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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SOMNUS MEDICAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
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SOMNUS MEDICAL TECHNOLOGIES, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 20, 1998
----------------
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of SOMNUS
MEDICAL TECHNOLOGIES, INC., a Delaware corporation (the "Company"), will be
held on Friday, May 20, 1998, at 10:00 a.m., local time, at the Company's
principal executive offices at 285 North Wolfe Road, Sunnyvale, CA 94086 for
the following purposes (as more fully described in the Proxy Statement
accompanying this Notice):
1. To elect two Class I directors of the Company to serve for terms of
three years expiring upon the 2001 Annual Meeting of Stockholders or
until their successors are elected.
2. To approve an amendment to the Company's 1996 Stock Plan (the "Stock
Plan") to increase the number of shares of Common Stock reserved for
issuance thereunder by 500,000 shares to a new total of 3,850,000 shares
and to approve the material terms of the Stock Plan, including but not
limited to, share limitations for purposes of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
3. To ratify the appointment of Ernst & Young LLP as independent auditors
of the Company for the year ending December 31, 1998.
4. To transact such other business as may properly come before the meeting
or any postponement or adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 23, 1998, are
entitled to notice of and to vote at the Annual Meeting.
All stockholders are cordially invited to attend the meeting. However, to
ensure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. If you attend the meeting, you may vote in
person even if you return a proxy.
FOR THE BOARD OF DIRECTORS
/s/ STUART D. EDWARDS
Stuart D. Edwards
Chairman of the Board of Directors
Chief Executive Officer and
President
Sunnyvale, California
March 31, 1998
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, AND RETURN
IT IN THE ENCLOSED ENVELOPE. YOUR STOCK WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS YOU HAVE GIVEN IN THE PROXY. YOUR PROXY MAY BE REVOKED AT ANY
TIME BEFORE IT IS VOTED BY SIGNING AND RETURNING A LATER-DATED PROXY WITH
RESPECT TO THE SAME SHARES, BY FILING WITH THE INSPECTOR OF ELECTIONS OF THE
COMPANY A WRITTEN REVOCATION BEARING A LATER DATE OR BY ATTENDING AND VOTING
IN PERSON AT THE ANNUAL MEETING.
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
----------------
PROXY STATEMENT FOR THE
1998 ANNUAL MEETING OF STOCKHOLDERS
MAY 20, 1998
----------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Somnus Medical Technologies, Inc. (the "Company" or "Somnus") for use at the
Annual Meeting of Stockholders to be held Friday, May 20, 1998 at 10:00 a.m.,
local time, or at any postponement or adjournment thereof (the "Annual
Meeting"), for the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Stockholders. The Annual Meeting will be held at the
Company's principal executive offices at 285 North Wolfe Road, Sunnyvale, CA
94086. The Company's telephone number at its principal executive offices is
(408) 773-9121.
These proxy solicitation materials and the Annual Report to Stockholders for
the fiscal year ended December 31, 1997, including financial statements were
mailed on or about March 31, 1998 to all Stockholders entitled to vote at the
Annual Meeting.
RECORD DATE AND PRINCIPAL SHARE OWNERSHIP
Stockholders of record of the Company's Common Stock at the close of
business on March 23, 1998 (the "Record Date") are entitled to notice of, and
to vote at, the Annual Meeting. At the record date, 13,493,521 shares of the
Company's Common Stock were issued and outstanding and held of record by
approximately 141 stockholders. The closing price of the Company's Common
Stock on the Record Date as reported by The National Association of Securities
Dealers, Inc. Automated Quotation National Market was $10.00 per share.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it any time before its use by delivering to American Securities
Transfer, Inc., 938 Quail Street, Suite 101, Lakewood, CO 80215-5513
(Attention: Tiffany Skiles, Inspector of Elections) a written notice of
revocation or a duly executed proxy bearing a later date or by attending the
meeting and voting in person.
VOTING AND SOLICITATION
Each stockholder is entitled to one vote for each share held as of the
record date. Stockholders will not be entitled to cumulate their votes in the
election of directors.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation material to
such beneficial owners. Proxies may also be solicited by certain of the
Company's directors, officers and regular employees, without additional
compensation, personally or by telephone or facsimile.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections (the "Inspector") appointed for the meeting and
will determine whether or not a quorum is present.
The required quorum for the transaction of business at the Annual Meeting is
a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the record date. Shares that are voted "FOR",
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for
<PAGE>
purposes of establishing a quorum and are also treated as shares entitled to
vote at the Annual Meeting (the "Votes Cast") with respect to such matter.
While there is not definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence of absence of a quorum for the transaction of
business, broker non-votes should not be counted for purposes of determining
the number of Votes Cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, the Company intends to treat
broker non-votes in this manner. Thus, a broker non-vote will not affect the
outcome of the voting on a proposal.
Any proxy which is returned using the form of proxy enclosed and which is
not marked as to a particular item will be voted for the election of the two
Class I directors, for the amendment of the Stock Plan, for the confirmation
of the appointment of the designated independent auditors, and as the proxy
holders deem advisable on other matters that may come before the meeting, as
the case may be, with respect to the items not marked.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented by such
stockholders at the Company's 1999 Annual Meeting must be received by the
Company no later than November 30, 1998 in order that such proposals may be
considered for possible inclusion in the proxy statement and form of proxy
relating to that meeting.
2
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 23, 1998, by (i) each person who is known by the
Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each of the Company's directors, (iii) each of the executive
officers named in the Summary Compensation Table, and (iv) all directors and
executive officers as a group. Except as otherwise noted, the stockholders
named in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
applicable community property laws.
<TABLE>
<CAPTION>
SHARES APPROXIMATE
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED (1)
------------------------------------ ------------ -----------
<S> <C> <C>
INVESCO Trust Company (2)............................. 1,000,000 7.4%
Attn: Buck Phillips
7800 East Union Avenue, Suite 1100
Denver, CO 80237
Entities affiliated with The Travelers Companies (3).. 1,000,000 7.4%
Attn: Don Scudder
The Travelers Companies
One Tower Square
Hartford, CT 06183
Stuart D. Edwards..................................... 808,500 6.0%
Somnus Medical Technologies, Inc.
285 N. Wolfe Road
Sunnyvale, CA 94086
Medtronic Asset Management, Inc. ..................... 714,286 5.3%
7000 Central Avenue NE
Minneapolis, MN 55432-3576
David L. Douglass..................................... 500,000 3.7%
Ronald G. Lax......................................... 300,000 2.2%
David B. Musket (4)................................... 226,700 1.7%
Eric N. Doelling (5).................................. 137,750 1.0%
Stephen M. Rudy (6)................................... 126,875 *
Robert E. McNamara (7)................................ 68,304 *
Donald R. Bruce (8)................................... 28,583 *
David J. Illingworth (9).............................. 15,000 *
Woodrow A. Myers, Jr., M.D. (10)...................... 7,500 *
All directors and executive officers as a group (ten
persons)............................................. 2,219,212 16.4%
</TABLE>
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* Less than 1%
(1) Applicable percentage ownership is based on 13,493,521 shares of Common
Stock outstanding as of March 23, 1998, together with applicable options
or warrants for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission.
(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 of these shares and is therefore the
beneficial 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 disclaims 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 15,000 shares
exercisable within 60 days of March 23, 1998.
(5) Includes options to purchase up to 56,250 shares exercisable within 60
days after March 23, 1998.
(6) Includes options to purchase up to 28,125 shares exercisable within 60
days after March 23, 1998.
(7) Consists of options to purchase up to 68,304 shares exercisable within 60
days after March 23, 1998.
(8) Consists of options to purchase up to 27,083 shares exercisable within 60
days after March 23, 1998.
(9) Consists of options to purchase up to 15,000 shares exercisable within 60
days of March 23, 1998.
(10) Consists of options to purchase up to 7,500 shares exercisable within 60
days of March 23, 1998.
3
<PAGE>
COMPLIANCE WITH SECTION 16(A) FILING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and beneficial
owners of more than 10% of the Company's Common Stock to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of Common Stock and other equity
securities of the Company. Based solely on its review of the copies of such
reports received by it, or written representations from reporting persons, the
Company believes that during the fiscal year ended December 31, 1997, its
officers, directors and holders of more than 10% of the Company's Common Stock
complied with all Section 16(a) filing requirements except for the
transactions for officers Conner, Doelling and Rudy in November 1997 which
were reported on amended Forms 3.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
DIRECTORS AND NOMINEES FOR DIRECTOR
Pursuant to the Company's Restated Certificate of Incorporation, the
Company's Board of Directors currently consists of seven persons, divided into
three classes serving staggered terms of three years. Currently, there are two
directors in Class I, three directors in Class II, and two directors in Class
III. Two Class I directors are to be elected at the Annual Meeting. The Class
II and Class III directors will be elected at the Company's 1999 and 2000
Annual Meetings of Stockholders, respectively. Each of the two Class I
directors elected at the Annual Meeting will hold office until the 2001 Annual
Meeting of Stockholders, or until his successor has been duly elected and
qualified.
In the event that any of such persons becomes unavailable or declines to
serve as a director at the time of the Annual Meeting, the proxy holders will
vote the proxies in their discretion for any nominee who is designated by the
current Board of Directors to fill the vacancy. It is not expected that any of
the nominees will be unavailable to serve.
The names of the two Class I nominees for election to the Board of Directors
at the Annual Meeting, their ages as of the Record Date, and certain
information about them are set forth below. The names of the current Class II
and Class III directors with unexpired terms, their ages as of the Record
Date, and certain information about them are also stated below.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
---- --- -------------------- --------
<C> <C> <S> <C>
NOMINEES FOR CLASS I DIRECTORS
David L. Douglass (2)............ 45 General Partner, Delphi 1996
Ventures
David B. Musket (1).............. 39 President, Musket Research 1996
Associates, Inc.
CONTINUING CLASS II DIRECTORS
Eric N. Doelling................. 39 Executive Vice President, 1996
Chief Operating Officer
David J. Illingworth (1)......... 44 Chairman of the Board of 1997
Directors, Chief Executive
Officer and President,
VidaMed, Inc.
Ronald G. Lax.................... 64 President, Prodesearch Corp. 1996
CONTINUING CLASS III DIRECTORS
Stuart D. Edwards (2)............ 52 Chairman of the Board of 1996
Directors, Chief Executive
Officer and President
Woodrow A. Myers, Jr., M.D. (2).. 44 Director, Healthcare 1997
Management, Ford Motor
Company
</TABLE>
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(1) Member of the Audit Committee
(2) Member of the Compensation Committee
There are no family relationships among any of directors or executive
officers of the Company.
4
<PAGE>
DIRECTORS TO BE ELECTED AT THE ANNUAL MEETING
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
University.
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
Company. Since August 1991, he has been President of Musket Research
Associates, Inc., an investment banking firm specializing in healthcare, and
of DBM Corporate 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.
DIRECTORS WHOSE TERMS EXTEND BEYOND THE ANNUAL MEETING
Eric N. Doelling has served as Executive Vice President and 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.
David J. Illingworth has served as a Director of the Company since February
1997. In February 1998, Mr. Illingworth accepted the position of President,
Chief Executive Officer and Chairman of the Board of VidaMed, Inc. a public
medical device company which develops minimally-invasive surgical systems.
From 1993 to March 1998, Mr. Illingworth held positions with Nellcor Puritan
Bennett, Inc., a wholly owned subsidiary of Mallinckrodt Inc., most recently
serving as Executive Vice President and President, Alternate 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.
Stuart D. Edwards is 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.
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
5
<PAGE>
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.
VOTE REQUIRED
The two nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted for them shall be
elected as Class I directors. Votes withheld from any director are counted for
purposes of determining the presence or absence of a quorum for the
transaction of business, but have no other legal effect under Delaware law.
BOARD MEETINGS, COMMITTEES AND DIRECTOR COMPENSATION
The Board of Directors of the Company held a total of four meetings during
the fiscal year ended December 31, 1997.
The Board of Directors has an Audit Committee and Compensation Committee. It
does not have a nominating committee or committee performing the functions of
a nominating committee. From time to time, the Board has created various ad
hoc committees for special purposes. No such committee is currently
functioning.
The Audit Committee reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent accountants. This Committee, which currently consists of directors
Illingworth and Musket, held no meetings during 1997.
The Compensation Committee reviews and makes recommendations to the Board
concerning salaries and incentive compensation for executive officers and
certain employees of the Company. This Committee, which consists of directors
Edwards, Douglass and Myers, held three meetings during 1997. Mr. Edwards,
Chairman of the Board, Chief Executive Officer and President of the Company,
participates fully with all other committee members in recommending salaries
and incentive compensation for executives to the Board of Directors, except
that he does not participate in committee proceedings relating to his own
salary and compensation.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash for services they provide as
directors, but directors may be reimbursed for reasonable expenses in
connection with attendance at Board and committee meetings. Under the 1997
Director Stock Option Plan (the "Director Plan"), each director who is not
also an employee or consultant of the Company (an "Outside Director") will
automatically receive an option to purchase 20,000 shares of Common Stock upon
joining the Board of Directors. Thereafter, each Outside Director who has
served on the Board of Directors for at least six months shall receive an
option to acquire 5,000 shares of Common Stock on the date of each of the
Company's annual meetings of stockholders, provided such Outside Director is
re-elected. Each option granted under the Director Plan will become
exercisable ratably over a four-year period. The term of such options is ten
years from the date of grant, provided that such options shall terminated
three months following the termination of the optionee's status as a director
(or twelve months if the termination is due to death or disability.) The
exercise price of all options granted under the Director Plan is equal to the
fair market value of the Company's Common Stock on the date of grant, as
determined in accordance with the Director Plan. The Director Plan provides
for the automatic grant of non-statutory options to Outside Directors on an
annual basis in order to motivate them to continue to serve as directors. A
total of 350,000 shares of the Company's Common Stock is reserved for issuance
during the current 10-year term of the Director Plan, which expires in
September 2007.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
NOMINEES SET FORTH HEREIN.
6
<PAGE>
CERTAIN TRANSACTIONS
Since the beginning of the Company's last fiscal year, Mr. Edwards was
indebted to the Company for short-term loans totaling, in the aggregate,
$142,813. As of December 31, 1997, Mr. Edwards was indebted to the Company for
short-term loans totaling, in the aggregate, $50,206.88.
In connection with the Company's 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 were purchased by
investors or parties directly affiliated the investors identified by MRA in
the Series B Preferred Stock financing, MRA would be granted options or
warrants to purchase 1,000 shares of Common Stock at a price equivalent to the
initial public offering price. On January 13, 1998, 5,000 of such options or
warrants were issued, which have a five year term and are entitled to
antidilution and piggyback registration rights
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, Inc., 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.
7
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth information as of December 31, 1997 regarding
executive officers of the Company.
<TABLE>
<C> <C> <S>
Stuart D. Edwards........... 52 Chairman of the Board of Directors, Chief
Executive Officer and President
Executive Vice President, Chief Financial
Robert E. McNamara.......... 41 Officer
Executive Vice President, Chief Operating
Eric N. Doelling............ 39 Officer and Director
Senior Vice President, Marketing and
Stephen M. Rudy............. 40 Business Development
Donald R. Bruce............. 47 Vice President, Worldwide Sales
Vice President, Clinical and Regulatory
Eve A. Conner, Ph.D. ....... 52 Affairs
Kirti P. Kamdar............. 36 Vice President, Research and Development
</TABLE>
Stuart D. Edwards, biographical information, infra., at Proposal No. 1.
Robert E. McNamara, has served as Executive Vice President and 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
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, biographical information, infra., at Proposal No. 1.
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 drb 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, 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), an
M.S. from New Jersey Institute of Technology and an M.B.A. from the University
of Houston.
8
<PAGE>
EMPLOYMENT AGREEMENTS
Robert E. McNamara. 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 and option vesting. The agreement also
provides that, upon an acquisition, merger or sale of a majority of the
Company's assets, Mr. McNamara will receive six months continued salary,
insurance benefits and bonus, and all of his outstanding stock options will
fully and immediately vest. Mr. McNamara's current annual salary is $175,000
and he holds 225,000 options to purchase shares of Common Stock which vest
over four years from the date of hire.
Eric N. Doelling. 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 an acquisition, merger or sale of a majority of the
Company's assets, all of Mr. Doelling's outstanding stock options will fully
and immediately vest. Mr. Doelling's current annual salary is $160,000 and he
holds 300,000 options to purchase shares of Common Stock which vest over four
years from the date of hire.
Stephen M. Rudy. 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 have otherwise vested in the year
of his termination. The agreement also provides that, upon an acquisition,
merger or sale of a majority of the Company's assets, Mr. Rudy's outstanding
options will fully and immediately vest. Mr. Rudy's current annual salary is
$160,000 and he holds 200,000 options to purchase shares of Common Stock which
vest over four years from the date of hire and 25,000 options to purchase
shares of Common Stock which vest over four years from August 1997.
9
<PAGE>
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table. The following table sets forth information for
the years ended December 31, 1996 and 1997 regarding the compensation of the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers whose total annual salary and bonus for
such fiscal years were in excess of $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) OPTIONS COMPENSATION(1)
------------------ ---- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Stuart D. Edwards....... 1997 212,346(2) 150,000(3) 100,000(4) 4,385
Chief Executive Officer 1996 61,538(5) -- -- 1,846
Robert E. McNamara...... 1997 59,865(6) 10,000(7) 225,000 1,384
Chief Financial Officer
Eric N. Doelling........ 1997 152,689(8) 7,500 -- 3,600
Executive Vice 1996 67,308(9) -- 300,000 1,731
President, Chief
Operating Officer
Stephen M. Rudy......... 1997 150,919(10) -- 25,000 3,600
Sr. Vice President, 1996 78,077(11) -- 200,000 2,008
Marketing and
Business Development
Donald R. Bruce......... 1997 105,000(12) 42,000(13) 125,000 --
Vice President,
Worldwide Sales
</TABLE>
- --------
(1) Reflects amounts for automobile allowances. Mr. Edwards receives a
monthly automobile allowance of $500. Mssrs. McNamara, Doelling and Rudy
each receive a monthly automobile allowance of $300.
(2) During 1997, Mr. Edwards' annual salary was $200,000 until August, when
his annual salary was increased to $250,000.
(3) Mr. Edwards received a bonus as compensation for his contributions to the
Company during 1997, as approved by the Board of Directors in January
1998.
(4) In August 1997, Mr. Edwards received an option to purchase 100,000 shares
of the Company's Common Stock, which option vests over four years.
(5) Mr. Edwards began receiving a salary from the Company in September 1996.
(6) Mr. McNamara joined the Company in August 1997. His annual salary is
$175,000.
(7) As a part of Mr. McNamara's employment agreement with the Company, Mr.
McNamara received a bonus of $10,000 payable in January 1998.
(8) During 1997, Mr. Doelling's annual salary was $140,000 until April, when
his annual salary was increased to $160,000.
(9) Mr. Doelling began receiving a salary from the Company in July 1996.
(10) During 1997, Mr. Rudy's annual salary was $140,000 until April, when his
annual salary was increased to $160,000.
(11) Mr. Rudy began receiving a salary from the Company in June 1996.
(12) Mr. Bruce joined the Company in March 1997. His annual salary is
$140,000.
(13) As a part of Mr. Bruce's employment agreement with the Company, Mr. Bruce
is eligible to receive a bonus of 30% of his base salary in March 1998
upon the attainment of certain goals and objectives.
10
<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1997 to each
of the Named Executive Officers:
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM
UNDERLYING EMPLOYEES EXERCISE (3)
OPTIONS IN FISCAL PRICE EXPIRATION ------------------
NAME GRANTED (#) YEAR (1) ($/SH)(2) DATE 5% 10%
---- ----------- ---------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stuart D. Edwards....... 100,000(4) 8.2 $3.00 08/21/07 $188,668 $ 478,122
Robert E. McNamara...... 225,000(5) 18.5 3.00 08/21/07 424,503 1,075,776
Eric N. Doelling........ -- -- -- -- -- --
Stephen M. Rudy......... 25,000(4) 2.1 3.00 08/21/07 47,167 119,530
Donald R. Bruce......... 100,000(4) 8.2 0.70 06/06/07 44,023 111,562
25,000(4) 2.1 3.00 08/21/07 47,167 119,531
</TABLE>
- --------
(1) Based on an aggregate of options to purchase 1,217,900 shares of the
Company's Common Stock granted to employees and directors of the Company,
including the Named Executive Officers.
(2) The Company recorded deferred compensation with respect to the option
grants for the difference between the exercise price and the deemed fair
value of these options.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Common Stock of the Company on the date of
grant appreciates at the annual rate shown (compounded annually) from the
date of grant until the expiration of the ten year option term. These
numbers are calculated based on the requirements promulgated by the SEC
and do not reflect the Company's estimate of future stock growth.
(4) Options become exercisable as to 25% of the option shares on the first
anniversary of the vesting commencement date and thereafter ratably on a
monthly basis, with full vesting occurring on the fourth anniversary of
the vesting commencement date.
(5) Mr. McNamara's options vest as to 56,250 shares in February 1998 and
thereafter 4,018 shares monthly, until all shares are vested.
11
<PAGE>
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. The
following table sets forth the information with respect to stock option
exercises during the year ended December 31, 1997, by the Named Executive
Officers, and the number and value of securities underlying unexercised
options held by the Named Executive Officers at December 31, 1997.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stuart D. Edwards....... -- -- -- 100,000 -- 975,000
Robert E. McNamara...... -- -- -- 225,000 -- 2,193,750
Eric N. Doelling........ 87,500 $51,250 25,000 187,500 316,250 2,371,875
Stephen M. Rudy......... 93,750 271,875 12,500 118,750 158,125 1,429,687
Donald R. Bruce......... -- -- -- 125,000 -- 1,448,750
</TABLE>
- --------
(1) The fair market value of Somnus Medical Technologies' Common Stock at the
close of business on December 31, 1997, was $12.75.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is provided to stockholders by the members of the Compensation
Committee of the Board of Directors:
The Compensation Committee of the Board of Directors (the "Committee"),
comprising two outside directors and the Chief Executive Officer, is
responsible for the administration of the Company's compensation programs.
These programs include base salary for executive officers and both annual and
long-term incentive compensation programs. The Company's compensation programs
are designed to provide a competitive level of total compensation and include
incentive and equity ownership opportunities linked to the Company's
performance and stockholder return.
Compensation Philosophy. The Company's overall executive compensation
philosophy is based on a series of guiding principles derived from the
Company's values, business strategy, and management requirements. These
principles are summarized as follows:
. Provide competitive levels of total compensation which will enable the
Company to attract and retain the best possible executive talent;
. Motivate executives to achieve optimum performance for the Company;
. Align the financial interest of executives and stockholders through
equity-based plans;
. Provide a total compensation program that recognizes individual
contributions as well as overall business results.
Compensation Program. The Committee is responsible for reviewing and
recommending to the Board the compensation and benefits of all officers of the
Company and establishes and reviews general policies relating to compensation
and benefits of employees of the Company. The Committee is also responsible
for the administration of the Stock Plan. There are two major components to
the Company's executive compensation: base salary and potential cash bonus, as
well as potential long-term compensation in the form of stock options. The
Committee considers the total current and potential long-term compensation of
each executive officer in establishing each element of compensation.
1. Base Salary. In setting compensation levels for executive officers, the
Committee reviews competitive information relating to compensation levels for
comparable positions at medical product, biotechnology and high
12
<PAGE>
technology companies. In addition, the Committee may, from time to time, hire
compensation and benefit consultants to assist in developing and reviewing
overall salary strategies. Individual executive officer base compensation may
vary based on time in position, assessment of individual performance, salary
relative to internal and external equity and critical nature of the position
relative to the success of the Company.
2. Long-Term Incentives. The Company's 1996 Stock Plan provides for the
issuance of stock options to officers and employees of the Company to purchase
shares of the Company's Common Stock at an exercise price equal to the fair
market value of such stock on the date of grant. Stock options are granted to
the Company's executive officers and other employees both as a reward for past
individual and corporate performance and as an incentive for future
performance. The Committee believes that stock-based performance compensation
arrangements are essential in aligning the interests of management and the
stockholders in enhancing the value of the Company's equity. Consistent with
this philosophy, in August 1997 the Committee granted an incentive stock
option of 100,000 shares with a four year vesting period to the President and
Chief Executive Officer of the Company, Mr. Stuart D. Edwards. Mr. Edwards'
stock option reflects the Committee's judgment as to Mr. Edwards' personal
performance as well as his role in the attainment of the Company's overall
objectives.
1997 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
In determining Mr. Edwards' salary for 1997, the Committee considered
competitive compensation data for chairmen and chief executive officers of
similar companies within the medical device and biotechnology industry, taking
into account Mr. Edwards' experience and knowledge. Based on the Company's
achievement of specified goals, the Committee determined that it was
appropriate to raise Mr. Edwards' salary to an annual rate of $250,000
commencing in August 1997.
SECTION 162(M) OF THE INTERNAL REVENUE CODE LIMITATIONS ON EXECUTIVE
COMPENSATION
In 1993, Section 162(m) was added to the United States Internal Revenue Code
of 1986, as amended, (the "Code"). Section 162(m) may limit the Company's
ability to deduct for United States federal income tax purposes compensation
in excess of $1,000,000 paid to the Company's Chief Executive Officer and its
four other highest paid executive officers in any one fiscal year. No
executive officer of the Company received any such compensation in excess of
this limit during fiscal 1997. Grants under the Stock Plan will not be subject
to the deduction limitation if the stockholders approve the Stock Plan,
including the option grant limitations described below.
Section 162(m) of the Code places limits on the deductibility for United
States federal income tax purposes of compensation paid to certain executive
officers of the Company. In order to preserve the Company's ability to deduct
the compensation income associated with options granted to such person, the
Stock Plan provides that no employee may be granted, in any fiscal year of the
Company, options to purchase more than 450,000 shares of Common Stock. In
addition, the Stock Plan provides that in connection with an employee's
initial employment, the employee may be granted an additional 450,000 shares
of Common Stock.
The foregoing Committee Report shall not be "soliciting material" or to be
"filed" with the SEC, nor shall such information be incorporated by reference
into any future filing under this Securities Act of 1933, as amended, or the
Exchange Act, except to the extent the Company specifically incorporates it by
reference into such filing.
Respectfully submitted,
Stuart D. Edwards
David L. Douglass
Woodrow A. Myers, Jr., M.D.
13
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total return of the Nasdaq National
Market, U.S. index ("Nasdaq U.S. Index") and the Hambrecht & Quist Healthcare,
Excluding Biotechnology index ("H&Q Healthcare Index") for the period
beginning on November 6, 1997, the Company's first day of trading after its
initial public offering, and ending on December 31, 1997.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG SOMNUS MEDICAL TECHNOLOGIES, INC.
NASDAQ NATIONAL MARKET, U.S. INDEX AND
THE HAMBRECHT & QUIST HEALTHCARE, EXCLUDING
BIOTECHNOLOGY INDEX
(PERIOD ENDED DECEMBER 31, 1997)
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
H & Q
SOMNUS HEALTHCARE NASDAQ
Measurement Period TECHNOLOGLIES EXCLUDING STOCK
(Fiscal Year Covered) INC. BIOTECHNOLOGY MARKET
- ------------------- ---------- ------------- ----------
<S> <C> <C> <C>
Measurement Pt-11/06/97 $100 $100 $100
FYE 11/97 $110 $ 99 $ 98
FYE 12/97 $121 $101 $ 97
</TABLE>
- -------
* The graph assumes that $100 was invested on November 6, 1997 in the
Company's Common Stock, the Nasdaq U.S. Index and the H&Q Healthcare Index,
and that all dividends were reinvested. No dividends have been declared or
paid on the Company's Common Stock. Stock performance shown in the above
chart for the Common Stock is historical and should not be considered
indicative of future price performance. This graph was prepared by Research
Data Group, Inc.
14
<PAGE>
PROPOSAL NO. 2
AMENDMENT TO THE 1996 STOCK PLAN
As of the Record Date, a total of 3,350,000 shares of Common Stock have been
reserved for issuance under the Company's 1996 Stock Plan (the "Stock Plan"),
and 451,507 shares were available for future grant. In March 1998, the Board
of Directors authorized an amendment to the Stock Plan, subject to shareholder
approval, to increase the number of shares reserved for issuance thereunder by
500,000 shares, bringing the total number of shares issuable under the Stock
Plan to 3,850,000.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment of the Stock Plan to increase the number of
shares of Common Stock reserved for issuance thereunder, and to approve the
material terms of the Stock Plan, including, but not limited to, share
limitations for purposes of Section 162(m) of the Internal Revenue Code of
1986, as amended. A vote for the amendment of the Stock Plan will constitute
approval of the proposed increase in the number of shares authorized for
issuance under the Stock Plan and of the material terms of the Stock Plan.
The Board of Directors believes that the amendment is necessary to enable
the Company to, among other things, continue its policy of employee stock
ownership as a means to motivate high levels of performance and to recognize
key employee accomplishments. A summary of the Stock Plan is set forth below.
SUMMARY OF THE STOCK PLAN
General. The Company's Stock Plan was approved by the Board of Directors in
March 1996 and by the stockholders in July 1996. The Stock Plan was amended
and restated in August 1997. The Stock Plan authorizes the Board of Directors
(the "Board"), or one or more committees which the Board may appoint from
among its members, to grant options to purchase Common Stock. Options granted
under the Stock Plan may be either "incentive stock options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonstatutory stock options, as determined by the Board or a Board Committee.
Purpose. The general purpose of the Stock Plan is to attract and retain the
best available personnel for positions of substantial responsibility, to
provide additional incentive to employees and consultants and to promote the
success of the Company's business.
Administration. The Stock Plan may be administered by the Board or a Board
Committee (together, the "Administrator"). Subject to the other provisions of
the Stock Plan, the Administrator has the authority: (i) to determine the fair
market value of the Company's Common Stock; (ii) to select the consultants and
employees to whom the options and stock purchase rights may be granted under
the Stock Plan; (iii) to determine the number of shares of Common Stock to be
covered by each option and stock purchase right granted under the Stock Plan;
(iv) to approve forms of agreement for use under the Stock Plan; (v) to
determine the terms and conditions, not inconsistent with the terms of the
Stock Plan, of any option or stock purchase right granted under the Stock
Plan, including the exercise price, the time or times when options or stock
purchase rights may be exercised (which may be based on performance criteria),
and 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 sold 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 Stock Plan and
awards granted pursuant to the Stock Plan; (ix) to prescribe, amend and
rescind rules and regulations relating to the Stock 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; (xi) to authorize any person to
15
<PAGE>
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;
(xii) to institute an option exchange program; and (xiii) to make all other
determinations deemed necessary or advisable for administering the Stock Plan.
Eligibility. The Stock Plan provides that options and rights may be granted
to the Company's employees and independent contractors. Incentive stock
options may be granted only to employees. Any optionee who owns more than 10%
of the combined voting power of all classes of outstanding stock of the
Company (a "10% Stockholder") is not eligible for the grant of an incentive
stock option unless the exercise price of the option is at least 110% of the
fair market value of the Common Stock on the date of grant.
Performance-Based Compensation Limitations. No employee shall be granted, in
any fiscal year of the Company, options to purchase more than 450,000 shares
of Common Stock. The Stock Plan also provides that in connection with an
employee's initial employment, the employee may be granted an additional
450,000 shares of Common Stock. The foregoing limitation, which shall be
adjusted proportionately in connection with any change in the Company's
capitalization, is intended to satisfy the requirements applicable to options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code. In the event that the Administrator determines
that such limitation is not required to qualify options as performance-based
compensation, the Administrator may modify or eliminated such limitation.
Terms and Conditions of Options. Each option granted under the Stock Plan is
evidenced by a written stock option agreement between the optionee and the
Company and is subject to the following terms and conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options to purchase shares of Common Stock at the time the options are
granted. However, excluding options issued to 10% Stockholders, the
exercise price under an incentive stock option must not be less than 100%
of the fair market value of the Common Stock on the date the option is
granted. If the Common Stock is listed on any established stock exchange or
a national market system, the fair market value shall be the closing sale
price for such stock (or the closing bid if no sales were reported) on the
last market trading day prior to the date the option is granted. If the
Common Stock is traded on the over-the-counter market, the fair market
value shall be the mean of the high bid and high ask prices on the last
market trading day prior to the date the option is granted.
(b) Form of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally
may be made by cash, check, promissory note, other shares of Common Stock
of the Company owned by the optionee, consideration received by the Company
under a formal cashless exercise program adopted by the Company, a
reduction in the amount of any Company liability to the Optionee, or by a
combination thereof.
(c) Exercise of the Option. Each stock option agreement will specify the
term of the option and the date when the option is to become exercisable.
However, in no event shall an option granted under the Stock Plan be
exercised more than 10 years after the date of grant. Moreover, in the case
of an incentive stock option granted to a 10% Stockholder, the term of the
option shall be for no more than five years from the date of grant.
Generally, all options granted under the Stock Plan vest 25% annually,
starting one year from the vesting commencement date.
(d) Termination of Employment. If an optionee's employment or consulting
relationship terminates for any reason (other than death or permanent
disability), then all options held by such optionee under the Stock Plan
expire upon the earlier of (i) such period of time as is set forth in his
or her option agreement (but not to exceed ninety days after the
termination of his or her employment in the event of an incentive stock
option) or (ii) the expiration of the date of the option. The optionee may
exercise all or part of his or her option at any time before such
expiration to the extent that such option was exercisable at the time of
termination of employment or consulting relationship.
16
<PAGE>
(e) Permanent Disability. If an optionee is unable to continue his or her
employment or consulting relationship with the Company as a result of
permanent and total disability (as defined in the Code), then all options
held by such optionee under the Stock Plan shall expire upon the earlier of
(i) 12 months after the date of termination of the optionee's employment or
(ii) the expiration date of the option. The optionee may exercise all or
part of his or her option at any time before such expiration to the extent
that such option was exercisable at the time of termination of employment.
(f) Death. If an optionee dies while employed by the Company, his or her
option shall expire upon the earlier of (i) 12 months after the optionee's
death or (ii) the expiration date of the option. The executors or other
legal representative of the optionee may exercise all or part of the
optionee's option at any time before such expiration to the extent that
such option was exercisable at the time of death.
(g) Termination of Options. Each stock option agreement will specify the
term of the option and the date when all or any installment of the option
is to become exercisable. Notwithstanding the foregoing, however, the term
of any incentive stock option shall not exceed 10 years from the date of
grant. No options may be exercised by any person after the expiration of
its term.
(h) Nontransferability of Options. Unless determined otherwise by the
Administrator, during an optionee's lifetime, his or her option(s) shall be
exercisable only by the optionee and shall not be transferrable other than
by will or laws of descent and distribution.
(i) Value Limitation. If the aggregate fair market value of all shares of
Common Stock subject to an optionee's incentive stock option which are
exercisable for the first time during any calendar year exceeds $100,000,
the excess options shall be treated as nonstatutory stock options.
(j) Other Provisions. The stock option agreement may contain such terms,
provisions and conditions not inconsistent with the Stock Plan as may be
determined by the Board or Committee.
Adjustment Upon Changes in Capitalization, Corporate Transactions. In the
event that the stock of the Company is changed by reason of any stock split,
reverse stock split, stock dividend, recapitalization or other change in the
capital structure of the Company, appropriate proportional adjustments shall
be made in the number and class of shares of stock subject to the Stock Plan,
the number and class of shares of stock subject to any option or right
outstanding under the Stock Plan, and the exercise price of any such
outstanding option or right. Any such adjustment shall be made upon approval
of the Board and, if required, the stockholders of the Company, whose
determination shall be conclusive. Notwithstanding the above, in connection
with any merger, consolidation, acquisition of assets or like occurrence
involving the Company, each outstanding option and right shall be assumed or
an equivalent option or right substituted by a successor corporation. If the
successor corporation does not assume the options or substitute substantially
equivalent options, then the exercisability of all outstanding options and
rights shall be automatically accelerated.
Amendment, Suspensions and Termination of the Stock Plan. The Board may
amend, suspend or terminate the Stock Plan at any time; provided, however,
that stockholder approval is required for any amendment to the extent
necessary to comply with Rule 16b-3 promulgated under the Exchange Act or
Section 422 of the Code, or any similar rule or statute. In any event, the
Stock Plan will terminate automatically in March 2006.
Federal Tax Information. Options granted under the Stock Plan may be either
incentive stock options, as defined in Section 422 of the Code, or
nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of
(i) the fair market value of the shares at the date of the
17
<PAGE>
option exercise or (ii) the sale price of the shares. A different rule for
measuring ordinary income upon such a premature disposition may apply if the
optionee is also an officer, director or 10% Stockholder of the Company. The
Company will be entitled to a deduction in the same amount as the ordinary
income recognized by the optionee. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated as
ordinary income will be characterized as long-term or short-term capital gain
or loss, depending on the holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory option.
However, upon its exercise, the optionee will recognize taxable income
generally measured as the excess of the then fair market value of the shares
purchased over the purchase price. Any taxable income recognized in connection
with an option exercise by an optionee who is also an employee of the Company
will be subject to tax withholding by the Company. Upon resale of such shares
by the optionee, any difference between the sale price and the optionee's
purchase price, to the extent not recognized as taxable income as described
above, will be treated as long-term or short-term capital gain or loss,
depending on the holding period.
Stock purchase rights are taxed in substantially the same manner as
nonstatutory stock options.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Stock Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
VOTE REQUIRED
The approval of the amendment of the Stock Plan requires the affirmative
vote of a majority of the shares of the Company's Common Stock present and
voting at the annual meeting.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT TO THE 1996 STOCK PLAN SET FORTH HEREIN.
18
<PAGE>
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent auditors,
to audit the consolidated financial statements of the Company for the fiscal
year ending December 31, 1998, and recommends that stockholders vote "FOR"
ratification of such appointment. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection.
Ernst & Young LLP has audited the Company's financial statements annually
since the Company's inception in 1996. Representatives of Ernst & Young LLP
are expected to be present at the meeting with the opportunity to make a
statement if they desire to do so and are expected to be available to respond
to appropriate questions. If stockholders fail to ratify the selection, the
Audit Committee and the Board will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Audit Committee and the Board in
their discretion may direct the appointment of different independent auditors
at any time during the year.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1998.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the accompanying form of proxy to vote the shares they
represent as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Sunnyvale, California
March 31, 1998
19
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Somnus Medical Technologies, Inc., a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement each dated March 31, 1998 and hereby appoints
Stuart D. Edwards and Robert E. McNamara or either of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in
the name of the undersigned to represent the undersigned at the 1998 Annual
Meeting of Stockholders of Somnus Medical Technologies, Inc. to be held on May
20, 1998 at 10:00 a.m., local time, at the Company's principal executive
offices located at 285 North Wolfe Road, Sunnyvale, California 94086 and at any
postponement or adjournment thereof, and to vote all shares of Common Stock
which the undersigned would be entitled to vote if then and there personally
present, on the matters set forth below:
1. Election of Class I Directors
[_] FOR [_] WITHHOLD
NOMINEES: DAVID L. DOUGLASS DAVID B. MUSKET
THE STOCKHOLDER MAY WITHHOLD AUTHORITY TO VOTE FOR EITHER NOMINEE BY
STRIKING OUT ABOVE.
2. To approve an amendment to the Company's 1996 Stock Plan (the "Plan") to
increase the number of shares of Common Stock reserved for issuance
thereunder by 500,000 shares to a new total of 3,850,000 shares and to
approve the material terms of the Plan, including but not limited to, share
limitations for purposes of Section 162(m) of the Internal Revenue Code of
1986, as amended.
[_] FOR [_] WITHHOLD [_] ABSTAIN
3. Proposal to ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31, 1998.
[_] FOR [_] WITHHOLD
SEE REVERSE SIDE
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED AS FOLLOWS: (1) FOR THE ELECTION OF THE TWO NOMINATED
CLASS I DIRECTORS; (2) FOR APPROVAL OF THE AMENDMENT TO THE COMPANY'S 1996
STOCK PLAN; (3) FOR THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS
INDEPENDENT AUDITORS, AND AS THE PROXY HOLDERS DEEM ADVISABLE ON SUCH OTHER
MATTERS AS MAY COME BEFORE THE MEETING.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. IF THE STOCK IS REGISTERED
IN THE NAMES OF TWO OR MORE PERSONS, EACH SHOULD SIGN. EXECUTORS,
ADMINISTRATORS, TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT SHOULD ADD THEIR
TITLES. IF SIGNER IS A CORPORATION, PLEASE GIVE FULL CORPORATE NAME AND HAVE A
DULY AUTHORIZED OFFICER SIGN, STATING TITLE. IF SIGNER IS A PARTNERSHIP, PLEASE
SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
PLEASE SIGN, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
DATE:________________________ , 1998
------------------------------------
SIGNATURE(S)
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SIGNATURE(S)
NOTE: This Proxy should be marked, signed by the stockholder(s) exactly as
his or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.
