prior written notice from Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if they, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or emcumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been paid in
advance.
27. CONSTRUCTION CHANGES It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes
shall affect this Lease or entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant. Landlord does not guarantee the
accuracy of any drawings supplied to Tenant and verification of the accuracy of
such drawings rests with Tenant.
28. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder of shall fail to perform any other term or covenant hereunder on
its part to be performed, and such failure shall continue for five (5) days
after written notice thereof by Landlord, Landlord, without waiving or releasing
Tenant from any obligation of Tenant hereunder, may, but shall not be obliged
to, make any such payment or perform any such other term or covenant on Tenant's
part to be performed. All sums so paid by Landlord and all necessary costs of
such performance by Landlord together with interest thereon at the rate of the
prime rate of interest per annum as quoted by the Bank of America from the date
of such payment on performance by Landlord, shall be paid (and Tenant covenants
to make such payment) to Landlord on demand by Landlord, and Landlord shall have
(in addition to any other right or remedy of Landlord) the same rights and
remedies in the event of nonpayment by Tenant or in the case of failure by
Tenant in the payment of rent hereunder.
29. ATTORNEYS' FEES
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease or
because of the breach of any provision of this Lease, or for any other relief
against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees,
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<PAGE>
incurred by the prevailing party therein shall be paid by the other party, which
obligation on the part of the other party shall be deemed to have accrued on the
date of the commencement of such action and shall be enforceable whether or not
the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its cost and expenses incurred in such suit, including a
reasonable attorney's fee.
30. WAIVER The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
31. NOTICES All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises of if sent by United Stated certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at PEERY/ARRILLAGA, 2560 Mission College
Blvd., Suite #101, Santa Clara, CA 95054.
Each notice, request, demand, advice or designation referred to in this
paragraph shall be deemed received on the date of the personal service or
receipt or refusal to accept receipt of the mailing thereof on the manner herein
provided, as the case may be.
32. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
33. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than (30) days after written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have heretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the
by-laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. If Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
36. LIMITATION OF LIABILITY In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(a) the sole and exclusive remedy shall be against Landlord's
interest in the Premises leased herein;
(b) no partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(c) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the partnership);
(d) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(e) no judgment will be taken against any partner of Landlord;
(f) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(g) no writ of execution will ever levied against the assets of any
partner of Landlord;
(h) these covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
37. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice to and at the
expense of Tenant. If Tenant is allowed to print or affix or in any way place a
sign in, on, or about the Premises, upon expiration or other sooner termination
of this Lease, Tenant at Tenant's sole cost and expense shall both remove such
sign and repair all damage in such manner as to restore all aspects of the
appearance of the Premises to the condition prior to the placement of said sign.
All approved signs and lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door partition or wall which may appear unsightly from
outside the Premises.
MISCELLANEOUS AND GENERAL PROVISIONS
A. Use of Building Name. Tenant shall not, without the written consent of
Landlord, use the name of the building for any purpose other than as the address
of the business conducted by Tenant in the Premises.
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<PAGE>
B. Choice of Law; Severability. This Lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provision of this Lease shall be invalid, unenforceable or
ineffective for any reason whatsoever, all other provisions hereof shall be and
remain in full force and effect.
C. Definition of Terms. The term "Premises" includes the space leased
hereby and any improvements now or hereafter installed therein or attached
thereto. The term "Landlord" or any pronoun used in place thereof includes the
plural as well as the singular and the successors and assigns of Landlord. The
term "Tenant" or any pronoun used in place thereof includes the plural as well
as the singular and individuals, firms, associations, partnerships and
corporations, and their and each of their respective heirs, executors,
administrators, successors and permitted assigns, according to the context
hereof, and the provisions of this Lease shall inure to the benefit of and bind
such heirs, executors, administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words used in
any gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph headings of
this Lease are for convenience of reference only and shall have no effect upon
the construction or interpretation of any provision hereof.
D. Time of Essence. Time is of the essence of this Lease and of each and
all of its provisions.
E. Quitclaim. At the expiration or earlier termination of this Lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days
after written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in the
State of California, to remove the cloud or encumbrance created by this Lease
from the real property of which Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This Instrument along
with any exhibits and attachments hereto constitutes the entire agreement
between Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
agree hereby that all prior or contemporaneous oral agreements between and among
themselves and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
G. Recording. Neither Landlord nor Tenant shall record this Lease or a
short form memorandum hereof without the consent of the other.
H. Amendments for Financing. Tenant further agrees to execute any
amendments required by a lender to enable Landlord to obtain financing, so long
as Tenant's rights hereunder are not substantially affected.
I. Additional Paragraphs. Paragraphs 39 through 54 are added
------------ ----------
hereto and are included as a part of this lease.
J. Clauses, Plats and Riders. Clauses, plats and riders, if any, signed by
Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof.
K. Diminution of Light, Air or View. Tenant covenants and agrees that no
diminution or shutting off light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect his
Lease, entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
ARRILLAGA FAMILY TRUST SOMNUS MEDICAL TECHNOLOGIES, INC.
a Delaware corporation
By /s/ John Arrillaga
--------------------------------------- By_________________________________
John Arrillaga, Trustee
Date: 2/12/97
------------------------------------ Title______________________________
RICHARD T. PEERY SEPARATE PROPERTY TRUST
Type or Print Name_________________
By /s/ Richard T. Peery
--------------------------------------- Date:______________________________
Richard T. Peery, Trustee
Date: 2/19/97
------------------------------------
Pages 8 of 8
<PAGE>
Paragraphs 39 through 54 to Lease Agreement dated February 4, 1997, By and
Between the Arrillaga Family Trust and the Richard T. Peery Separate Property
Trust, as Landlord, and Somnus Medical Technologies, Inc., a Delaware
corporation, as Tenant for 20,000+ Square Feet of Space Located at 285 N. Wolfe
-
Road, Sunnyvale, California.
39. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate
----------
sum of TWO MILLION ONE HUNDRED EIGHTEEN THOUSAND NINETY SIX AND 77/100 DOLLARS
($2,118,096.77), shall be payable as follows:
On March 15, 1997, the sum of EIGHTEEN THOUSAND NINETY SIX AND 77/100
DOLLARS ($18,096.77) shall be due, representing the rental for the period March
15, 1997 through March31, 1997.
On April 1, 1997, the sum of THIRTY THREE THOUSAND AND NO/100 DOLLARS
($33,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including March 1, 1998.
On April 1, 1998, the sum of THIRTY FOUR THOUSAND AND NO/1O0 DOLLARS
($34,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including March 1, 1999.
On April 1, 1999, the sum of THIRTY FIVE THOUSAND AND NO/1OO DOLLARS
($35,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including March 1, 2000.
On April 1, 2000, the sum of THIRTY SIX THOUSAND AND NO/100 DOLLARS
($36,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including March 1, 2001.
On April 1, 2001, the sum of THIRTY SEVEN THOUSAND AND NO/100 DOLLARS
($37,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including March 1, 2002; or until the entire aggregate
sum of TWO MILLION ONE HUNDRED EIGHTEEN THOUSAND NINETY SIX AND 77/100 DOLLARS
($2,118,096.77) has been paid.
40. "AS-IS" BASIS: Subject only to Paragraphs 51 ("Maintenance of the
-------------
Premises") and 53 ("Punch List") and to Landlord making the improvements shown
on Exhibit B to be attached hereto, it is hereby agreed that the Premises leased
---------
hereunder is leased strictly on an "as-is" basis and in its present condition,
and in the configuration as shown on Exhibit B to be attached hereto, and by
---------
reference made a part hereof. Except as noted herein, it is specifically agreed
between the parties that after Landlord makes the interior improvements as shown
on Exhibit B, Landlord shall not be required to make, nor be responsible for any
---------
cost, in connection with any repair, restoration, and/or improvement to the
Premises in order for this Lease to commence, or thereafter, throughout the Term
of this Lease. Notwithstanding anything to the contrary within this Lease,
Landlord makes no warranty or representation of any kind or nature whatsoever as
to the condition or repair of the Premises, nor as to the use or occupancy which
may be made thereof.
41. CONSENT: Whenever the consent of one party to the other is required
-------
hereunder, such consent shall not be unreasonably withheld.
42. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
--------------------
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
43. ASSESSMENT CREDITS: The demised property herein may be subject to a
------------------
special assessment levied by the City of Sunnyvale as part of an Improvement
District. As a part of said special assessment proceedings (if any), additional
bonds were or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds which will be credited for
the benefit of said assessment district. To the extent surpluses are created in
said district through unused contingency
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<PAGE>
funds, interest earnings or reserve funds, such surpluses shall be deemed the
property of Landlord. Notwithstanding that such surpluses may be credited on
assessments otherwise due against the Leased Premises, Tenant shall pay to
Landlord, as additional rent if, and at the time of any such credit of
surpluses, an amount equal to all such surpluses so credited. For example: if
(i) the property is subject to an annual assessment of $1,000.00, and (ii) a
surplus of $200.00 is credited towards the current year's assessment which
reduces the assessment amount shown on the property tax bill from $1,000.00 to
$800.00, Tenant shall, upon receipt of notice from Landlord, pay to Landlord
said $200.00 credit as Additional Rent.
44. ASSIGNMENT AND SUBLETTING (CONTINUED): Any and all sublease agreement(s)
-------------------------------------
between Tenant and any and all subtenant(s) (which agreements must be consented
to by Landlord, pursuant to the requirements of this Lease) shall contain the
following language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master Lease
termination date, then this Sublease (if then still in effect) shall terminate
concurrently with the termination of the Master Lease. Subtenant expressly
acknowledges and agrees that (1) the voluntary termination of the Master Lease
by Landlord and Tenant and the resulting termination of this Sublease shall not
give Subtenant any right or power to make any legal or equitable claim against
Landlord, including without limitation any claim for interference with contract
or interference with prospective economic advantage, and (2) Subtenant hereby
waives any and all rights it may have under law or at equity against Landlord to
challenge such an early termination of the Sublease, and unconditionally
releases and relieves Landlord, and its officers, directors, employees and
agents, from any and all claims, demands, and/or causes of action whatsoever
(collectively, "Claims"), whether such matters are known or unknown, latent or
apparent, suspected or unsuspected, foreseeable or unforeseeable, which
Subtenant may have arising out of or in connection with any such early
termination of this Sublease. Subtenant knowingly and intentionally waives any
and all protection which is or may be given by Section 1542 of the California
Civil Code which provides as follows: "A general release does not extend to
claims which the creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have materially
affected his settlement with debtor.
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of and
agreement to this early termination provision, (b) Subtenant's acknowledgment
that, in determining the net benefits to be derived by Subtenant under the terms
of this Sublease, Subtenant has anticipated the potential for early termination,
and (c) Subtenant's agreement to the general waiver and release of Claims above.
Initials: _____________ Initials: "
------------
Subtenant Tenant
45. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
-------------------
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises, which
includes the entire parcel of land on which the Premises are located as shown in
Green on EXHIBIT A attached hereto (hereinafter collectively referred to as the
---------
"Property"):
A. As used herein, the term "Hazardous Materials" shall mean any material,
waste, chemical, mixture or byproduct which is or hereafter is defined, listed
or designated under Environmental Laws (defined below) as a pollutant, or as a
contaminant, or as a toxic or hazardous substance, waste or material, or any
other unwholesome, hazardous, toxic, biohazardous, or radioactive material,
waste, chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental
Laws" shall mean any applicable Federal, State of California or local government
law (including common law), statute, regulation, rule, ordinance, permit,
license, order, requirement, agreement, or approval, or any determination,
judgment, directive, or order of any executive or judicial authority at any
level of Federal, State of California or local government (whether now existing
or subsequently adopted or promulgated) relating to pollution or the protection
of the environment, ecology, natural resources, or public health and safety.
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<PAGE>
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage, disposal,
treatment, transportation, release, discharge, or emission of any Hazardous
Materials on, in, beneath, to, from, at or about the Property, in connection
with Tenant's use of the Property, or by Tenant or by any of Tenant's agents,
employees, contractors, vendors, invitees, visitors or its future subtenants or
assignees. Tenant agrees that any and all Tenant's Hazardous Materials
Activities shall be conducted in strict, full compliance with applicable
Environmental Laws at Tenant's expense, and shall not result in any
contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with prompt written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous Materials
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense: (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation or to require any such
installation); (ii) provide Landlord with a written inventory of such Hazardous
Materials, including an update of same each year upon the anniversary date of
the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each
Anniversary Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether Tenant is in compliance with all applicable
Environmental Laws with respect to Tenant's Hazardous Materials Activities.
Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous Materials
which come to be located at the Property in connection with Tenant's Hazardous
Materials Activities, and (ii) fully comply with and complete all facility
closure requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x) properly
restoring and repairing the Property to the extent damaged by such closure
activities, and (y) obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written concurrence that
closure has been completed in compliance with applicable Environmental Laws.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
such closure activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Except as may be required of Tenant by applicable
Environmental Laws, Tenant shall not perform any sampling, testing, or drilling
to identify the presence of any Hazardous Materials at the Property, without
Landlord's prior written consent which may be withheld in Landlord's discretion.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
sampling, testing or drilling performed pursuant to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the
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<PAGE>
Commencement Date of the Lease; or (iii) the breach of any obligation of Tenant
under this Paragraph 45 (collectively, "Tenant's Environmental
Indemnification"). Tenant's Environmental Indemnification shall include but is
not limited to the obligation to promptly and fully reimburse Landlord for
losses in or reductions to rental income, and diminution in fair market value of
the Property. Tenant's Environmental Indemnification shall further include but
is not limited to the obligation to diligently and properly implement to
completion, at Tenant's expense, any and all environmental investigation,
removal, remediation, monitoring, reporting, closure activities, or other
environmental response action (collectively, "Response Actions"). Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any Response
Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
45.
46. ALTERATIONS AND TRADE FIXTURES: The provisions of this Paragraph 46 shall
------------------------------
modify Paragraphs 5 ("Acceptance and Surrender of Premises") and 6 ("Alterations
and Additions"):
A. As used herein, the Term "Alteration" shall mean any alteration,
addition or improvement made by Tenant to the Premises during the Term of the
Lease, but shall not include Tenant's trade fixtures so long as such trade
fixtures are not installed in such a manner that they have become an integral
part of the building.
B. Notwithstanding the foregoing, Tenant shall have the right to
reconfigure the non-floor-to-ceiling partitions without Landlord's prior
consent, which have been installed by Tenant and paid for by Tenant.
Notwithstanding the above, Tenant may not remove or reconfigure the floor-to-
ceiling ultrawall partitions without receiving Landlord's prior written consent.
C. At all times during the Lease Term: (i) Tenant shall maintain and keep
updated "as-built" plans for all alterations constructed by Tenant, and (ii)
Tenant shall provide to Landlord 1/8 inch scale sepias of such "as-built" plans
as such Alterations are made.
D. At the time Tenant requests the consent of Landlord to approve the
installation of an Alteration requiring the consent of Landlord, Tenant shall
seek from Landlord a written statement of whether or not Landlord will require
Tenant to remove such Alteration and restore all or part of the Premises as
required by Landlord in accordance with this Paragraph and Paragraph 5 at the
expiration or earlier termination of the Term of the Lease. If Tenant does not
obtain from Landlord a statement in writing that Landlord will not require such
Alteration to be removed, then at the expiration or sooner termination of the
Term of this Lease, it is agreed that Tenant may be required by Landlord to
remove all or part of such Alterations, and return the Premises to the condition
and configuration existing prior to the installation of such Alterations as
provided for in Paragraph 5 above. Alterations, for which Landlord has given its
written consent to Tenant providing that such Alteration shall not be removed,
shall not be removed by Tenant at the expiration or earlier termination of the
Term of the Lease.
47. LANDLORD'S RIGHT TO ENTER: Notwithstanding the provisions of Paragraph 18
-------------------------
("Entry by Landlord"), (i) except in the event of an emergency, Landlord shall
give Tenant twenty-four (24) hours notice prior to entering the Premises, agrees
to comply with any reasonable safety and/or security regulations imposed by
Tenant with respect to such entry, and shall only enter the Premises when
accompanied by Tenant or its agent (so long as Tenant makes itself reasonably
available for this purpose), and (ii) Landlord may install "for lease" signs
relating to the Premises only during the last 180 days of the Lease term.
Landlord agrees to use its reasonable, good faith efforts such that any entry by
Landlord, and Landlord's agents, employees, contractors and invitees shall be
performed in a manner with as minimal interference as possible with Tenant's
business at the Premises. Subject to the foregoing, Tenant agrees to cooperate
with Landlord and Landlord's agents, employees and contractors so that
responsibilities of Landlord under the Lease can be fulfilled in a reasonable
manner during normal business hours so that no extraordinary costs are incurred
by Landlord.
48. TRANSFER BY LANDLORD: The provisions of Paragraph 23 ("Sale or Conveyance
--------------------
by Landlord") of the Lease to the contrary notwithstanding, Landlord shall not
be relieved of its obligations under the Lease which may accrue after the date
of a sale or other transfer unless and until (i) the transferee agrees to assume
and be bound by the terms of this Lease and to perform all obligations of the
Landlord under the Lease which may accrue after the date of such transfer, and
(ii) Landlord transfers the balance (if any), as of the date of said transfer of
the Security Deposit to its
Page 12
<PAGE>
successor in interest (transferee).
49. REAL PROPERTY TAXES: Paragraph 9 ("Taxes") is modified by the following:
-------------------
A. If any assessments for public improvements are levied against the
Premises, Landlord may elect either to pay the assessment in full or to allow
the assessment to go to bond. If Landlord pays the assessment in full, Tenant
shall pay to Landlord or any assignee or purchaser of the Premises, each time
payment of Real Property Taxes is made, a sum equal to that which would have
been payable (as both principal and interest) had Landlord allowed the
assessment to go to bond.
B. In addition to and notwithstanding anything to the contrary contained
in Paragraph 9, it is agreed that Tenant shall have the right to contest the
real estate taxes and/or assessments levied against the Premises leased
hereunder with the specific understanding and agreement that any such contest
shall in no way and in no event relieve Tenant from Tenant's responsibility to
pay all real estate taxes and assessments as they appear on the tax bill as they
become due. In the event any such contest by Tenant is successful, the
proportionate portion of the refund relating to real estate taxes and
assessments actually paid by Tenant shall be refunded to Tenant, net of any
expenses Landlord incurs or is responsible for related to said refund. It is
further understood and agreed that Landlord shall in no event be responsible for
any liability or for any cost or expense incurred by Tenant by reason of
Tenant's contest of such taxes and/or assessments.
50. SUBORDINATION AND MORTGAGES: Paragraph 17 ("Subordination and Mortgages")
---------------------------
is modified to provide that this Lease shall not be subordinate to a mortgage or
deed of trust unless the Lender holding such mortgage or deed of trust enters
into a written subordination, non-disturbance and attornment agreement in which
the Lender agrees that notwithstanding any subordination of this Lease to such
Lender's mortgage or deed of trust, (i) such Lender shall recognize all of
Tenant's rights under this Lease, and (ii) in the event of a foreclosure, this
Lease shall not be terminated so long as Tenant is not in default of its
obligations under this Lease, but shall continue in effect and Tenant and such
Lender (or any party acquiring the Premises through such foreclosure) shall each
be bound to perform the respective obligations of Tenant and Landlord with
respect to the Premises arising after such foreclosure.
51. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in
---------------------------
Paragraph 7, Landlord shall repair damage to the structural shell, foundation,
and roof structure (but not the interior improvements, roof membrane, or
glazing) of the building leased hereunder at Landlord's cost, Landlord shall
amortize the cost of the repair over the useful life of said repair, and Tenant
shall be responsible for paying to Landlord one hundred percent (100%) of
Tenant's pro rata share of the amortization of said cost over the full Term
remaining in the Lease at the time the repair is made; provided Tenant has not
caused such damage, in which event Tenant shall be responsible for 100 percent
of any such costs for repair or damage so caused by the Tenant. For Example: In
the event (i) the roof purlin is repaired at a cost of $10,000, and (ii) said
repair purlin has a useful life of twenty years, and (iii) Tenant has one year
remaining in its Lease Term at the time said repair was made, Tenant would be
charged its prorata share of $500 ($10,000 /20 years x 1 year = $500) as
Additional Rent, in which case said amount would be due within thirty (30) days
of notice from Landlord. Tenant hereby waives all rights under, and benefits of
subsection I of Section 1932 and Sections 1941 and 1942 of the California Civil
Code and under any similar law, statute or ordinance now or hereafter in effect
Notwithstanding the foregoing, a crack in the foundation, or exterior walls,
that does not endanger the structural integrity of the building, or which is not
life-threatening, shall not be considered material, nor shall Landlord be
responsible for repair of same.
In the event the Term of the Lease is extended, pursuant to Paragraph 54
("Option to Extend Lease for Five (5) Years") or by any other agreement between
Landlord and Tenant, Tenant's pro rata share of the earlier repair cost shall be
increased to include the additional amount payable to Landlord due to the
Extended Term of the Lease. For Example: In the event: (i) the roof purlin was
repaired as illustrated above; and (ii) Tenant exercises its Option to Extend
this Lease for an additional five year period, Tenant would be liable for an
additional payment to Landlord of $2,500 as Additional Rent. Said payment would
be due in full immediately upon Tenant's exercise of its Option to Extend.
52. AMORTIZATION OF CAPITAL IMPROVEMENTS: Notwithstanding anything to the
------------------------------------
contrary in Paragraph 7 ("Tenant Maintenance") and provided Tenant has not
caused damage which resulted in the capital improvements being made, Landlord
shall amortize the cost of capital
Page 13
<PAGE>
improvements as an operating expense over the life of said improvement and
Tenant shall pay its pro rata share of said capital improvement cost based on
the remaining Term (and/or extended Term, if any) of the Lease. For example: (i)
Landlord incurs capital improvement costs of $10,000, and (ii) said capital
improvement's life is ten (10) years, and (iii) there are four months remaining
on the Term of this Lease; Tenant shall pay upon receipt of invoice from
Landlord its pro rata share of its prorata share of $333.33 ($10,000/120 months
x 4 months).
In the event the Term of the Lease is extended, pursuant to Paragraph 54
("Option to Extend Lease for Five (5) Years") or by any other agreement between
Landlord and Tenant, Tenant's pro rata share of the capital improvement cost
shall be increased to include the additional amount payable to Landlord due to
the Extended Term of the Lease. For Example: In the event: (i) Landlord incurred
capital improvement costs illustrated above; and (ii) Tenant remains in the
Premises on a hold over basis, Tenant would be liable for an additional monthly
payment to Landlord of Tenant's prorata share of $83.33 as Additional Rent. Said
payment would be due monthly on the first day of each month during the hold over
period.
53. PUNCH LIST: In addition to and notwithstanding anything to the contrary
----------
in Paragraphs 7 ("Tenant Maintenance") and 40 ("'As-Is' Basis") of this Lease,
Tenant shall have thirty (30) days after the Commencement Date to provide
Landlord with a written "punch list" pertaining to defects in the Building and
in the interior improvements constructed by Landlord for Tenant. As soon as
reasonably possible thereafter, Landlord, or one of Landlord's representatives
(if so approved by Landlord), and Tenant shall conduct a joint walk-through of
the Premises (if Landlord so requires), and inspect such Tenant Improvements,
using their best efforts to agree on the incomplete or defective construction
related to the Tenant Improvements installed by Landlord. After such inspection
has been completed, Landlord shall prepare, and both parties shall sign, a list
of all "punch list" items which the parties reasonably agree are to be corrected
by Landlord (but which shall exclude any damage or defects caused by Tenant, its
employees, agents or parties Tenant has contracted with to work on the
Premises). Landlord shall have thirty (30) days thereafter (or longer if
necessary, provided Landlord is diligently pursuing the completion of the same)
to complete, at Landlord's expense, the "punch list" items without the
Commencement Date of the Lease and Tenant's obligation to pay Rental thereunder
being affected. Notwithstanding the foregoing, a crack in the foundation, or
exterior walls that does not endanger the structural integrity of the
building, or which is not life-threatening, shall not be considered
material, nor shall Landlord be responsible for repair of same. This Paragraph
shall be of no force and effect if Tenant shall fail to give any such notice to
Landlord within thirty (30) days after the Commencement Date of this Lease.
54. OPTION TO EXTEND LEASE FOR FIVE (5) YEARS: Landlord hereby grants to
-----------------------------------------
Tenant an Option to Extend this Lease Agreement for an additional five (5) year
period (the "Extended Term") upon the following terms and conditions;
A. Tenant shall give Landlord written notice of Tenant's exercise of this
Option to Extend not later than twelve (12) months prior to the scheduled Lease
Termination Date, which Termination Date is currently projected to be March 31,
2002, in which event the Lease shall be considered extended for an additional
five (5) years subject to the Basic Rental set forth below and with: (i) the
terms and conditions subject to amendment by Landlord (Landlord, in its sole and
absolute discretion, may, but is not required to, incorporate its current Lease
provisions that are standard in Landlord's leases as of the date of Tenant's
exercise of its Option to Extend) and (ii) this Paragraph 54 deleted. In the
event that Tenant fails to timely exercise Tenant's option as set forth herein
in writing, Tenant shall have no further Option to Extend this Lease, and this
Lease shall continue in full force and effect for the full remaining term
hereof, absent this Paragraph 54.
B. The following summarizes the Basic Monthly Rental and the related per
square foot charge by period under the Lease Agreement that would be applied
to the Extended Term:
<TABLE>
<CAPTION>
Monthly
Period PSF Rate Basic Rental
<S> <C> <C>
04/01/02 - 03/31/03 $1.90 $38,000.00
04/01/03 - 03/31/04 $1.95 $39,000.00
04/01/04 - 03/31/05 $2.00 $40,000.00
04/01/05 - 03/31/06 $2.05 $41,000.00
04/01/06 - 03/31/07 $2.10 $42,000.00
</TABLE>
PAGE 14
<PAGE>
C. The option rights of Tenant under this Paragraph 54, and the Extended
Term thereunder, are granted for Tenant's personal benefit and may not be
assigned or transferred by Tenant, either voluntarily or by operation of law, in
any manner whatsoever. In the event that Landlord consents to a sublease or
assignment under Paragraph 16 ("Assignment and Subletting"), the option granted
herein and any Extended Term thereunder shall be void and of no force and
effect, whether or not Tenant shall have purported to exercise such option prior
to such assignment or sublease.
D. Notwithstanding anything to the contrary in this Paragraph 54, this
Option to Extend is automatically forfeited by Tenant (without notice from
Landlord) in the event Tenant is, at any time during the Term of this Lease, in
default of said Lease and if Tenant does not completely cure said default within
five days for a monetary default and thirty days for a non-monetary default. In
the event said Option to Extend is forfeited as stated herein, Tenant shall have
no further Option to Extend this Lease.
E. INCREASED SECURITY DEPOSIT: In the event the term of Tenant's Lease
--------------------------
is extended pursuant to this Paragraph 54, Tenant's Security Deposit shall be
increased to equal twice the Basic Rental due for the last month of the extended
term (i.e. $42,000.00 per month X 2 = $84,000.00).
Page 15
<PAGE>
[SITE PLAN APPEARS HERE]
EXHIBIT A TO LEASE AGREEMENT DATED
- ---------
FEBRUARY 4, 1997 BETWEEN THE ARRILLAGA
FAMILY TRUST AND RICHARD T. PEERY
SEPARATE PROPERTY TRUST, AS LANDLORD,
AND SOMNUS MEDICAL TECHNOLOGIES, INC.,
AS TENANT
ARQUES 1
16
<PAGE>
[SITE PLAN APPEARS HERE]
EXHIBIT B TO LEASE AGREEMENT DATED
- ---------
FEBRUARY 4, 1997 BETWEEN THE ARRILLAGA
FAMILY TRUST AND RICHARD T. PEERY
SEPARATE PROPERTY TRUST, AS LANDLORD,
AND SOMNUS MEDICAL TECHNOLOGIES, INC.,
AS TENANT
ARQUES 1
17
<PAGE>
Exhibit 10.8
________________________________________________________________________________
SOMNUS MEDICAL TECHNOLOGIES, INC.
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. DEFINITIONS AND CONSTRUCTION................................................................... 1
1.1 Definitions.............................................................................. 1
1.2 Accounting Terms......................................................................... 5
2. LOAN AND TERMS OF PAYMENT...................................................................... 6
2.1 Advances................................................................................. 6
2.2 Interest Rates, Payments, and Calculations............................................... 7
2.3 Crediting Payments....................................................................... 7
2.4 Fees..................................................................................... 7
2.5 Additional Costs......................................................................... 7
2.6 Term..................................................................................... 8
3. CONDITIONS OF LOANS............................................................................ 8
3.1 Conditions Precedent to Initial Advance.................................................. 8
3.2 Additional Conditions Precedent to Initial Advance under Equipment Line C................ 9
3.3 Conditions Precedent to all Advances..................................................... 9
4. CREATION OF SECURITY INTEREST.................................................................. 9
4.1 Grant of Security Interest............................................................... 9
4.2 Delivery of Additional Documentation Required............................................ 9
4.3 Right to Inspect......................................................................... 9
5. REPRESENTATIONS AND WARRANTIES................................................................. 9
5.1 Due Organization and Qualification....................................................... 9
5.2 Due Authorization; No Conflict........................................................... 9
5.3 No Prior Encumbrances.................................................................... 10
5.4 Merchantable Inventory................................................................... 10
5.5 Name; Location of Chief Executive Office................................................. 10
5.6 Litigation............................................................................... 10
5.7 No Material Adverse Change in Financial Statements....................................... 10
5.8 Solvency................................................................................. 10
5.9 Regulatory Compliance.................................................................... 10
5.10 Environmental Condition.................................................................. 10
5.11 Taxes.................................................................................... 11
5.12 Subsidiaries............................................................................. 11
5.13 Government Consents...................................................................... 11
5.14 Full Disclosure.......................................................................... 11
6. AFFIRMATIVE COVENANTS.......................................................................... 11
6.1 Good Standing............................................................................ 11
6.2 Government Compliance.................................................................... 11
6.3 Financial Statements, Reports, Certificates.............................................. 11
6.4 Inventory; Returns....................................................................... 12
6.5 Taxes.................................................................................... 12
6.6 Insurance................................................................................ 12
6.7 Principal Depository..................................................................... 12
6.8 Minimum Liquidity or Debt Service Coverage............................................... 12
6.9 Debt-Net Worth Ratio..................................................................... 12
6.10 Tangible Net Worth....................................................................... 13
6.11 Profitability............................................................................ 13
6.12 Registration of Intellectual Property Rights............................................. 13
6.13 Further Assurances....................................................................... 13
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
7. NEGATIVE COVENANTS............................................................................. 13
7.1 Dispositions............................................................................. 13
7.2 Change in Business....................................................................... 13
7.3 Mergers or Acquisitions.................................................................. 13
7.4 Indebtedness............................................................................. 13
7.5 Encumbrances............................................................................. 14
7.6 Distributions............................................................................ 14
7.7 Advances to Employees or Shareholders.................................................... 14
7.8 investments.............................................................................. 14
7.9 Transactions with Affiliates............................................................. 14
7.10 Subordinated Debt........................................................................ 14
7.11 Inventory................................................................................ 14
7.12 Compliance............................................................................... 14
8. EVENTS OF DEFAULT.............................................................................. 14
8.1 Payment Default.......................................................................... 14
8.2 Covenant Default......................................................................... 14
8.3 Material Adverse Change.................................................................. 15
8.4 Attachment............................................................................... 15
8.5 Insolvency............................................................................... 15
8.6 Other Agreements......................................................................... 15
8.7 Subordinated Debt........................................................................ 15
8.8 Judgments................................................................................ 15
8.9 Misrepresentations....................................................................... 15
9. BANK'S RIGHTS AND REMEDIES..................................................................... 16
9.1 Rights and Remedies...................................................................... 16
9.2 Power of Attorney........................................................................ 16
9.3 Accounts Collection...................................................................... 17
9.4 Bank Expenses............................................................................ 17
9.5 Bank's Liability for Collateral.......................................................... 17
9.6 Remedies Cumulative...................................................................... 17
9.7 Demand; Protest.......................................................................... 17
10. NOTICES........................................................................................ 17
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..................................................... 18
12. GENERAL PROVISIONS............................................................................. 18
12.1 Successors and Assigns................................................................... 18
12.2 Indemnification.......................................................................... 18
12.3 Time of Essence.......................................................................... 18
12.4 Severability of Provisions............................................................... 19
12.5 Amendments in Writing, Integration....................................................... 19
12.6 Counterparts............................................................................. 19
12.7 Survival................................................................................. 19
12.8 Confidentiality.......................................................................... 19
</TABLE>
ii
<PAGE>
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Agreement") is
entered into as of April 2, 1997, by and between Venture Lending, a division of
Cupertino National Bank & Trust ("Bank") and Somnus Medical Technologies, Inc.
("Borrower").
RECITALS
--------
Bank and Borrower are parties to that certain Loan and Security Agreement
dated as of October 1, 1996, as may have been amended. Borrower wishes to
continue to obtain credit from time to time from Bank, and Bank desires to
extend credit to Borrower. This Agreement supersedes Loan and Security Agreement
dated October 1, 1996, and sets forth the terms on which Bank will advance
credit to Borrower, and Borrower will repay the amounts owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means an Advance under the Section
2.1(i), (ii), and (iii) hereto.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
---------
hereto.
1
<PAGE>
"Committed Equipment Line A" means One Million Five Hundred
Thousand Dollars ($1,500,000).
"Committed Equipment Line B" means Five Hundred Thousand Dollars
($500,000).
"Committed Equipment Line C" means One Million Dollars
($1,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Debt Service Coverage" means, as of the last day of each fiscal
quarter, the ratio of (a) an amount equal to the sum of (i) Borrower's
consolidated net income for such quarter, plus (ii) depreciation, amortization
of intangible assets and other non-cash charges made to Borrower's consolidated
income in such quarter, minus (iii) any reductions to asset valuation reserves
during such quarter, to (b) an amount equal to the current portion of long term
debt.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"Equipment Line A" means the facility under which Borrower may
request the Advance pursuant to Section 2.1(i).
"Equipment Line B" means the facility under which Borrower may
request the Advance pursuant to Section 2.1 (ii).
2
<PAGE>
"Equipment Line C" means the facility under which Borrower may
request the Advance pursuant to Section 2.1 (iii).
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Equipment Line A Maturity Date" means October 1, 2000.
"Equipment Line B Maturity Date" means June 12, 2000.
"Equipment Line C Maturity Date" means April 2, 2001.
3
<PAGE>
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of tide, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness to leasing companies incurred for the
acquisition by lease of new capital equipment provided that such Indebtedness is
secured solely by such new equipment.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
--------
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that any such Lien described in (i) or (ii) above is
--------
confined solely to the property so
4
<PAGE>
acquired (and improvements thereon, and the proceeds of such equipment) and that
no such Lien shall be permitted in any Equipment financed with Advances under
this Agreement;
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) and (c) above, provided that any extension, renewal or replacement
--------
Lien shall be limited to the property encumbered by the existing Lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase.
"Person" means any individual, sole proprietorship, partnership
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently published in The Wall Street Journal, as the "prime rate," whether or
-----------------------
not such published rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, (I) the sum of any amounts attributable
-----
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
---
"Term Loan" means the collective loans described in Section
2.1(i), (ii), and (iii) hereto.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.
1.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
5
<PAGE>
2. LOANS AND TERMS OF PAYMENT
--------------------------
2.1 Advances.
--------
(i) Equipment Line A. Subject to and upon the terms and
----------------
conditions of this Agreement, Bank agrees to make Advances to Borrower at any
time from the date hereof through April 1, 1997 and October 1, 1997 (the
"Equipment Availability Date"), Borrower may from time to time request Advances
from Bank in an aggregate principal amount not to exceed the Committed Equipment
Line A. There shall be not more than two (2) Term Loan conversion dates during
the term of this Agreement. The Advances shall be used only to purchase new
Equipment approved from time to time by Bank and shall not exceed 100% of the
invoice amount of such new Equipment, excluding shipping installation expense,
freight discounts, warranty charges and taxes; provided that the Advances for
software shall not exceed Two Hundred Fifty Thousand Dollars ($250,000). The
Advance or Advances that are outstanding on the Equipment Availability Date
under Committed Equipment Line A will be payable in thirty-six (36) equal
monthly installments of principal, plus accrued interest, beginning on the first
day of the month following the Equipment Availability Date.
(ii) Equipment Line B. Subject to and upon the terms and
----------------
conditions of this Agreement, Bank agrees to convert in an aggregate principal
amount not to exceed the Committed Equipment Line B to a Term Loan on April 12,
1997 (the "Equipment Availability Date"). The Advances shall have been used only
to purchase new Equipment approved from time to time by Bank. The Advance or
Advances that are outstanding on the Equipment Availability Date under Committed
Equipment Line B will be payable in thirty-six (36) equal monthly installments
of principal, plus accrued interest, beginning on the twelfth day of the month
following the Equipment Availability Date.
(iii) Equipment Line C. Subject to and upon the terms and
----------------
conditions of this Agreement, Bank agrees to make Advances to Borrower at any
time from the date hereof through October 2, 1997 (the "Equipment Availability
Date"), Borrower may from time to time request Advances from Bank in an
aggregate principal amount not to exceed the Committed Equipment Line C. There
shall be not more than one (1) Term Loan conversion date during the term of this
Agreement. The Advances shall be used only to purchase new Equipment approved
from time to time by Bank and shall not exceed 100% of the invoice amount of
such new Equipment, excluding shipping installation expense, freight discounts,
warranty charges and taxes; provided that the Advances for software shall not
exceed Two Hundred Thousand Dollars ($200,000). The Advance or Advances that are
outstanding on the Equipment Availability Date under Committed Equipment Line C
will be payable in forty-two (42) equal monthly installments of principal, plus
accrued interest, beginning on the second day of the month following the
Equipment Availability Date.
(a) Interest shall accrue from the date of each
Advance at the rate specified in Section 2.2(a), and shall be payable monthly
for each month through the month in which the Equipment Availability Date falls.
(b) When Borrower desires to obtain an Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time one (1) Business
Day before the day on which the Advance is to be made. Such notice shall be in
substantially the form of Exhibit B. The notice shall be signed by a Responsible
---------
Officer and include a copy of the invoice for the Equipment to be financed.
Borrower's obligations to repay the Advances shall be evidenced, in addition to
this Agreement, by promissory notes made to the order of the Bank, in
substantially the form of Exhibits C-1, C-2 and C-3, respectively.
-------------------------
6
<PAGE>
2.2 Interest Rates Payments. and Calculations.
-----------------------------------------
(a) Interest Rate. Except as set forth in Section 2.2(b), any
-------------
Advances on Equipment Line A shall bear interest, on the average Daily Balance,
at a rate equal to one and a half (1.5) percentage points above the Prime Rate.
Except as set forth in Section 2.2(b), any Advances on Equipment Line B shall
bear interest, on the average Daily Balance, at a rate equal to two (2)
percentage points above the Prime Rate. Except as set forth in Section 2.2(b),
any Advances on Equipment Line C shall bear interest, on the average Daily
Balance, at a rate equal to one (1) percentage points above the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from and
------------
after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on the
--------
first calendar day of each month during the term hereof. Bank shall, at its
option, charge such interest, all Bank Expenses, and all Periodic Payments
against any of Borrower's deposit accounts or against the Committed Line, in
which case those amounts shall thereafter accrue interest at the rate then
applicable hereunder. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from
-----------
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.3 Crediting Payments. Prior to the occurrence of an Event of
------------------
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.4 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee. A Facility Fee equal to Ten Thousand Dollars
-------------
($10,000), which fee shall be due on the Closing Date and shall be fully earned
and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's customary
----------------------------------------
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date hereof, all Bank Expenses
-------------
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.5 Additional Costs. In case any change in any law, regulation,
----------------
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged
7
<PAGE>
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.6 Term. This Agreement shall become effective on the Closing Date
----
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the
right to terminate its obligation to make Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Advance. The obligation of Bank
---------------------------------------
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a collateral assignment and patent mortgage;
(d) warrant agreements to purchase stock;
(e) financing statements (Forms UCC-1);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due specified in
Section 2.4 hereof; and
(h) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
8
<PAGE>
3.2 Additional Condition Precedent to Initial Advance under
-------------------------------------------------------
Committed Equipment Line C. The obligation of Bank to make the initial Advance,
- --------------------------
is further subject to the following condition:
(a) closing of the Medtronic, Inc. investment in Borrower.
3.3 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1;
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.3(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to Bank
--------------------------
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower shall
---------------------------------------------
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees,
----------------
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
----------------------------------
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2 Due Authorization: No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which
9
<PAGE>
Borrower is bound.Borrower is not in default under any agreement to which it is
a party or by which it is bound, which default could have a Material Adverse
Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible tide to
---------------------
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Merchantable Inventory. All Inventory is in all material
----------------------
respects of good and marketable quality, free from all material defects.
5.5 Name: Location of Chief Executive Office. Except as disclosed in
----------------------------------------
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.6 Litigation. Except as set forth in the Schedule, there are no
----------
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.7 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.8 Solvency. Borrower is solvent and able to pay its debts
--------
(including trade debts) as they mature.
5.9 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.10 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.
10
<PAGE>
5.11 Taxes. Borrower and each Subsidiary has filed or caused to be
-----
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.12 Subsidiaries. Borrower does not own any stock, partnership
------------
interest or other equity securities of any Person, except for Permitted
Investments.
5.13 Government Consents. Borrower and each Subsidiary has obtained
-------------------
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.14 Full Disclosure. No representation, warranty or other statement
---------------
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements. Reports. Certificates. Borrower shall
-------------------------------------------
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month, a company prepared consolidated balance sheet
and income statement covering Borrower's consolidated operations during such
period, certified by a Responsible Officer; (b) as soon as available, but in any
event within one hundred and twenty (120) days after the end of Borrower's
fiscal year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days upon becoming available,
copies of all statements, reports and notices sent or made available generally
by Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K and 10-Q filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand
Dollars ($100,000) or more; and (e) such budgets, sales projections, operating
plans or other financial information as Bank may reasonably request from time to
time.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto.
---------
11
<PAGE>
6.4 Inventory: Returns. Borrower shall keep all Inventory in good
------------------
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
-----
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank.
6.8 Minimum Liquidity: Debt Service Coverage. Borrower shall
----------------------------------------
maintain, as of the last day of each calendar month, a minimum Liquidity of one
and one-half (1.5) times the amount of outstanding Advances. "Liquidity" means
the sum of (i) cash and cash-equivalents plus (ii) fifty (50) percent of
accounts receivable plus (iii) availability under the Medtronic Line of Credit
granted to Borrower divided (iv) the aggregate outstanding Advances as of the
measurement date. Notwithstanding the foregoing, after Borrower achieves a Debt
Service Coverage of at least 1.50 to 1.00 for two consecutive quarters measured
on a three months rolling basis, Borrower shall not be subject to the Liquidity
requirement, and shall be required only to maintain a minimum Debt Service
Coverage ratio of a least 1.50 to 1.00, measured as of the last day of each
fiscal quarter. "Debt Service Coverage" means the ratio of (a) earnings after
tax plus interest and depreciation, to (b) the current portion of long term
debt.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the last
--------------------
day of each calendar month, a ratio of Total Liabilities less Subordinated Debt
to Tangible Net Worth plus Subordinated Debt of not more than 1.50 to 1.0.
12
<PAGE>
6.10 Tangible Net Worth. Borrower shall maintain, as of the last day
------------------
of each calendar month, a Tangible Net Worth of not less than Three Million
Dollars ($3,000,000).
6.11 Profitability. Borrower shall not incur losses in each fiscal
-------------
quarter that exceed the losses as set forth in the chart below:
<TABLE>
<CAPTION>
Quarter Ending Date Maximum Quarterly Loss
------------------ ----------------------
<S> <C>
March 31, 1997 $2,000,000
June 30, 1997 $2,300,000
September 30, 1997 $2,300,000
December 31, 1997 $2,000,000
</TABLE>
6.12 Registration of Intellectual Property Rights. Borrower shall
--------------------------------------------
register or cause to be registered (to the extent not already registered) with
the United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those intellectual property rights listed on Exhibits A,
B and C to the Collateral Assignment, Patent Mortgage and Security Agreement
delivered to Bank by Borrower in connection with this Agreement within thirty
(30) days of the date of this Agreement. Borrower shall register or cause to be
registered with the United States Patent and Trademark Office or the United
States Copyright Office, as applicable, those additional intellectual property
rights developed or acquired by Borrower from time to time in connection with
any product prior to the sale or licensing of such product to any third party,
including without limitation revisions or additions to the intellectual property
rights listed on such Exhibits A, B and C. Borrower shall execute and deliver
such additional instruments and documents from time to time as Bank shall
reasonably request to perfect Bank's security interest in such additional
intellectual property rights.
6.13 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
------------
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of its
------------------
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
-----------------------
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
13
<PAGE>
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
-------------
or payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Advances to Employees or Shareholders. Advance by way of
-------------------------------------
payment, credit or other manner, any unearned funds to employees or shareholders
of Borrower.
7.8 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.9 Transactions with Affiliates. Directly or indirectly enter into
----------------------------
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.10 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.11 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.12 Compliance. Become an "investment company" controlled by an
----------
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the principal of, or
---------------
any interest on, any Advances when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
----------------
under Sections 6.7, 6.8, 6.9, 6.10, 6.11, or 6.12 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition,
14
<PAGE>
covenant or agreement that can be cured, has failed to cure such default within
ten (10) days after Borrower receives notice thereof or any officer of Borrower
becomes aware thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and such default
is likely to be cured within a reasonable time, then Borrower shall have an
additional reasonable period (which shall not in any case exceed thirty (30)
days) to attempt to cure such default, and within such reasonable time period
the failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure period);
8.3 Material Adverse Change. If there occurs a material adverse
-----------------------
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
----------
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Advances will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
----------------
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
------------------
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
15
<PAGE>
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
-----------------
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or
16
<PAGE>
notify account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this
-------------------
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
-------------
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Revolving Facility as Bank deems necessary to protect Bank from the exposure
created by such failure; or (c) obtain and maintain insurance policies of the
type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
---------------
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail,
17
<PAGE>
postage prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: Somnus Medical Technologies, Inc.
995 Benecia Avenue
Sunnyvale, CA 94086
Attn: Stuart Edwards
FAX: (408) 773-9137
If to Bank: Venture Lending
Three Palo Alto Square, Suite 150
Palo Alto, California 94306
Attn: Daniel Pistone
FAX: (415) 843-6969
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-------- -------
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
18
<PAGE>
12.4 Severability of Provisions. Each provision of this Agreement
--------------------------
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing; Integration. This Agreement cannot be
----------------------------------
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
--------
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information Bank
---------------
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SOMNUS MEDICAL TECHNOLOGIES, INC
By: /s/ Stuart D. Edwards
-------------------------------------
Title: President & CEO
----------------------------------
By: ____________________________________
Title: _________________________________
VENTURE LENDING, a division of
CUPERTINO NATIONAL BANK & TRUST
By: /s/ Dan Pistone
------------------------------------
Title: AVP
----------------------------------
20
<PAGE>
DEBTOR: Somnus Medical Technologies, Inc.
SECURED PARTY: Cupertino National Bank & Trust
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Debtor in
and to the following:
All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located, but excluding equipment
currently subject to lease agreements prohibiting further encumbrance while such
equipment is under lease;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Debtor's custody or possession or in transit
and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and Debtor's
books relating to any of the foregoing;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
disks, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Debtor
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Debtor, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Debtor and Debtor's books relating
to any of the foregoing;
All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Debtor's books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
T0: VENTURE LENDING DATE: ____________________________
FAX#: (415) 843-6969 TIME: ____________________________
________________________________________________________________________________
FROM: SOMNUS MEDICAL TECHNOLOGIES, INC.
--------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: /s/ Stuart D. Edwards
-----------------------------------------------------------
PHONE NUMBER:___________________________________________________________________
FROM ACCOUNT # ___________________ TO ACCOUNT # _______________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_______________________________________
PRINCIPAL PAYMENT (ONLY) $_______________________________________
INTEREST PAYMENT (ONLY) $_______________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_______________________________________
OTHER INSTRUCTIONS: ____________________________________________________________
________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
________________________________________________________________________________
________________________________________________________________________________
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
____________________________________ ____________________________________
Authorized Requester Phone #
____________________________________ ____________________________________
Received By (Bank) Phone #
______________________________________
Authorized Signature (Bank)
________________________________________________________________________________
<PAGE>
EXHIBIT C-1
Term Note
---------
$1,500,000 Palo Alto, California
October 1, 1996
FOR VALUE RECEIVED, the undersigned, Somnus Medical Technologies, Inc. (the
"Borrower"), promises to pay to the order of Venture Lending, a division of
Cupertino National Bank & Trust ("Bank"), at such place as the holder hereof may
designate, in lawful money of the United States of America, the aggregate unpaid
principal amount of all advances ("Advances") made by Bank to Borrower under the
Loan Agreement (as defined below), not to exceed the Committed Equipment Line A.
Interest shall accrue from the date of each Advance at a rate equal to the Prime
Rate plus one and a half (1.5) percentage points, and shall be payable monthly
for each month through the earlier of (i) the date on which Borrower elects
convert the Advances into a Term Loan or (ii) the next to occur of April 1, 1997
or October 1, 1997 (the "Term Conversion Date"). The Advance or Advances that
are outstanding on each Term Conversion Date that have not already been
converted into Term Loans will be payable in thirty-six (36) equal monthly
installments of principal, plus accrued interest, beginning on the first day of
the month following the applicable Term Conversion Date. There shall be not more
than two (2) Term Conversion Dates during the term of this Agreement. In the
absence of a specific determination by Bank with respect thereto, all payments
shall be applied in the following order: (a) then due and payable fees and
expenses; (b) then due and payable interest payments and mandatory prepayments;
and (c) then due and payable principal payments and optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any errors in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
Borrower promises to pay Bank all costs and expenses of collection of this
Note and to pay all reasonable attorneys' fees incurred in such collection or in
any suit or action to collect this Note or in any appeal thereof. Borrower
waives presentment, demand, protest, notice of protest, notice of dishonor,
notice of nonpayment, and any and all other notices and demands in connection
with the delivery, acceptance, performance, default or enforcement of this Note.
No delay by Bank in exercising any power or right hereunder shall operate as a
waiver of any power or right. Time is of the essence as to all obligations
hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern the
rights and obligations of Borrower with respect to all obligations hereunder.
BORROWER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
This Note shall be deemed to be made under, and shall be construed in accordance
with and governed by, the laws of the State of California, excluding conflicts
of laws principles.
SOMNUS MEDICAL TECHNOLOGIES, INC.
By: /s/ Stuart D. Edwards
---------------------------------------
Title: President & CEO
------------------------------------
<PAGE>
EXHIBIT C-2
Term Note
---------
$500,000 Palo Alto, California
April 2, 1997
FOR VALUE RECEIVED, the undersigned, Somnus Medical Technologies, Inc. (the
"Borrower"), promises to pay to the order of Venture Lending, a division of
Cupertino National Bank & Trust ("Bank"), at such place as the holder hereof may
designate, in lawful money of the United States of America, the aggregate unpaid
principal amount of all advances ("Advances") made by Bank to Borrower under the
Loan Agreement (as defined below), not to exceed the Committed Equipment Line B.
Interest shall accrue from the date of each Advance at a rate equal to the Prime
Rate plus two (2) percentage points, and shall be payable monthly for each month
through the earlier of (i) the date on which Borrower elects to convert the
Advances into a Term Loan or (ii) April 12, 1996 (the "Term Conversion Date").
The Advance or Advances that are outstanding on each Term Conversion Date that
have not already been converted into Term Loans will be payable in thirty-six
(36) equal monthly installments of principal, plus accrued interest, beginning
on the twelfth day of the month following the applicable Term Conversion Date.
In the absence of a specific determination by Bank with respect thereto, all
payments shall be applied in the following order: (a) then due and payable fees
and expenses; (b) then due and payable interest payments and mandatory
prepayments; and (c) then due and payable principal payments and optional
prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any errors in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
Borrower promises to pay Bank all costs and expenses of collection of this
Note and to pay all reasonable attorneys' fees incurred in such collection or in
any suit or action to collect this Note or in any appeal thereof. Borrower
waives presentment, demand, protest, notice of protest, notice of dishonor,
notice of nonpayment, and any and all other notices and demands in connection
with the delivery, acceptance, performance, default or enforcement of this Note.
No delay by Bank in exercising any power or right hereunder shall operate as a
waiver of any power or right. Time is of the essence as to all obligations
hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern the
rights and obligations of Borrower with respect to all obligations hereunder.
BORROWER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
This Note shall be deemed to be made under, and shall be construed in accordance
with and governed by, the laws of the State of California, excluding conflicts
of laws principles.
SOMNUS MEDICAL TECHNOLOGIES, INC.
By: /s/ Stuart D. Edwards
---------------------------------------
Title: President & CEO
------------------------------------
<PAGE>
EXHIBIT C-3
Term Note
---------
$1,000,000 Palo Alto, California
April 2, 1997
FOR VALUE RECEIVED, the undersigned, Somnus Medical Technologies, Inc. (the
"Borrower"), promises to pay to order of Venture Lending, a division of
Cupertino National Bank & Trust ("Bank"), at such place as the holder hereof may
designate, in lawful money of the United States of America, the aggregate unpaid
principal amount of all advances ("Advances") made by Bank to Borrower under the
Loan Agreement (as defined below), not to exceed the Committed Equipment Line C.
Interest shall accrue from the date of each Advance at a rate equal to the Prime
Rate plus one (1) percentage points, and shall be payable monthly for each month
through the earlier of (i) the date on which Borrower elects to convert the
Advances into a Term Loan or (ii) October 2, 1997 (the "Term Conversion Date").
The Advance or Advances that are outstanding on each Term Loan Conversion Date
that have not already been converted into Term Loans will be payable in forty-
two (42) equal monthly installments of principal, plus accrued interest,
beginning on the twelfth day of the month following the applicable Term
Conversion Date. In the absence of a specific determination by Bank with respect
thereto, all payments shall be applied in the following order: (a) then due and
payable fees and expenses; (b) then due and payable interest payments and
mandatory prepayments; and (c) then due and payable principal payments and
optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any errors in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
Borrower promises to pay Bank all costs and expenses of collection of this
Note and to pay all reasonable attorneys' fees incurred in such collection or in
any suit or action to collect this Note or in any appeal thereof. Borrower
waives presentment, demand, protest, notice of protest, notice of dishonor,
notice of nonpayment, and any and all other notices and demands in connection
with the delivery, acceptance, performance, default or enforcement of this Note.
No delay by Bank in exercising any power or right hereunder shall operate as a
waiver of any power or right. Time is of the essence as to all obligations
hereunder.
This Note is issued pursuant to the Loan Agreement dated April 2, 1997,
which shall govern the rights and obligations of Borrower with respect to all
obligations hereunder.
BORROWER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
This Note shall be deemed to be made under, and shall be construed in accordance
with and governed by, the laws of the State of California, excluding conflicts
of laws principles.
SOMNUS MEDICAL TECHNOLOGIES, INC.
By: /s/ Stuart D. Edwards
---------------------------------------
Title: President & CEO
------------------------------------
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: VENTURE LENDING
FROM: SOMNUS MEDICAL TECHNOLOGIES, INC.
The undersigned authorized officer of Somnus Medical Technologies, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending _________________ with all
required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and are consistently applied from one period to the next except as
explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under "Complies"
column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Annual CPA Audited FYE within 120 days Yes No
<CAPTION>
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Tangible Net Worth $3,000,000 $_________ Yes No
---------
Maximum Debt/Tangible Net Worth 1.50:1.00 _____:1.00 Yes No
----
Minimum Cash Coverage * $_________ Yes No
Maintain on a Quarterly Basis:
Debt Service Coverage * $_________ Yes No
Profitability * $_________ Yes No
</TABLE>
* See attached Schedule
__________________________________
Comments Regarding Exceptions: See Attached. BANK USE ONLY
Received by: ___________________
Sincerely, AUTHORIZED SIGNER
/s/ Stuart D. Edwards Date: __________________________
- ---------------------------------------
SIGNATURE
Verified: ______________________
_______________________________________ AUTHORIZED SIGNER
TITLE
Date: __________________________
_______________________________________
DATE Compliance Status: Yes No
__________________________________
<PAGE>
SCHEDULE D
COMPLIANCE CERTIFICATE
MINIMUM LIQUIDITY: DEBT SERVICE COVERAGE:
- ----------------------------------------
Borrower shall maintain, as of the last day of each calendar month, a
minimum Liquidity of one and one-half (1.5) times the amount of outstanding
Equipment Advances. "Liquidity" means the sum of (i) cash and cash-
equivalents plus (ii) fifty (50) percent of accounts receivable plus (iii)
availability under the Medtronic Line of Credit granted to Borrower divided
(iv) the aggregate outstanding Equipment Advances as of the measurement
date. Notwithstanding the foregoing, after Borrower achieves a Debt Service
Coverage of at least 1.50 to 1.00 for two consecutive quarters measured on
a three months rolling basis, Borrower shall not be subject to the
Liquidity requirement, and shall be required only to maintain a minimum
Debt Service Coverage ratio of a least 1.50 to 1.00, measured as of the
last day of each fiscal quarter. "Debt Service Coverage" means the ratio of
(a) earnings after tax plus interest and depreciation, to (b) the current
portion of long term debt.
PROFITABILITY:
- --------------
<TABLE>
<CAPTION>
QUARTER ENDING DATE MAXIMUM QUARTERLY LOSS
------------------- ----------------------
<S> <C>
March 31, 1997 $2,000,000
June 30, 1997 $2,300,000
September 30, 1997 $2,300,000
December 31, 1997 $2,000,000
</TABLE>
<PAGE>
EXHIBIT 10.9
July 20, 1997
Mr. Robert E. McNamara
56 Politzer Drive
Menlo Park, CA 94025
Dear Bob:
On behalf of Somnus Medical Technologies, Inc. (the "Company") I am pleased to
offer you the position of Chief Financial Officer, Executive Vice President.
You will have complete responsibility for financial, administration and legal
for Somnus Medical Technologies, Inc. The purpose of this letter is to set
forth the terms of this offer.
We are offering you the following:
1. Your position will be as a regular full-time employee. You will begin
on a part time basis effective August 15, 1997 and become full time
effective October 1, 1997. Your position is classified as exempt.
You will be a regular full-time employee entitled to paid holidays and
benefits, pursuant to Somnus' policies and procedures.
2. Your bi-weekly salary is $6,730.77. This equates to a monthly salary
of $14,583.33. Your salary will be payable in accordance with the
Company's standard payroll policies (subject to normal required
withholding). You will be entitled to five (5) weeks paid vacation
(pro rated during 1997) which may be taken or accrued pursuant to our
vacation policy.
3. You will receive a bonus of up to $10,000.00 per year, providing
agreed to objectives and performance have been met for the year.
4. You will receive a car allowance of $300.00 per month, payable in
accordance with the Company's standard payroll policies.
5. Somnus has major medical, vision and dental insurance, as well as life
insurance for all regular full-time employees. The details of this
program will be available upon first day orientation with Personnel.
These benefits as well as all other Company compensation and benefits
programs are subject to change from time to time as deemed appropriate
and necessary by the Company.
6. Subject to approval by the Board of Directors, you will receive
an option to purchase 225,000 shares of Common Stock at fair market
value, currently at $3.00 per share, which shall vest at the rate of
1/4 shares after you have completed six (6) months of employment and
1/42 of the remaining shares each month of completed employment
thereafter (so that if you remain in our employ, at the end of four
years your option would be fully vested.)
7. In the event of termination within the first two (2) years, without
cause, you are entitled to (i) twelve (12) months compensation and
continuation in full of your insurance benefits and (ii) continuation
of vesting of your options for twelve (12) months following
termination and (iii) continuation of bonus plan for twelve (12)
months following termination. In the event of a Constructive
Termination your termination shall be treated as a termination of
employment without cause. For purposes of this agreement, a
Constructive Termination shall mean a material reduction of salary or
benefits or a material change in responsibilities.
<PAGE>
Mr. Robert McNamara
Offer Letter
Page Two
8. In the event of acquisition, merger or sale of the majority of the
Company's assets, you are entitled to (i) six (6) months compensation
and continuation in full of your insurance benefits, (ii) continuation
of bonus plan for six (6) months, and (iii) all your options in Somnus
Medical Technologies, Inc. will vest fully and immediately.
9. You will be required to sign a confidentiality and assignment of
proprietary inventions contract. Further, by accepting this offer, you
agree that you will not bring with you to Somnus, or use in any way
during your employment at Somnus, any confidential information, trade
secrets, or proprietary materials or processes of any former employer,
company or individual for whom you have performed services. You
further confirm that by accepting this offer you will not breach any
contract or agreement to which you are a party.
10. All employment at Somnus is at-will as provided by California law.
This means that the employment relationship may be terminated by
either party at any time with or without notice or cause.
11. You will agree to follow the Company's strict policy that employees
must not disclose any information regarding salary, bonuses, or stock
purchase or option allocation to other employees, either directly or
indirectly.
This offer expires August 15, 1997 if not accepted.
12. In compliance with the Federal Immigration Reform and Control Act, you
must present to Somnus Medical Technologies, Inc. the required
documents (passport, or certified birth certificate, or drivers
license and social security card, or Green Card) on your first day of
employment. You will also be asked to verify and attest, on a form
provided by the US Department of Justice, that you are authorized to
work in the United States. It is extremely important that you comply
with these requirements. If you fail to comply, we will not be able to
allow you to work and our offer of employment may be withdrawn.
Acceptance of this offer may be acknowledged by signing below and returning this
document to me.
Again, let me indicate how pleased we all are to extend this offer, and how much
we look forward to working together.
Sincerely,
/s/ Stuart D. Edwards
Stuart D. Edwards
President & CEO of Somnus Medical Technologies, Inc.
Signature /s/ Robert E. McNamara
---------------------------
Robert E. McNamara
Date: 8/14/97
---------------------------
Start Date: August 15, 1997
<PAGE>
EXHIBIT 10.10
[LETTERHEAD OF SOMNUS APPEARS HERE]
8 May 1996
Eric N. Doelling
995 Benecia Avenue
Sunnyvale, CA 94086
Dear Eric;
On behalf of Somnus Medical Technologies, Inc. (the "Company"), I am pleased to
offer you the position of Executive Vice President and Chief Operating Officer
as well as a member of the Board of Directors reporting to Stuart D. Edwards,
President and Chief Executive Officer. This position will be responsible
for: Quality Assurance and Regulatory, Engineering, Manufacturing, Materials,
Planning and Control, Finance, Administration and Human Resources.
The terms of your relationship with the Company will be as indicated
herein.
1. You will be hired as a permanent employee with a start date to be no later
than July 1, 1996. You may continue to support Cardiac Pathways as a
consultant from your office at Somnus for a brief period to assist them
with their transition, as long as this activity does not interfere with or
interrupt your effectiveness at Somnus as determined by Stuart E. Edwards.
2. You will be paid a base salary of $67.05 per hour. Your salary will be
payable in accordance with the Company's standard payroll policies (subject
to normal required withholding). You will be entitled to 2 weeks paid
vacation for the first year and three weeks starting the second year, pro
rated during 1996.
3. The Company is in the process of obtaining major medical insurance. This
program will be available within 120 days and will include major Medical
and Dental insurance. Vision and Long Term Disability insurance will
become available at a later date.
4. Subject to the approval of the Board of Directors of the Company, you will
be granted an option to purchase 300,000 shares of Common Stock at an
exercise price of $.10 per share, which shall be exercised at the rate of
1/4 of the shares one year after commencement of employment and 1/48 of the
shares each month thereafter of completed employment (so that at the end of
four years, your option will be fully vested). Terms to be reviewed in six
months of start date. 12.5% of
<PAGE>
Eric Doelling [LETTERHEAD OF SOMNUS APPEARS HERE]
Page 2
options will vest upon acceptance of offer. All of your options will vest
fully and immediately following an acquisition, merger or sale of the
majority of the companies assets.
5. You will be required to sign the Company's standard Employee Agreement
prior to the initiation of your employment. In addition, you shall abide by
the company's strict policy that prohibits any new employee from using or
bringing with him or her from any previous employer any confidential
information, trade secrets, or proprietary materials or processes of such
former employer.
6. You will agree to follow the Company's strict policy that employees must
not disclose any information regarding salary, bonuses, or stock purchase
or option allocations to other employees, either directly or indirectly.
7. You will be an employee-at-will, where employment may be terminated at any
time by either party, with or without notice, and with or without cause.
8. In the event of termination, Mr. Doelling is entitled to (i) 6 months
compensation and insurance benefits and (ii) vesting of the options which
would otherwise have vested in the year of termination. In the event of a
Constructive Termination your termination shall be treated as a termination
of employment. For purposes of this agreement, a Constructive Termination
shall mean a material reduction of salary or benefits or a material change
in responsibilities.
9. A $300 per month car allowance will be furnished by Somnus Medical
Technologies, Inc.
10. This agreement constitutes the entire agreement between the parties and
supersedes all other agreements or understandings.
11. The Company agrees to pay relocation of $10,000 at the closing of 2nd Round
of company financing.
This offer expires May 24, 1996 if not accepted
<PAGE>
Eric Doelling [LETTERHEAD OF SOMNUS APPEARS HERE]
Page 3
Again, let me indicate how pleased we all are to extend this offer, and how much
we look forward to working together.
Acceptance of this offer may be acknowledged by signing below and returning this
document to me.
Sincerely,
/s/ Stuart D. Edwards
Stuart D. Edwards
President/CEO of Somnus Medical Technologies, Inc.
Signature: /s/ Eric N. Doelling
-----------------------
Eric N. Doelling
Date: 5/15/96
----------------------------
<PAGE>
August 26, 1996
Stuart D. Edwards
President and CEO
Somnus Medical Technologies, Inc.
995 Benecia Avenue
Sunnyvale, CA 94086
Eric N. Doelling
995 Benecia Avenue
Sunnyvale, CA 94086
Dear Eric:
In connection with the employment agreement between you and Somnus signed
by you on May 15, 1996 and amended on August 16, 1996, you have been granted an
option to purchase 300,000 shares of Common Stock of Somnus at $0.10 per share,
one eighth of which vested on May 15, 1996, one eighth of which will vest on
June 1, 1997 and the remainder of which will vest at the rate of one
forty-eighth of the total on the first day of each full month thereafter,
provided that future vesting is contingent on continued status as an employee.
All options will vest fully and immediately if Somnus undergoes a merger,
acquisition or sale of a majority of company assets upon the closing of such
transaction. In addition, upon termination or constructive termination, as those
terms are used in the employment agreement, you are entitled to vesting of the
options which would otherwise have vested in the year following termination.
Please sign below to acknowledge that the above described equity
compensation is all of the equity compensation you are entitled to receive as an
employee under any and all agreements between you and Somnus. A signature below
also indicates that you hereby amend any and all such agreements, including
without limitation Section 4 of the above referenced employment agreement, to
contain the above described terms and change any terms that do not agree with
the above described terms.
Sincerely,
Stuart D. Edwards
President and CEO
ACKNOWLEDGED AND AMENDED
/s/ Eric Doelling Date: 8/28/96
- ---------------------------------- ----------------------------
Eric Doelling
/s/ Stuart Edwards
<PAGE>
EXHIBIT 10.11
1 June 1996
Stephen M. Rudy
1631 Cowper Street
Palo Alto, CA 94301
Dear Stephen:
On behalf of Somnus Medical Technologies, Inc. (the "Company"), I am pleased to
offer you the position of Senior Vice President, reporting to Stuart Edwards.
The terms of your relationship with the Company will be as indicated
herein:
1. You will become a regular full-time employee. As such, you will have
responsibilities as determined by the Company. Your start date is June 1,
1996.
2. You will be paid a base salary of $140,000 per year. Your salary will be
payable in accordance with the Company's standard payroll policies
(subject to normal withholding.) You will be entitled to 2 weeks paid
vacation per year, pro rated during 1996.
3. You will receive a car allowance of $3,600 per year, payable in accordance
with the Company's standard payroll policies.
4. The Company is in the process of obtaining major Medical insurance. The
program will be available within 120 days and will include major Medical
and Dental insurance. Vision and Long Term Disability insurance will
become available at a later date.
5. You will be granted an option dated June 1, 1996 to purchase 200,000
shares of Common Stock at an exercise price of $0.10 per share, which
shall vest as follows:
. 50,000 shares will vest fully as of June 1, 1996
. 1/48 of the remaining 150,000 shares each month of completed
employment, such that all 200,000 shares shall be vested at the end
of four years.
6. You will be reviewed after six months. If you accomplish the mutually
agreed milestones of your position, you will be awarded an additional
option to
<PAGE>
Stephen M. Rudy
28 May 1996
Page 2
purchase 100,000 shares of Common Stock at an exercise price of $0.10 per
share. This stock will vest over four years at a rate of 1/48th of the
total each month.
7. You will be required to sign the Company's standard Employee Agreement. In
addition, you will abide by the Company's strict policy that prohibits any
new employee from using or bringing with him from any previous employer
any confidential information, trade secrets, or proprietary materials or
processes of such former employer.
8. You will agree to follow the Company's strict policy that employees must
not disclose any information regarding salary, bonuses, or stock purchase
or option allocations to other employees, either directly or indirectly.
9. You will be an employee-at-will, where employment may be terminated at any
time by either party, with or without notice, and with or without cause.
10. You have informed Somnus that you will be on previously arranged trips
during the week of June 17th and August 19th to 26th, 1996. You have
agreed that no agreed-upon milestones will be compromised by these
absences, and that you will not be paid for this time away.
11. This agreement constitutes the entire agreement between the parties and
supersedes all other agreements or understandings.
Acceptance of this offer can be acknowledged by signing below and returning this
document to me.
Sincerely,
/S/ Stuart D. Edwards
Stuart D. Edwards
President, CEO, and Chairman of the Board
Signature: /S/ Stephen M. Rudy
-------------------------------
Stephen M. Rudy
Date: 6/1/96
--------------------------
<PAGE>
[LETTERHEAD OF SOMNUS MEDICAL TECHNOLOGIES, INC. APPEARS HERE]
14 October 1996
Stephen M. Rudy
1631 Cowper Street
Palo Alto, CA 94301
Dear Stephen:
This letter is an addendum to your offer of employment dated 1 June 1996. The
following provisions are added:
1. All of your options in Somnus Medical Technologies will vest fully and
immediately following an acquisition, merger or sale of the majority of
the company's assets.
2. In the event of termination you will vest all options which would
otherwise have vested in the year of termination. In the event of a
Constructive Termination your termination will be treated as a
termination of employment. For purposes of this agreement, a
Constructive Termination shall mean a material reduction of salary or
benefits or a material change in responsibilities.
Best Regards:
/s/ Stuart D. Edwards
Stuart D. Edwards
President and CEO
<PAGE>
EXHIBIT 10.12
SOMNUS MEDICAL TECHNOLOGIES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of Somnus Medical Technologies, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Somnus Medical Technologies, Inc. and any
-------
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
------------
overtime and commissions, but exclusive of payments for shift premium, incentive
compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
<PAGE>
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board, or;
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before October 31,
1999. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this 1997 Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first
-2-
<PAGE>
Purchase Period of any Offering Period shall commence on the Enrollment Date and
end with the next Exercise Date.
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
October 31, 1999. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
-3-
<PAGE>
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or, may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any,
-4-
<PAGE>
which arise upon the exercise of the option or the disposition of the Common
Stock. At any time, the Company may, but shall not be obligated to, withhold
from the participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefits attributable to sale or
early disposition of Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 2,500
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19) on the Enrollment Date, and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall
expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier with drawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall
-5-
<PAGE>
be made for such Offering Period. If a participant withdraws from an Offering
Period, payroll deductions shall not resume at the beginning of the succeeding
Offering Period unless the participant delivers to the Company a new
subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 50,000 shares, plus an
annual increase to be added on the date of each annual meeting of the
stockholders equal to the lesser of (i) 175,000 shares, (ii) 1% of the
outstanding shares on such date or (iii) a lesser amount determined by the
Board, subject to adjustment upon changes in capitalization of the Company as
provided in Section 19 hereof. If, on a given Exercise Date, the number of
shares with respect to which options are to be exercised exceeds the number of
shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
-6-
<PAGE>
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
-7-
<PAGE>
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least
fifteen (15) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least fifteen (15) business days prior to the New Exercise Date, that the
Exercise Date for the participant's option has been changed to the New Exercise
Date and that the participant's option shall be exercised automatically on the
New Exercise Date, unless prior to such date the participant has withdrawn from
the Offering Period as provided in Section 10 hereof.
-8-
<PAGE>
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law, regulation or stock exchange rule), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
-9-
<PAGE>
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
SOMNUS MEDICAL TECHNOLOGIES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ______________________________ hereby elects to participate in the Somnus
Medical Technologies, Inc. 1997 Employee Stock Purchase Plan (the "Employee
Stock Purchase Plan") and subscribes to purchase shares of the Company's
Common Stock in accordance with this Subscription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (up to 10%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only): __________
______________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing
---------------------------------------------
<PAGE>
within 30 days after the date of any disposition of my shares and I will
------------------------------------------------------------------------
make adequate provision for Federal, state or other tax withholding
-------------------------------------------------------------------
obligations, if any, which arise upon the disposition of the Common Stock.
-------------------------------------------------------------------------
The Company may, but will not be obligated to, withhold from my
compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year and 1-year holding periods, I understand
that I will be treated for federal income tax purposes as having received
income only at the time of such disposition, and that such income will be
taxed as ordinary income only to the extent of an amount equal to the
lesser of (1) the excess of the fair market value of the shares at the time
of such disposition over the purchase price which I paid for the shares, or
(2) 15% of the fair market value of the shares on the first day of the
Offering Period. The remainder of the gain, if any, recognized on such
disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)______________________________________________
(First) (Middle) (Last)
__________________________________ ________________________________________
Relationship
_________________________________________
(Address)
-2-
<PAGE>
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:________________ ________________________________________
Signature of Employee
________________________________________
Spouse's Signature (If beneficiary other
than spouse)
-3-
<PAGE>
EXHIBIT B
---------
SOMNUS MEDICAL TECHNOLOGIES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Somnus Medical
Technologies, Inc. 1997 Employee Stock Purchase Plan which began on
____________, 19____ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The under signed understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to partici
pate in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:__________________________
<PAGE>
EXHIBIT 10.13
SOMNUS MEDICAL TECHNOLOGIES, INS.
1997 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Director Option Plan
--------------------
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) 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) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the common stock of the Company.
------------
(d) "Company" means Somnus Medical Technologies, Inc., a Delaware
-------
corporation.
(e) "Director" means a member of the Board.
--------
(f) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall
<PAGE>
be the mean between the high bid and low asked prices for the Common Stock for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Board 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
Board.
(i) "Inside Director" means a Director who is an Employee.
---------------
(j) "Option" means a stock option granted pursuant to the Plan.
------
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means a Director who holds an Option.
--------
(m) "Outside Director" means a Director who is not an Employee.
----------------
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1997 Director Option Plan.
----
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 350,000 Shares, plus an annual increase to be added on the
date of each annual meeting of the stockholders equal to (i) the Optioned Stock
underlying Options granted in the immediately preceding year, or (ii) a lesser
amount determined by the Board (collectively, the "Pool"). The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
-2-
<PAGE>
(a) Procedure for Grants. All grants of Options to Outside Directors
--------------------
under this Plan 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 20,000 Shares (the "Initial Option") on the date which such
person first becomes an Outside Director, whether through election by the
stockholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that a Director who is an Outside Director on the date of
adoption of this Plan shall not receive an Initial Option; provided, further,
that an Inside Director who ceases to be an Inside Director but who remains a
Director shall not receive an Initial Option.
(iii) Each Outside Director shall be automatically granted an
Option to purchase 5,000 Shares (a "Subsequent Option") on the date of the
Company's annual meeting of stockholders, provided he or she is then an Outside
Director and if, as of such date, he or she shall have served on the Board for
at least the preceding six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any exercise of an Option granted before the Company has
obtained stockholder approval of the Plan in accordance with Section 16 hereof
shall be conditioned upon obtaining such stockholder approval of the Plan in
accordance with Section 16 hereof.
(v) The terms of any Option granted hereunder shall be as
follows:
(A) the term of the Option shall be ten (10) years.
(B) the Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Sections 8
and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.
-3-
<PAGE>
(D) subject to Section 10 hereof, the Option shall become
exercisable as to 1/48th of the Shares subject to the Option on the last day of
each month, provided that the Optionee continues to serve as a Director on such
dates.
(vi) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or 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.
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 hereof.
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 the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) consideration received
by the Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (v) any combination of the foregoing methods of
payment.
8. 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 hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
-4-
<PAGE>
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 7 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
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 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. Subject to
----------------------------------------------
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or total and permanent disability (as
defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her
Option, but only within three (3) months following the date of such termination,
and only to the extent that the Optionee was entitled to exercise it on the date
of such termination (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of such termination, and to the extent that the Optionee does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status as a
----------------------
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months following the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option
on the date of termination, or if he or she does not exercise such Option (to
the extent otherwise so entitled) within the time specified herein, the Option
shall terminate.
(d) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to
-5-
<PAGE>
exercise such Option does not exercise such Option (to the extent otherwise so
entitled) within the time specified herein, the Option shall terminate.
9. Non-Transferability 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 and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares 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 covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." 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
subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the
Option or equivalent option shall continue to be exercisable as provided in
Section 4 hereof for so long as the Optionee serves as a Director or a director
of the Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor Corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to
Shares for which it would not otherwise be exercisable. Thereafter, the Option
or option shall remain exercisable in accordance with Sections 8(b) through (d)
above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that
-6-
<PAGE>
the Option shall be fully exercisable for a period of thirty (30) days from the
date of such notice, and upon the expiration of such period the Option shall
terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
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 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such
-7-
<PAGE>
Shares, if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned relevant provisions of law.
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.
14. 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.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
-8-
<PAGE>
EXHIBIT 10.14
LEASE AGREEMENT
RGL LEASING COMPANY
JULY 1, 1996
LESSEE: SOMNUS MEDICAL TECHNOLOGIES, INC.
---------------------------------------
ADDRESS: 995 BENICIA DRIVE
--------------------------------------
CITY & STATE: SUNNYVALE, CA. ZIP: 94086
------------------- -----
DESCRIPTION OF LEASED EQUIPMENT: (See attached Exhibit A)
EFFECTIVE DATE OF LEASE: July 1, 1996
NUMBER OF LEASE PAYMENTS: 48 (See attached Exhibit B)
AMOUNT OF MONTHLY RENTAL: $1,977.90 (See attached Exhibit B)
FIXED INTEREST RATE OF: 10.0%
PURCHASE OPTION PRICE: $7,798.50
LEASE AGREEMENT
RGL Leasing Company, as Lessor hereby leases to Lessee, and Lessee rents from
Lessor, the machinery , equipment and other personal property described above,
together with attachments and accessories, all hereinafter referred to as the
"equipment" upon the terms and conditions as set forth in this lease.
LEASE TERM: The lease term shall be for 48 months and shall begin on the
--
effective date of the lease specified above.
RENTAL PAYMENTS: Lessee agrees to pay as rental for use of the equipment the
rental payments specified above, with the first and last such rental payment
totaling $3,955.86 due on the effective date of the lease specified above. The
--------
remaining monthly payments shall be due on the 1st of each succeeding month.
---
All rent and other sums payable by Lessee to Lessor under the terms of this
lease shall be paid to the Lessor at its office or as the Lessor may hereafter
direct. Lessee agrees that Lessor may collect a late rental charge of each
rental payment which is in arrears not less than ten (10) days, said charge to
be in an amount equal to five percent (5%) of said rental payment, plus all
other collection agency fees and costs, or the maximum permitted under
applicable law, whichever is the lesser amount.
PURCHASE OPTION: If Lessee has complied with all other terms and conditions of
the lease, Lessee is given the option to purchase the equipment at the above
purchase option price at termination of the lease, 48 months after the effective
date. --
Undersigned agrees to all terms and conditions set forth above and acknowledges
receipt of a copy of said Lease. This Lease is not binding upon Lessor until
accepted by Lessor.
(Lessor) RGL LEASING CO. (Lessee) SOMNUS MEDICAL TECHNOLOGIES, INC.
---------------------- ---------------------------------
Accepted on JULY 19, 1996 Executed on JULY 19, 1996
------------------ -----------------------------
By: /s/ Ronald G. Lax By: /s/ Stuart D. Edwards
--------------------------- ---------------------------------
Title PRINCIPAL Title PRESIDENT & CEO
------------------------- -----------------------------------
<PAGE>
Somnus Medical Technologies
995 Benicia Drive Sunnyvale, CA 94086
Tel 408 773-9121 FAX 408 773-9137
-----------------------------------------------------------------------
To: Stuart D. Edwards
Subject: Prototype Facility Equipment
From: Ronald G. Lax
Date: May 23, 1996
-----------------------------------------------------------------------
The following is a list of the equipment we discussed for our tooling facility.
This would be available under the same terms as offered by Venture Leasing
Company but would not decrease the amount available under that credit line.
<TABLE>
<S> <C> <C>
1 ea Eltee Pulsatron EDM Model # EP30/RDP
S/N 1578, Machine tool section #TR20 S/N 1175 with Fehlman Swiss
Jig bore Type KS200 table S/N 20985291 with Digital readout 24,150
1 ea Chevalier FSG-618M 6x18 surface grinder S/N A3784056, ball bearing
table, manual feed with Walker Fineline #LPB electromagnetic chuck,
Walker Control # MMCV-1.5 Part # DXM9247, S/N 771-L 5,870
1 ea Deckel GK21 3D Pantograph Milling Machine S/N 10573 34,500
1 ea Rockwell Combination Belt/Disc Sander Model# 52-611 with base and 1,550
Heavy duty caster base
1 ea Rockwell Portable dust collector w/Baldor Drive # VL3503 Spec # 875
34-168-167
1 ea Torit Model 30 High Efficiency Dust Collector S/N IC 50966-2 2,480
1 ea Delta Unisaw 10" Precision Table Saw, 5 HP 3 Phase Cat# 334-806 1,885
1 ea Bulleri High Speed Contour Pin Router Model # 05 S/N 771-L 3,620
1 ea Thelco Model 29 Vacuum chamber oven 1,825
1 ea DuoSeal Laboratory Vacuum Pump with base and G.E. 1/2 HP Motor 1,230
Total.... 77,985
</TABLE>
<PAGE>
EXHIBIT B
SOMNUS MEDICAL TECHNOLOGIES, INC.
AMORTIZATION TABLE - RGL LEASE
July 1, 1996
[AMORTIZATION TABLE]
<PAGE>
EXHIBIT 11.1
SOMNUS MEDICAL TECHNOLOGIES, INC.
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
-----------------------------------------------------------
PERIOD FROM INCEPTION PERIOD FROM INCEPTION SIX MONTHS
(JANUARY 19, 1996) TO (JANUARY 19, 1996) TO ENDED
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
--------------------- --------------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss $ (3,097,117) $ (785,779) $ (4,546,909)
============ ========== ============
Weighted average common
shares outstanding 1,850,488 1,365,975 2,335,000
Common equivalent shares
from issuances of con-
vertible preferred
stock, warrants and
common stock during the
twelve month period
prior to the Company's
proposed initial public
offering 5,338,784 5,338,784 5,338,784
------------ ---------- ------------
Shares used in computing
historical net loss per
share 7,189,272 6,704,759 7,673,784
============ ========== ============
Net loss per share $ (0.43) $ (0.12) $ (0.59)
============ ========== ============
Shares used in computing
historical net loss per
share 7,189,272 6,704,759 7,673,784
============ ========== ============
Convertible preferred
stock issued more than
twelve months prior to
the proposed initial
public offering 1,262,293 740,427 1,784,160
------------ ---------- ------------
Shares used in computing
pro forma net loss pert
share 8,451,565 7,445,186 9,457,944
============ ========== ============
Pro forma net loss per
share $ (0.37) $ (0.11) (0.48)
============ ========== ============
</TABLE>
<PAGE>
EXHIBIT 21.1
SOMNUS MEDICAL TECHNOLOGIES, INC.
SUBSIDIARY OF THE COMPANY
Somnus Medical Technologies Pty. Limited
<PAGE>
EXHIBIT 24.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 7, 1997 (except for Note 8, as to which the date is September 4, 1997),
in the Registration Statement (Form S-1) and related Prospectus of Somnus
Medical Technologies, Inc. for the registration of shares of its common stock.
/s/ ERNST & YOUNG LLP
Palo Alto, California
September 11, 1997
