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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________.
TO ______________.
COMMISSION FILE NO. 000-23275
SOMNUS MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0423465
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
285 N. Wolfe Road
Sunnyvale, California 94086
(Address of principal executive offices, including zip code)
(408) 773-9121
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1999, 14,093,457 shares of the Registrant's Common Stock were
outstanding.
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SOMNUS MEDICAL TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31,1998...................................3
Condensed Consolidated Statements of Operations for the
Three month periods ended March 31, 1999 and 1998.....................4
Condensed Consolidated Statements of Cash Flows for the
Three month periods ended March 31, 1999 and 1998.....................5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................8
Item 3. Quantitative and Qualitative Disclosures of
Market Risk..........................................................18
PART II. OTHER INFORMATION
- ---------------------------
Item 2. Changes in Securities and Use of Proceeds............................19
Item 6. Exhibits and Reports on Form 8-K.....................................19
Signatures....................................................................20
2
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
SOMNUS MEDICAL TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
(Unaudited) (*)
--------------------- --------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 29,598 $ 32,280
Accounts receivable, net 1,547 1,329
Inventories 1,126 806
Other current assets 304 411
--------------------- --------------------
Total current assets 32,575 34,826
Property and equipment, net 1,472 1,601
Other assets 91 85
--------------------- --------------------
$ 34,138 $ 36,512
===================== ====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,633 $ 1,521
Accrued liabilities 2,586 2,174
Accrued compensation 2,585 1,858
Accrued clinical costs 759 675
Deferred revenue 1,319 856
--------------------- --------------------
Total current liabilities 8,882 7,084
Stockholders' equity:
Common stock 14 14
Additional paid-in capital 64,910 65,046
Deferred stock compensation (347) (450)
Accumulated deficit (39,321) (35,182)
--------------------- --------------------
Total stockholders' equity 25,256 29,428
--------------------- --------------------
$ 34,138 $ 36,512
===================== ====================
</TABLE>
(*) Derived from audited financial statements.
See accompanying notes
3
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SOMNUS MEDICAL TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended
----------------------------------
March 31, March 31,
1999 1998
-------------- ---------------
<S> <C> <C> <C>
Revenue $ 2,342 $ 1,685
Cost of sales 1,506 1,324
-------------- ---------------
Gross Margin 836 361
Operating expenses:
Research and development 1,871 2,382
Selling, general and administrative 3,596 2,594
-------------- ---------------
Total operating expenses 5,467 4,976
-------------- ---------------
Loss from operations (4,631) (4,615)
Interest and other income, net 492 542
-------------- ---------------
Net Loss $(4,139) $(4,073)
============== ===============
Net loss per share:
Basic and Diluted $ (0.29) $ (0.30)
============== ===============
Shares used in computing per share amounts:
Basic and Diluted 14,077 13,479
============== ===============
</TABLE>
See accompanying notes
4
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SOMNUS MEDICAL TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
1999 1998
--------------------- --------------------
<S> <C> <C>
Cash flows used in operating activities
Net loss $(4,139) $(4,073)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred compensation 103 570
Depreciation and amortization 243 218
Changes in operating assets and liabilities:
Other current assets 106 (69)
Accounts receivable (218) (603)
Inventories (320) (6)
Other assets noncurrent (6) (47)
Accounts payable and other accrued liabilities 524 36
Accrued compensation 727 250
Accrued clinical costs 84 447
Deferred revenue 463 (40)
--------------------- --------------------
Net cash used in operating activities (2,433) (3,317)
--------------------- --------------------
Cash flows used in investing activities
Capital expenditures (114) (175)
Repurchase of common stock (196) -
--------------------- --------------------
Net cash used in investing activities (310) (175)
--------------------- --------------------
Cash flows provided by financing activities
Net proceeds from issuance of common stock 60 27
--------------------- --------------------
Net decrease in cash and cash equivalents (2,682) (3,465)
Cash and cash equivalents, beginning of period 32,280 45,145
--------------------- --------------------
Cash and cash equivalents at end of period $29,598 $41,680
===================== ====================
Supplemental disclosure of cash flow information
Cash paid for interest 1 1
</TABLE>
See accompanying notes
5
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SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 Summary of Significant Accounting Policies
- --------------------------------------------------
Basis of Presentation
The condensed consolidated balance sheet as of March 31, 1999, the
condensed consolidated statements of operations for the three month periods
ended March 31, 1999 and 1998, and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 1999 and 1998, have been
prepared by management, without audit, in accordance with generally accepted
accounting principles, for interim financial information and pursuant to
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at March 31, 1999 and results
of operations and cash flows for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1998 has been derived from
the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.
These condensed financial statements should be read in conjunction with the
our audited consolidated financial statements as included in our Annual Report
on Form 10-K for the year ended December 31, 1998, as filed with the Securities
and Exchange Commission. The results of operations for the three month periods
ended March 31, 1999 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1999.
Revenue Recognition
We generally recognize revenue at the time products are shipped or, for
sales which are financed through third parties, upon acceptance from a third
party leasing company of a customer lease and the related equipment. For
shipments to distributors made under agreements that do not provide for right of
return or price protection, revenue is generally recognized upon shipment.
Allowances for product returns are provided for at the time of revenue
recognition.
Comprehensive Loss
We have no material components of other comprehensive loss and,
accordingly, the comprehensive loss is the same as the net loss for all periods
presented.
Net Loss Per Share
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Basic and diluted earnings per share have been calculated using the
weighted average common shares outstanding during the periods in accordance with
Statement No. 128 "Earnings Per share" issued by the Financial Accounting
Standards Board and Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 98.
We have securities outstanding that could dilute basic earnings per share
in the future that were not included in the computation of net loss per share in
the periods presented as their effect is antidilutive.
Segment Information
We have organized the business in one operating segment which includes
activities relating to development, manufacturing and marketing of medical
devices and utilization of proprietary radiofrequency technology for the
treatment of upper airway disorders. Substantially all of our assets are in the
United States and through March 31, 1999 we have derived our revenue primarily
from our operations in the United States.
NOTE 2 - Inventories
- --------------------
<TABLE>
<CAPTION>
(in thousands) March 31, 1999 December 31, 1998
(Unaudited)
<S> <C> <C>
Raw Materials $ 426 $399
Work in Process 125 111
Finished Goods 575 296
-----------------------------------------
$ 1,126 $806
=========================================
</TABLE>
NOTE 3 Stock Repurchase Program
- --------------------------------
In October 1998, we announced that our board of directors had authorized a
stock repurchase program permitting the purchase of up to 1,000,000 shares, at
up to $5.00 per share, of our common stock in the open market. The stock
repurchase program has been implemented during the first quarter of fiscal 1999
with 67,500 shares repurchased under the program as of March 31, 1999 for a net
cash outflow of approximately $196,000.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with our
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.
The information set forth below contains forward-looking statements
(designated by an *), and our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below under "Factors That May Affect Future Results"
and those set forth under "Item One" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
Overview
Somnus Medical Technologies, Inc. designs, develops, manufactures and
markets innovative medical devices that utilize our proprietary RF technology
for the treatment of upper airway disorders. Our Somnoplasty/SM/ System
provides physicians with a suite of products designed to offer minimally
invasive, curative treatment alternatives for disorders of the upper airway,
including obstructive sleep apnea (OSA), enlarged turbinates and snoring.
We have a limited history of operations that, to date, has consisted
primarily of research and development, product engineering, seeking clearance of
our products from the Food & Drug Administration (FDA), initial development of a
direct sales force in the United States and internationally, and training
international distributor employees for distribution of the Somnoplasty System
in the European Union (EU), Australia, Southeast Asia and certain other areas.
We commercially introduced the Somnoplasty System internationally, through
Medtronic, beginning in June 1997. One month later, after receiving 510(k)
clearance from the FDA for the use of the Somnoplasty System to treat snoring,
we began direct sales of the Somnoplasty System in the United States. We
subsequently received FDA clearance to treat enlarged turbinates, in December
1997, and OSA in November 1998. During the third quarter of fiscal 1998 we
terminated our relationship with Medtronic and established a European
headquarters in The Netherlands. This headquarters is responsible for:
. establishing and managing relationships with key distributors throughout
Europe,
. marketing the Somnoplasty System throughout Europe and
. providing clinical support.
We ship product from our facility to end user customers within the
United States. Additionally, we have entered into independent distribution
agreements, several of which were executed during the three months ended March
31, 1999, for distribution of our products within Europe, Canada and
Asia/Pacific. We expect to continue to invest in our sales and marketing
organization and to identify further qualified distribution partners.*
8
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We plan to continue to hire additional management and engineering personnel
to support and develop manufacturing expertise and large scale manufacturing
capacity expansion as required to support the current and anticipated growth.*
Additionally, we will invest in further production equipment, vertical
integration and facility expansion to reduce manufacturing costs, reduce
manufacturing cycle time and increase production capacity.* During the first
quarter of fiscal 1999, we completed certain manufacturing facility expansion
and improved layout for increased capacity, process improvement and quality
control to support such growth. Personnel hires and capital expenditures will
continue to require operating capital on an ongoing basis.* We will continue to
improve processes, expand our internal reporting capabilities and further
strengthen systems to manage our expanding business.*
This current and anticipated significant growth of our personnel, sales and
scope of operations may place considerable strain on our management, financial,
manufacturing and other capabilities, procedures and controls. There can be no
assurance that any existing or additional capabilities, procedures or controls
will be adequate to support our operations or that our 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 our business, financial condition and results of operations.
As of March 31, 1999, we have incurred cumulative losses from inception of
approximately $39,321,000. Moreover, we expect to incur significant additional
operating losses over the next couple of years primarily due to the development
of our manufacturing and sales and marketing capabilities along with ongoing
research and development efforts, including clinical studies and expenses
associated with our patent portfolio.* Our limited operating history makes
accurate prediction of future operating 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 extent to which our 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 us or our
competitors, the timing of regulatory clearances or approvals of those
9
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new products and our ability to market our products in the United States
and internationally. Accordingly, interim period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indicators of likely future performance or annual operating results.
Our business and financial results could be materially adversely affected
in the event that we are unable to market the Somnoplasty System effectively,
anticipate customer demand accurately or effectively manage new product
launches, pricing and cost containment pressures in health care. Our 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
Net revenue. Our revenues for the three months ended March 31, 1999 (first
quarter) are derived primarily from sales of our Somnoplasty System, consisting
of the the S2 control unit, the SP 1010, SP 1100 and SP 1200 disposable
handpieces, to private practices, hospitals, clinics and sleep centers. During
the first quarter of 1998 the control unit commercially available was the 215
RF, the S2 control unit and SP 1200 handpiece had not yet been introduced. Net
revenues increased for the first quarter of fiscal 1999 to $2,342,000 from
$1,685,000 for the first quarter of fiscal 1998, an increase of approximately
$657,000 or 39%. This increase is primarily due to increased sales of control
units and increased handpiece shipments driven by a higher installed base,
increased intensity of consumption by that installed base, plus additional
indications treatable with the Somnoplasty System. The indications treatable
with the Somnoplasty System during the first quarter of fiscal 1999 included
the tongue, turbinate and soft palate/uvala, compared to only the soft
palate/uvala during the first quarter of fiscal 1998. During the three month
periods ended March 31, 1999 and 1998, net revenues were attributable to sales
to customers principally in the United States. We expect that the sale of
control units will constitute a significant percentage of our total revenues in
the near term as we build an installed base of users.* However, we expect
disposable handpieces to increase as a percentage of total revenue, year over
year.*
Cost of sales. Cost of sales increased by approximately $182,000 or 14% to
$1,506,000 for the first quarter of fiscal 1999 from $1,324,000, for the prior
year comparative period. Cost of sales consists of raw materials, subassemblies
and completed electronics, quality assurance and warranty costs. The cost of
product, salaries and employee-related expenses, and the costs of expanding
manufacturing capabilities account for the majority of the increase from 1998 to
1999. We believe that cost of sales will increase in absolute dollars but may
fluctuate as a percentage of revenues.*
Research and development expenses. Research and development (R&D) costs
for the first quarter of fiscal 1999 were $1,871,000, compared to $2,382,000 for
the same period in the prior year, a decrease of approximately $511,000 or 21%.
Research and development expenses are comprised of salaries, prototype
development costs, costs associated with intellectual property, and clinical
trial and regulatory approval expenses.
The decrease in expenses for the three month period is primarily due to a
decrease in salaries and employee related expenses of $262,000 due to lower
headcount including two open vice president positions, decreased consulting fees
of $345,000 and lower intellectual property costs of $121,000, partially offset
by a one time charge of $214,000 being fifty percent of the severance costs of a
certain officer. Included in the employee related expenses is
10
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approximately $50,000 of non-cash stock compensation charges resulting from
stock option grants, compared to $206,000 for the prior year period.
Selling, general and administrative. Selling, general and administrative
("SG&A") expenses for the first quarter of fiscal 1999 were $3,596,000, compared
to $2,594,000 for the prior-year period, an increase of approximately $1,002,000
or 39%. SG&A expenses consist of executive salaries, professional fees,
facilities overhead, accounting and human resources, general office
administration expenses such as rent and facility costs.
The increases in SG&A are primarily due to increased infrastructure costs
of $572,000 including the European Office, information systems, human
resources and the facility remodeling during the period. A one time charge of
$214,000 being fifty percent of the severance costs of a certain officer and
increased advertising and sales travel expenses of $235,000. Non-cash stock
compensation charges resulting from stock option grants of $51,000 for the
three month period decreased compared to $365,000 for the prior year period.
Interest and other income, net. Interest and other income, net for the
first quarter of fiscal 1999 was $492,000, compared to $542,000 for the prior-
year period. The decrease is attributable to the reduction in interest income
earned on a decreasing balance of cash and cash equivalents, partially offset by
nonrecurring technology and documentation fees received from a related party.
Interest expense was $1,000 for each of the first quarters of fiscal 1999 and
1998.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We have assessed and continue to assess our exposure to the Year 2000
problem. We believe our enterprise resource planning systems and networking
systems are compliant and we are upgrading our telecommunications systems for
Year 2000 compliance. We also believe that our products are Year 2000
compliant. However, while we believe we have made significant progress in
resolving known Year 2000 issues, sufficient testing has not been completed to
fully validate the readiness of our systems and products. Additional testing
and upgrades are planned during the remainder of fiscal 1999 to reasonably
ensure substantial Year 2000 compliance for our operations.* There can be no
assurance that our additional testing and upgrades will ensure Year 2000
readiness and any inadequacies in our systems or products may have a material
adverse effect on our financial condition.
We have also assessed and continue to assess the possible effect on our
operations of the Year 2000 readiness of critical suppliers of products and
services. Our reliance on our key suppliers, and therefore on the proper
functioning of their information systems and software, is increasing. We are in
the process of contacting critical suppliers to gain assurance of their Year
2000 readiness. However, there can be no assurance all of these suppliers will
be Year 2000 compliant and their failure to address Year 2000 issues could have
a material adverse effect on us.
Although it is difficult to estimate the total Year 2000 project costs, our
preliminary estimate is that such costs will total between approximately
$100,000 and $200,000, * which is not material to our business operations or
financial condition. There can be no assurance that
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these estimates will be achieved and actual results could differ materially from
those anticipated. We have incurred approximately $60,000 through March 31, 1999
on this project. The expenses of the Year 2000 project are being funded from
existing cash reserves and through operating cash flows.
Somnus has not developed a formal comprehensive contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our operations. Contingency plans will be established for certain mission
critical operations for the period immediately subsequent to January 1, 2000
and will be formalized during fiscal 1999.* There can be no assurance that we
will be able to develop a contingency plan that will adequately address issues
that may arise in the year 2000. Our failure to develop and implement, if
necessary, an appropriate contingency plan could have a material impact on our
operations. Finally, we are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation Year
2000 compliance failures and related service interruptions.
We believe that we are unlikely to experience a material adverse impact on
our financial condition or results of operations due to Year 2000 compliance
issues within our operations.* However, since the assessment process is
ongoing, Year 2000 compliance complications are not fully known, critical
suppliers of components, services and others including utility companies are
outside our control, and potential liability issues are not clear, the full
potential impact of the Year 2000 on us is not known at this time and may have
a material adverse impact on us.
Liquidity and Capital Resources
Since inception through March 31, 1999, we have financed our operations
primarily through the private placement of equity securities, bank loans, lease
lines of credit, stockholder loans and our November 1997 IPO. From inception, we
raised approximately $16,400,000 in net proceeds from private equity financings.
We raised an additional $43,756,000 from our IPO, net of costs of $4,540,000.
Cash and cash equivalents at March 31, 1999 were $29,598,000 compared to
$32,280,000 at December 31, 1998.
Net cash used in operating activities was approximately $2,433,000 for the
three months ended March 31, 1999, compared to $3,317,000 for the prior-year
period. Net cash used in operating activities differs from our net loss for
these comparison periods primarily due to non-cash charges associated with the
amortization of deferred compensation, the depreciation of property and
equipment and changes in operating assets and liabilities. Net cash used in
investing activities was approximately $310,000 for the three months ended
March 31, 1999, compared to $175,000 for the prior-year period, the net cash
used in investing activities was primarily attributable to capital
expenditures during these periods and additionally the stock repurchase
program in 1999. Net cash provided by financing activities was approximately
$60,000 for the three months ended March 31, 1999 and for the prior year
period was $27,000. Net cash provided by financing activities in these three
month periods is primarily attributable to the exercise of options.
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We recorded deferred stock compensation expense for the difference between
the exercise price and the deemed fair value for financial statement
presentation purposes of our Common Stock, as determined by the Board of
Directors, for certain options granted. The total unamortized deferred stock
compensation at March 31, 1999 is $347,000. Our amortized deferred compensation
expenses were approximately $103,000 in the three months ended March 31, 1999
compared to $570,000 for the respective 1998 period. The remainder of the
deferred stock compensation will be amortized over the corresponding vesting
period of each respective option, which is generally four years from date of
original issuance.*
At March 31, 1999, our principal sources of liquidity consisted of
$29,598,000 in cash and cash equivalents. There were no other material unused
sources of liquid assets at March 31, 1999.
We currently anticipate that our capital expenditure requirements will be
approximately $1.0 million for the next twelve months.* These requirements
relate primarily to the acquisition of computer hardware and software and for
additional leasehold improvements to handle anticipated headcount additions.*
We anticipate that our existing resources will enable the us to maintain
our current and planned operations at least through the next twelve months.*
However, there can be no assurance that we will not require additional funding
prior to such time. Our future capital requirements will depend on many
factors, including the ability of management to establish and maintain strategic
distributor relationships, the time and cost in obtaining regulatory approvals,
competing technological and market developments, the cost of manufacturing and
other factors. There can be no assurance that additional financing to meet our
funding requirements will be available as needed. If additional funds are
raised by issuing equity securities, substantial dilution to existing
stockholders may result. Insufficient funds may require the us to delay, scale
back or eliminate some or all of our research or development programs or to
relinquish rights to products at an earlier stage of development or on less
favorable terms than we would otherwise seek to obtain. The failure of
management to raise capital when needed would have a material adverse effect on
our business, financial condition and results of operations.
Factors That May Affect Future Results
Our operating results may vary significantly depending on certain factors,
including the effect of lack of market acceptance of products, delays in the
introduction or shipment of new products, increased competition, delays in
ongoing research and development programs, litigation costs should we be
involved in litigation, adverse changes in the economic conditions in any of the
several countries in which we do business, a slower growth rate in our target
markets, the uncertainty of international regulatory clearances or approvals,
and the factors set forth in our annual report on form 10-K for the fiscal year
ended December 31, 1998.
We have a limited operating history and are not profitable.
We have generated only limited revenues from sales of the Somnoplasty
System and have limited experience in manufacturing, selling and marketing our
products in commercial quantities. There can be no assurance that the
Somnoplasty System will be sufficiently successful for us to achieve significant
revenues. From inception in 1996 through March 31, 1999, we have had total
revenues of approximately $12.2 million and incurred cumulative
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losses of approximately $39.3 million. We expect to significantly increase
spending over the next several years with respect to sales and marketing,
manufacturing and to a lesser extent, ongoing research and development efforts
and clinical trials, and expects to incur significant additional losses for the
foreseeable future.* Whether we can successfully manage the transition to a
larger-scale enterprise will depend upon a number of factors, including our
ability to increase our commercial manufacturing and sales and marketing
capabilities. Our inability to establish such capabilities would have a material
adverse effect on our business, financial condition and results of operations.
We are dependent upon the Somnoplasty System, which has not been available
for sufficient time for us to know if it is effective on a long-term basis.
Our success depends upon the market acceptance of the Somnoplasty System
for the treatment of OSA, enlarged turbinates and snoring. Market acceptance
will depend, in large part, upon the effectiveness of the Somnoplasty System
over time.* There can be no assurance that the procedure 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 our procedure.* Such 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 our business, financial condition and results of
operations.
Several factors will impact our ability to achieve market acceptance.
RF tissue volume reduction in the upper airway is a new and novel
development. Market acceptance of this procedure for the treatment of OSA,
enlarged turbinates and snoring could be adversely affected by numerous factors,
including:
. the lack of availability of third-party reimbursement,
. cost of the procedure,
. clinical acceptance,
. effective physician training and
. patient acceptance.
Third party reimbursement. We do not anticipate that patients will receive
third-party reimbursement for use of the Somnoplasty System in the treatment of
snoring.* Market acceptance of the Somnoplasty System for the treatment of OSA
and enlarged turbinates will depend, in large part, upon the availability of
third-party reimbursement for each of those indications, which is not assured.*
Cost of the procedure and clinical acceptance. Market acceptance will also
depend upon our 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.* We believe that recommendations and endorsements by influential
physicians will be essential to market acceptance.* There can be no assurance
that such recommendations or endorsements will be obtained.
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Physician training. 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 our
products and delay or preclude commercial sales and market acceptance. If we are
unable to achieve broad market acceptance of the Somnoplasty System for our
current and anticipated indications, our business, financial condition and
results of operations would be materially adversely affected.
Patient acceptance. Patient acceptance may be affected by numerous
factors, including the possibility that the Somnoplasty procedure will require
treatments on multiple occasions, which would be not only inconvenient for the
patient, but also more costly.* Patients may require anywhere from one to six
treatments to significantly reduce snoring; however, we anticipate that most
patients will only require one to three treatments to significantly reduce
snoring.* We anticipate that most patients will require fewer treatments to
reduce enlarged turbinates than required to reduce snoring and more to treat OSA
than snoring.* Factors such as poor training of the treating physician or
improper use of the Somnoplasty System by the treating physician could lead to a
patient requiring more treatments. Patient acceptance of the Somnoplasty System
for the treatment of snoring, turbinate reduction, OSA, 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 us 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 this 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 our
business, financial condition and results of operations.
We have limited direct sales and marketing experience.
We have only limited experience selling and marketing the Somnoplasty
System for the treatment of OSA, enlarged turbinates and snoring. We are
directing our sales effort in the United States on private practices, clinics,
hospitals and sleep clinics through a direct sales force. We currently have a
small direct sales force that covers certain regions of the United States and
intend to increase our 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 we will be successful in building an
effective sales and marketing force, that we will be cost-effective or that we
will ultimately prove successful in selling the Somnoplasty System on a direct
basis in the United States in sufficient quantities for us to become profitable.
Market acceptance of the Somnoplasty System will also require us to demonstrate
that the cost of our 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 control unit. There
can be no assurance that we will successfully generate sufficient demand for the
Somnoplasty System at the prices at which we currently offer our control units
and disposable devices. In the event the required investment were to preclude
us from placing sufficient quantities of control units, our ability to sell
disposable devices would be limited, which would have a material adverse effect
on our business, financial condition and results of operations.
15
<PAGE>
We need to develop successful distributor relationships for international
sales.
Our future success will depend, in part, on our ability to enter into and
successfully develop strategic and distributor relationships with other parties
with respect to the marketing and distribution of our products.*
In September 1998, we established a European Headquarters in The
Netherlands. This headquarters is responsible for:
. establishing and managing relationships with key distributors throughout
Europe,
. marketing the Somnoplasty System throughout Europe and
. providing clinical support
Product shipments are made directly from our facility in the United
States to the distributor. We have signed several distribution agreements
during the three months ended March 31 1999. We expect to continue to identify
qualified distribution partners intensifying our coverage of Europe.* In
markets outside the United States and Europe, we manage distributors from our
facility in the United States. We have distribution agreements outside the
United States and Europe and we expect to continue to identify qualified
distribution partners in such territories.*
The success of our future strategic or distributor relationships, will
depend on the other parties' ability to perform the role contemplated by us.*
We may have limited or no control over the resources that any particular
strategic party or distributor devotes to our relationship with us. There can
be no assurance that we will be successful in locating or finalizing agreements
with further 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 us. In the event we are not successful in
developing such additional relationships, or if such relationships do not prove
to be successful, our business, financial condition and results of operations
would be materially adversely affected.
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,
. difficulty in obtaining 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 our products,
. the risk of financial instability of distributors,
. fluctuations in overseas economic conditions and international currency
exchange rates,
. increases in duty rates and
. competition.
16
<PAGE>
There can be no assurance that we will be able to successfully
commercialize the Somnoplasty System or any of our future products in any
international market, which would have a material adverse effect on our
business, financial condition and results of operations.
We may experience manufacturing problems with regard to our control unit.
In the past we purchased our 215 RF control unit as a finished assembly
from a single-source supplier. We discontinued selling the 215 RF control unit
model during fiscal 1998. The S-2 control unit is manufactured entirely by us.
There can be no assurance that we will not experience design or production
issues as Somnus commences such manufacturing activities.
We launched the S-2 during the second quarter of fiscal 1998. The S-2
control unit is more expensive than the 215 RF control unit. There can be no
assurance that we will be able to successfully market and sell the S-2 control
unit. Further, there can be no assurance that we will not experience increased
levels of returns of the 215 RF control unit as a result of the launch of the S-
2 control unit or that we will not experience increased levels of warranty costs
associated with the new product. Further, we expect that we will continuously
bring new generation products to market that may compliment or replace current
products.* There can be no assurance that we can successfully manage these
product transitions.
We are dependent on single-source suppliers for components.
We purchase certain key components of our products from single-source
suppliers. There can be no assurance that the components obtained from the
single-source suppliers will continue to be available in adequate quantities or,
if required, that we will be able to locate alternative sources of such
components on a timely and cost-effective basis. To date, we have not
experienced significant adverse effects resulting from any shortage of
components. However, there can be no assurance that the single-source suppliers
will meet our future requirements for timely delivery of components of
sufficient quality and in sufficient quantity.* The components may take several
months to procure, and a significant increase of orders could lead to
significant delays and control unit or device shortages. Such delays or
shortages, particularly as we scale up our manufacturing activities in support
of sales and distributor orders, would have a material adverse effect on our
business, financial condition and results of operations.
We are dependent upon key personnel.
Our future success depends in significant part upon the continued service
of certain key scientific, technical and management personnel and our 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 we can retain our key scientific, technical and managerial
personnel or that we can attract, assimilate or retain other highly qualified
scientific, technical and managerial personnel in the future. We have taken
steps to retain our key employees, including the granting of stock options that
vest over time. 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 our business, financial condition and results of
operations.
Due to the factors noted above, our future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings from
17
<PAGE>
levels expected by security analysts could have an immediate and significant
adverse effect on the trading price of our common stock.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
There have been no material changes in the reported market risks since
December 31, 1998.
18
<PAGE>
PART II - OTHER INFORMATION
- -----------------------------
Item 2. Changes in Securities and Use of Proceeds
From the date of the sale of securities under our Registration Statement on
Form S-1 (File No. 333-35401), which was declared effective on November 5, 1997
(the "Offering"), through March 31, 1999, the approximate amount of net proceeds
used from the Offering were $8.2 million for research and development, clinical
trials and regulatory matters, $6.3 million to manufacture product and further
develop manufacturing expertise and capabilities, $14.1 million to improve and
expand financial capabilities, to enhance financial reporting systems, to expand
sales and marketing efforts, and for other general corporate purposes and
$925,000 for the acquisition of fixed assets. The remaining net proceeds from
the IPO continue to be held in temporary cash and cash equivalent investments.
All amounts represent estimates of direct or indirect payments of amounts
to third parties. No amounts were paid directly or indirectly for the above
purposes to directors of officers of Somnus, to persons owning ten percent
or more of any class of equity securities of Somnus, or to affiliates of
Somnus other than in the ordinary course of business. The use of proceeds
described above do not represent a material change in the use of proceeds
describe in the Offering prospectus.
Item 6: Exhibits and Reports on Form 8-K
(a) There were no reports on Form 8-K during the quarter ended March 31,
1999.
Exhibit 10.18 - Consulting agreement dated December 28, 1998 between
the Registrant and Gary R. Bang.
Exhibit 27.1 - Financial Data Schedule
19
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
---------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOMNUS MEDICAL TECHNOLOGIES, INC.
(Registrant)
Date: May 14, 1999 By: /s/ John G. Schulte
---------------------------
John G. Schulte
President and
Chief Executive Officer
By: /s/ Robert D. McCulloch
------------------------------
Robert D. McCulloch
Vice President of Finance
Chief Financial Officer
(principal financial and chief accounting officer)
20
<PAGE>
EXHIBIT 10.18
SOMNUS MEDICAL TECHNOLOGIES, INC.
CONSULTING AGREEMENT
--------------------
This Consulting Agreement ("Agreement") is made and entered into as of the
28th day of December, 1998 by and between Somnus Medical Technologies, Inc. (the
"Company"), and Gary Bang ("Consultant"). The Company desires to retain
Consultant as an independent contractor to perform consulting services for the
Company and Consultant is willing to perform such services, on terms set forth
more fully below. In consideration of the mutual promises contained herein, the
parties agree as follows:
1. SERVICES AND COMPENSATION
-------------------------
(a) Consultant agrees to perform for Company the services
("Services") described in Exhibit A, attached hereto.
(b) Company agrees to pay Consultant the compensation set forth in
Exhibit A for the performance of the Services.
2. CONFIDENTIALITY
---------------
(a) "Confidential Information" means any Company proprietary
information of a type that would be considered a Trade Secret (as defined in the
Uniform Trade Securities Act, California Civil Code Section 3426, et seq.).
Confidential Information may include technical data, trade secrets or know-how,
including, but not limited to, research, product plans, products, services,
customers, customer lists, markets, software, developments, inventions,
processes, formulas, technology, designs, drawings, engineering, hardware
configuration information, marketing, finances or other business information
disclosed by Company either directly or indirectly in writing, orally or by
drawings or inspection of parts or equipment.
(b) Consultant will not, during or subsequent to the term of this
Agreement, use the Company's Confidential Information for any purpose whatsoever
other than the performance of the Services on behalf of the Company or disclose
the Company's Confidential Information to any third party, except as reasonably
required to discharge Consultant's duties to Company. It is understood that
said Confidential Information shall remain the sole property of the Company.
Consultant further agrees to take all reasonable precautions to prevent any
unauthorized disclosure of such Confidential Information including, but not
limited to, having each employee of Consultant, if any, with access to any
Confidential Information, execute a nondisclosure agreement containing
provisions in the Company's favor comparable to that contained in Sections 2, 3
and 5(a) (modified to apply only to obligations applicable to such employee) of
this Agreement. Confidential Information does not include information which (i)
is known to Consultant at the time of disclosure to Consultant by the Company,
(ii has become publicly known and made generally available through no wrongful
act of Consultant, or (ii has been rightfully received by Consultant from a
third party who is authorized to make such disclosure.
<PAGE>
(c) Consultant agrees that Consultant will not, during the term of
this Agreement, improperly use or disclose any proprietary information or trade
secrets of any former or current employer or other person or entity with which
Consultant has an agreement or duty to keep in confidence information acquired
by Consultant, if any, and that Consultant will not bring onto the premises of
Company proprietary information belonging to such employer, person or entity
unless consented to in writing by such employer, person or entity.
(d) Consultant recognizes that Company has received and in the
future will receive from third parties their confidential or proprietary
information subject to a duty on Company's part to maintain the confidentiality
of such information and to use it only for certain limited purposes. Consultant
agrees that Consultant owes Company and such third parties, during the term of
this Agreement and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence and not to disclose it to
any person, firm or corporation or to use it except as necessary in carrying out
the Services for Company consistent with Company's agreement with such third
party.
Company agrees to inform Consultant prior to providing to Consultant
any confidential or proprietary information of third parties to which
Consultant's duty of confidentiality under this Section extends.
(e) Upon the termination of this Agreement, or upon Company's
earlier request, Consultant will deliver to the Company all of the Company's
property or Confidential Information that Consultant may have in Consultant's
possession or control.
3. OWNERSHIP
---------
(a) Consultant agrees that, with the exception of "Consultant
Property" (as herein after defined), all copyrightable material, notes, records,
drawings, designs, inventions, improvements, developments, discoveries and trade
secrets (collectively, "Inventions") conceived, made or discovered by
Consultant, solely or in collaboration with others, in providing Services during
the period of this Agreement which relate in any manner to the business of the
Company that Consultant may be directed to undertake, investigate or experiment
with, or which Consultant may become associated with in work, investigation or
experimentation in the line of business of Company in performing the Services
hereunder, are the sole property of the Company ("Company Property"). In
addition, any Company Property which constitute copyrightable subject matter
shall be considered "works made for hire" as that term is defined in the United
States Copyright Act. Consultant further agrees to assign (or cause to be
assigned) and does hereby assign fully to the Company all Company Property and
any copyrights, patents, mask work rights or other intellectual property rights
relating to Company Property.
(b) Company acknowledges that prior to the commencement of this
Agreement, Consultant has created and developed various business and management
techniques and strategies which Consultant may utilize in providing Services
hereunder. Company agrees that notwithstanding any other provisions in the
Agreement, Consultant shall reserve and shall at all times have and retain the
rights to the following:
(i) All Inventions concerning or in any way relating to
general management or business techniques, strategy and management team
development that are conceived, made, discovered or improved by Consultant,
solely or in collaboration with others, before, during or after the period of
this
2
<PAGE>
Agreement whether or not related in any manner to the business of Company
("Consultant Property"). In addition, Consultant shall not be obligated to
assign to Company any Consultant Property or any copyrights, patents, mask work
rights or other intellectual property rights relating thereto. Notwithstanding
the foregoing, all information included in any materials that would otherwise be
considered Consultant Property (i) that relates specifically to Company
management, business or strategy or (ii) constitutes Confidential Information
shall remain the sole property of Company.
(ii) Any notes, materials or other related documents prepared
by Consultant in his capacity as a member of Company's Board of Directors
("Director Property").
(c) Consultant agrees to assist Company, or its designee, at the
Company's expense, in every proper way to secure the Company's rights in Company
Property and any copyrights, patents, mask work rights or other intellectual
property rights relating thereto in any and all countries, including the
disclosure to the Company of all pertinent information and data with respect
thereto, the execution of all applications, specifications, oaths, assignments
and all other instruments which the Company shall deem necessary in order to
apply for and obtain such rights and in order to assign and convey to the
Company, its successors, assigns and nominees the sole and exclusive right,
title and interest in and to such Company Property, and any copyrights, patents,
mask work rights or other intellectual property rights relating thereto.
Consultant further agrees that Consultant's obligation to execute or cause to be
executed, when it is in Consultant's power to do so, any such instrument or
papers shall continue after the termination of this Agreement. In no event,
however, shall the provisions of this Section 3(c) apply to Consultant Property
or Director Property as those terms are defined in Section 3(b) of this
Agreement.
(d) Consultant agrees that if in the course of performing the
Services, Consultant incorporates into any Company Property developed hereunder
any Consultant Property or Director Property or other invention, improvement,
development, concept, discovery or other proprietary information owned by
Consultant, the Company is hereby granted and shall have a nonexclusive,
royalty-free, perpetual, irrevocable, worldwide license to make, have made,
modify, use and sell such item as part of or in connection with such Company
Property.
(e) Consultant agrees that if the Company is unable because of
Consultant's unavailability, dissolution, mental or physical incapacity, or for
any other reason, to secure Consultant's signature to apply for or to pursue any
application for any United States or foreign patents or mask work or copyright
registrations covering Company Property assigned to the Company above, then
Consultant hereby irrevocably designates and appoints the Company and its duly
authorized officers and agents as Consultant's agent and attorney in fact, to
act for and in Consultant's behalf and stead to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of patents, copyright and mask work registrations
thereon with the same legal force and effect as if executed by Consultant.
4. REPORTS
-------
Consultant agrees that it will from time to time during the term of
this Agreement or any extension thereof keep the Company advised as to
Consultant's progress in performing the Services hereunder and that Consultant
will, as requested by the Company, prepare written reports with respect thereto.
It is understood that the time required in the preparation of such written
reports shall be considered time devoted to the performance of Consultant's
Services.
3
<PAGE>
5. CONFLICTING OBLIGATIONS
-----------------------
(a) Subject to the matters set forth in Section 5(b), Consultant
certifies that Consultant has no outstanding agreement or obligation that is in
conflict with any of the provisions of this Agreement, or that would preclude
Consultant from complying with the provisions hereof, and further certifies that
Consultant will not enter into any such conflicting Agreement during the term of
this Agreement.
(b) Company acknowledges that Consultant has advised Company that
under an Employment Agreement, dated April 8, 1997, by and between Consultant
and Boston Scientific Corporation, a Delaware corporation ("Boston Scientific"),
Consultant has agreed that prior to April 8, 1999, Consultant:
"Shall not, directly or, acting through one or more persons,
indirectly as a sole proprietor, member of a partnership, stockholder
or investor, officer or director of a corporation, or as an employee,
associate, consultant, independent contractor, or agent of any person,
partnership, corporation or other business organization or entity
other than Boston Scientific, solicit or endeavor to entice away from
Target Therapeutics, Inc., a Delaware corporation ("Target"), any
person or entity who is employed by or is an exclusive consultant of
Target as of the date hereof."
Company acknowledges that the Services to be performed by Consultant
do not include any responsibilities or role on behalf of Company that would
cause Consultant to violate the foregoing covenant. Company and Consultant each
further agree not to take any action that would result in any breach by
Consultant of the covenant.
6. TERM AND TERMINATION
--------------------
(a) This Agreement will commence on the date first written above and will
continue until terminated as provided below.
(b) Termination With Severance Compensation.
---------------------------------------
(i) Company may terminate this Agreement by giving thirty (30) days
prior written notice thereof to Consultant. In the event this Agreement is
terminated by Company in accordance with this Section, Company shall be
obligated to pay the severance compensation as set forth in Section 6(b)(iii)
below.
(ii) Consultant may terminate this Agreement by written notice to
Company if Company breaches any material provision of this Agreement and fails
to cure such breach within thirty (30) days of receiving notice from Consultant
of the alleged breach and the action which Consultant believes is required to
cure the breach. If this Agreement is terminated by Consultant in accordance
with this Section, Company shall be obligated to pay the severance compensation
as set forth in Section 6(b)(iii) below.
(iii) In the event of a termination under this Section 6(b) on or
before the date two years following the effective date of this Agreement,
Company shall be obligated to pay Consultant as severance
4
<PAGE>
compensation, commencing from the date of termination of the Agreement, the
amount of $8,333.33 per month, and continuing each month for the shorter of (i)
twelve consecutive months or (ii) the number of full or partial months from the
effective date of this Agreement to the effective date of termination of this
Agreement. The severance compensation shall be paid on the first day of each
calendar month or if the first day is a non-business day, on the last business
day prior to the first day of the calendar month.
(c) Termination Without Severance Compensation.
------------------------------------------
(i) Notwithstanding the provisions of Section 6(b) above, Company
may terminate this Agreement immediately and without prior notice if Consultant
(i) refuses to or is unable to perform the Services or (ii) by written notice to
Consultant if Consultant breaches any material provision of this Agreement and
fails to cure such breach within thirty (30) days of receiving notice from
Company of the alleged breach and the action which Company believes is required
to cure the breach.
(ii) Consultant shall have the right under this Agreement to resign
upon giving thirty (30) days prior written notice thereof to Company.
(iii) The parties anticipate that the Board of Directors will appoint
Consultant to fill a vacancy on the Board of Directors of Company for a term
expiring at the annual meeting of stockholders of the corporation in 1999. Upon
expiration of such term, if Consultant elects not to be nominated for an
additional term or if Consultant is not re-elected by the shareholders to the
Board of Directors, this Agreement shall terminate concurrently with the
expiration of Consultant's term on the Board.
(iv) In the event this Agreement is terminated in accordance with
this Section 6(c), Company shall not be obligated to pay the severance
compensation as set forth in Section 6(b) above.
(d) Survival. In all events causing termination, Sections 2
--------
(Confidentiality) , 3 (Ownership), 7 (Indemnification of Consultant), 8
(Director and Officer Insurance), 10 (Independent Contractors) and 11
(Arbitration and Equitable Relief) shall survive the termination of this
Agreement and Company shall be obligated promptly to pay or reimburse to
Consultant all amounts due to Consultant as of the effective date of the
termination of this Agreement under the terms of Exhibit A hereto.
7. INDEMNIFICATION OF CONSULTANT
-----------------------------
To the fullest extent permissible under applicable laws, Company shall
indemnify and defend Consultant and hold him harmless from and against all
claims, liabilities, damages and expenses, including reasonable attorneys' fees
and costs of suit ("Claims") arising out of or in connection with the
performance of Services under this Agreement except to the extent that Claims
are determined to have been caused by Consultant's willful or reckless
misconduct. In addition, during any time that Consultant is serving as a member
of the Board of Directors of the Company and for a period of at least six years
thereafter, Company shall use its best efforts to provide indemnification
protection for Consultant for claims arising out of Consultant's role as a
director that is at least as protective as the provision currently contained in
Section 6.1 of the Company's Bylaws.
8. DIRECTOR AND OFFICER INSURANCE
------------------------------
5
<PAGE>
Company agrees that during the time that Consultant is serving on
Company's Board of Directors and for a period of at least six years thereafter,
Company shall use its best efforts to maintain in effect directors' and
officers' insurance covering Consultant in his role as a director and/or officer
of Company on terms not materially less favorable than the existing insurance
coverage for Company directors.
9. ASSIGNMENT
----------
Neither this Agreement nor any right hereunder or interest herein may
be assigned or transferred by (i) Consultant without the express written consent
of Company or (ii) Company without the express written consent of Consultant.
10. INDEPENDENT CONTRACTOR
----------------------
Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent or employee of the Company, Consultant shall perform the
Services hereunder as an independent contractor. Consultant agrees to furnish
all tools and materials necessary to accomplish this contract, and shall incur
all expenses associated with performance, except as expressly provided on
Exhibit A of this Agreement. Without limiting the generality of the foregoing,
Consultant recognizes that Company shall not provide for Consultant a dedicated
office space or dedicated secretarial assistance. Consultant acknowledges and
agrees that Consultant is obligated to report as income all compensation
received by Consultant pursuant to this Agreement, and Consultant agrees to and
acknowledges the obligation to pay all self-employment and other taxes thereon.
11. ARBITRATION AND EQUITABLE RELIEF
--------------------------------
(a) Except as provided in Section 11(b) below, Company and
Consultant agree that any dispute or controversy arising out of or relating to
any interpretation, construction, performance or breach of this Agreement, shall
be settled by arbitration to be held in Santa Clara County, California, in
accordance with the rules then in effect of the American Arbitration
Association. The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court of competent jurisdiction.
(b) In the event of any arbitration or other legal proceeding
between Company and Consultant growing out of this Agreement, the prevailing
party shall be entitled to recover all reasonable costs, including but not
limited to reasonable attorneys' fees, incurred in connection with (a) such
proceeding, (b) any appellate proceedings arising therefrom or relating thereto,
and/or (c) the enforcement of any judgment or award entered or issued in such
proceeding. "Prevailing party" within the meaning of this Section shall include,
without limitation, a party who dismisses a proceeding for recovery hereunder in
exchange for payment of the sums allegedly due, performance of covenants
allegedly breached or consideration substantially equal to the relief sought in
the proceeding.
(c) Consultant agrees that it may be impossible or inadequate to
measure and calculate Company's damages from any breach of the covenants set
forth in Sections 2 or 3 herein. Accordingly, Consultant agrees that if
Consultant breaches Sections 2 or 3, the Company will have available, in
addition to any other right or remedy available, the right to seek from any
court of competent jurisdiction an
6
<PAGE>
injunction restraining such breach or threatened breach and specific performance
of any such provision.
12. GOVERNING LAW
-------------
This Agreement shall be governed by the laws of the State of
California.
13. NO DUTY TO MITIGATE
-------------------
Consultant shall not be required to mitigate the amount of any payment
contemplated by this Agreement (whether by seeking new employment or in any
other manner), nor shall any payment required by this Agreement be reduced by
any earnings that Consultant may receive from any other source.
14. NOTICES
-------
Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery (including delivery by messenger
or by overnight courier service), by facsimile or by certified mail, return
receipt requested, addressed as follows:
If to Company: Somnus Medical Technologies, Inc.
285 North Wolfe Road
Sunnyvale, CA 94086
Facsimile No.: (408) 773-9123
If to Consultant: 875-A Island Drive, Number 370
Alameda, CA 94502
Facsimile No.: (510) 337-0634
Notice shall be effective upon receipt or refusal of delivery by the intended
recipient, as evidenced by the records of the messenger or delivery service or
the U.S. Postal Service or by mechanical confirmation of successful facsimile
transmission. Either party may, by notice to the other, specify a different
address or facsimile number for notice purposes.
15. Company and Consultant each acknowledges and agrees that Consultant's
services as a director are not governed by the terms of this Agreement.
Notwithstanding any other provision of this Agreement, in addition to the
compensation and rights provided herein, Consultant shall be entitled to receive
all compensation, benefits and privileges applicable to directors serving on the
Board of Directors
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CONSULTANT
/s/ Gary Bang
-------------
Gary Bang
SOMNUS MEDICAL TECHNOLOGIES, INC.
By: /s/ John G. Schulte
-------------------
Title: President and CEO
-----------------
<PAGE>
EXHIBIT A
---------
SERVICES AND COMPENSATION
-------------------------
1. Contact. Consultant's principal Company contact shall be John Schulte,
-------
President and CEO.
2. Services. Consultant will render Services in the areas of general business
--------
and management techniques, management team development, market development,
international marketing and investor relations strategy. Consultant will
provide approximately 50 days of consulting services per year (the "Minimum
Service Requirement"). The time when services are to be provided shall be
determined by Consultant in consultation with Company. Any time that
Consultant spends attending Board meetings or meetings of committees of the
Board shall be in addition to Consultant's Minimum Service Requirement.
Consultant shall be compensated in the same manner and at the same rate as
the other members of the Board for attending such meetings.
3. Consultant Compensation.
-----------------------
(a) While this Agreement is in effect, Company shall pay Consultant
$8,333.33 per month on the first day of each calendar month or if the
first is a non-business day, on the last business day prior to the
first day of the calendar month.
(b) The Board of Directors of the Company shall, at its earliest
opportunity, approve the issuance to Consultant in connection with
this Agreement of fully vested options to purchase 80,000 shares of
Company's Common Stock (the "Initial Grant"), pursuant to the terms
of the Company's 1996 Stock Option Plan and the Stock Option
Agreement. The exercise price shall be the fair market value of the
shares on the date of grant by the Board of Directors. The options
shall be exercisable for ten (10) years from the date of grant.
(c) Company shall reimburse Consultant for all travel and business
related entertainment and business development expenses incurred by
Consultant on behalf of Company in connection with Services provided
under this Agreement in accordance with Company's normal procedures
for reimbursement.
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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0
0
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</TABLE>
