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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998 or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-23275
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SOMNUS MEDICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 77-0423465
<S> <C>
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
<CAPTION>
285 N. Wolfe Road
Sunnyvale, California 94086
<S> <C>
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 773-9121
Securities Registered Pursuant to Section 12(b) of the Act:
<CAPTION>
Title of each class Name of each exchange on which registered
<S> <C>
None N/A
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 10,
1999, as reported on the Nasdaq National Market, was approximately
$33,142,000.
The number of shares of Common Stock outstanding as of March 10, 1999:
14,067,183 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year.
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SOMNUS MEDICAL TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I........................................................................... 3
ITEM 1. BUSINESS............................................................. 3
ITEM 2. PROPERTIES........................................................... 22
ITEM 3. LEGAL PROCEEDINGS.................................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 22
PART II.......................................................................... 23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................. 23
ITEM 6. SELECTED FINANCIAL DATA.............................................. 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................ 46
PART III......................................................................... 47
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 47
ITEM 11. EXECUTIVE COMPENSATION............................................... 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 48
PART IV.......................................................................... 49
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..... 49
</TABLE>
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PART I
ITEM 1. BUSINESS
This Report on Form 10-K contains certain forward looking statements
regarding future events. Actual events or results may differ materially as a
result of the factors described herein and in the documents incorporated
herein by reference, including, in particular, those factors described under
"Additional Risk Factors."
Company Overview
Somnus was incorporated in Delaware in January 1996. We design, develop,
manufacture and market innovative medical devices that utilize our proprietary
radiofrequency ("RF") technology for the treatment of upper airway disorders.
The Somnus Somnoplasty(TM) 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 habitual snoring. Our Somnoplasty System shrinks
tissue in the upper airway by utilizing automated RF control units and a suite
of disposable, single-use, needle electrode devices, which deliver controlled
thermal energy to obstructed areas, while protecting the delicate mucosal
lining of the tissue. We have received Food and Drug Administration ("FDA")
and European clearance for the use of the Somnoplasty System in the treatment
of OSA, enlarged turbinates and snoring, and officially launched the marketing
of the Somnoplasty System at the American Academy of Otolaryngology-Head and
Neck Surgery Foundation, Inc. conference in September 1997.
We have a direct sales force to market our products in the United States and
have a distributor in Canada. Our intention is to market the Somnoplasty
System primarily to:
.ear, nose and throat physicians,
.oral maxillofacial surgeons,
.pulmonologists,
.sleep medicine specialists and
.other physicians who treat upper airway disorders.
There are approximately 9,000 ear, nose and throat physicians, 7,000 oral
maxillofacial surgeons, and 6,800 pulmonologists and, we believe more than
1,800 sleep clinics in the United States. As of December 31, 1998, we have
shipped 297 control units in the United States, including 51 in the quarter
ended December 1998. We also intend to continuously expand our marketing
program directed primarily at the medical community and to a lesser extent at
consumers, to further establish awareness of the Somnoplasty ProcedureSM.
We have a European Headquarters in The Netherlands primarily to establish
and manage relationships with distributors throughout Europe. In markets
outside the United States and Europe, we are in the process of establishing
relationships with distributors that can provide us with access to an
established network for the marketing and distribution of the Somnoplasty
System.
At December 31, 1998, our commercial products included one control unit
model and three disposable devices designed to treat a variety of upper airway
disorders. Additional models of devices are under development. As of December
31, 1998, in the United States, we had 27 issued patents, and an additional 25
pending patent applications. We also had two issued foreign patents and 51
pending foreign patent applications.
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Business Strategy
Our strategy is to establish the Somnoplasty System, which utilizes our
proprietary radiofrequency technology, as the standard of care for the
treatment of a variety of upper airway disorders. The following are key
elements of the strategy:
We provide minimally-invasive, curative treatments for upper airway
disorders.
The Somnoplasty System provides physicians with a suite of products designed
to offer minimally-invasive, curative treatment alternatives for a number of
upper airway disorders. We believe that the clinical and patient benefits of
the Somnoplasty System include:
.effectiveness,
.quick procedure time,
.outpatient setting,
.use of local anesthesia and
.low post-procedural pain.
These benefits represent a significant advancement to physicians and
patients over existing treatment options, which, depending upon the disorder,
are highly-invasive, palliative and/or expensive.
We intend to pursue additional indications for the Somnoplasty System.
Somnus received 510(k) clearance in July 1997 for the use of the Somnoplasty
System for reduction of soft tissue, including the uvula and soft palate, for
the treatment of habitual snoring. We received the CE Mark for treatment of
upper airway disorders in June 1997. In December 1997, we received 510(k)
clearance for the treatment of enlarged turbinates associated with chronic
turbinate hypertrophy and in November 1998 we received 510(k) clearance for
the treatment of Upper Airway Resistance Syndrome ("UARS") and OSA. We intend
to seek 510(k) clearance of the Somnoplasty System for other new indications,
some of which are associated with OSA. Clinical trials have recently begun for
use of the Somnoplasty System in the treatment of hypertrophic ("enlarged")
tonsils.
We are creating global distribution through a direct sales force and
collaborative relationships.
We have established a direct sales and distribution capability in the United
States, initially targeting the estimated 9,000 ear, nose and throat
physicians, 7,000 oral maxillofacial surgeons, 6,800 pulmonologists and 1,800
sleep clinics. We may supplement our direct sales force with independent sales
representatives in selected areas of the United States. We have a distributor
in Canada.
In September 1998, we established a European Headquarters in The
Netherlands. This headquarters is responsible for:
.establishing and managing relationships with 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 a distributor agreement in Brazil and letters of
intent ("LOI") in several other countries. We expect distribution agreements
following these LOI's to be finalized within the first and second quarters of
fiscal 1999. We also expect to continue to identify qualified distribution
partners intensifying our coverage of Europe.
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In markets outside the United States and Europe, we are in the process of
establishing relationships with distributors that can provide us with access
to an established network for the marketing and distribution of the
Somnoplasty System.
We have acquired and may acquire or grant licensed complementary technologies
and products and may continue to pursue this strategy in the future.
We have acquired complimentary technology through license agreements for
technology and patents during fiscal 1998. One such license from Medtronic,
Inc. allows the use of the lockout feature of the S-2 control unit to protect
patients against the reuse of disposable devices. We have also granted a
license to Conway Stuart Medical, Inc., for certain radiofrequency generator
technology for treatment of gastroesophageal disorders. We expect to continue
to compliment our core business and technological platform through
acquisitions that broaden our product line and help accelerate the market
acceptance and penetration of the Sopmnoplasty System.
Upper Airway Disorders
The upper airway comprises the passages in the back of the mouth, the nose
and the throat and allows breathing, swallowing and speech vocalization. The
breathing function requires the upper airway tissue and musculature to be
stiff enough to prevent collapse during respiration, while swallowing and
speech require compliance and flexibility. The upper airway is susceptible to
a variety of ailments, including tissue obstructions. A common cause of
obstruction found in the upper airway is excess tissue in one or more
locations, including the uvula (the small conical fleshy tissue hanging from
the center of the soft palate), soft palate, base of the tongue, turbinates
(soft tissue in the nasal cavity) and tonsils. Obstructed breathing impedes
the normal flow of air to the respiratory system.
Certain upper airway disorders, such as snoring and OSA, are present only
during sleep, when normal neurologic stimulation and upper airway muscle tone
are diminished. Such upper airway disorders are classified as sleep disorders
and can have an adverse impact on a person's everyday life. The consequences
of sleep disorders and sleep deprivation include reduced productivity,
decreased quality of life due to excessive daytime sleepiness and increased
risk of serious illness such as cardiovascular disease. Other disorders, such
as nasal congestion due to enlarged turbinates (for instance, as a consequence
of allergies, such as hay fever) or enlarged tonsils, are independent of the
wake/sleep cycle and affect people throughout the day as well as during sleep.
Obstructive Sleep Apnea
OSA occurs when tissues in the back of the mouth and in the throat cause
intermittent complete or partial blockage in the upper airway, resulting in an
inability to breathe properly. The brain, sensing that the body is suffocating
from a lack of oxygen, arouses the person to a light sleep, causing the throat
muscles to contract, thus allowing a small passage of air and producing a
gasping sound. The person falls back into deeper sleep until the muscles relax
again, blocking the upper airway and repeating the cycle of arousal.
The cycle of complete or partial upper airway closure with subconscious
arousal to lighter levels of sleep can be repeated as many as several hundred
times during six to eight hours of sleep. Sufferers of OSA typically
experience ten or more such cycles per hour and experience two or more
clinical symptoms of OSA, such as excessive daytime sleepiness, reduced
cognitive function (including memory loss and lack of concentration) and
irritability. Several reports indicate that the oxygen desaturation, increased
heart rate and elevated blood pressure caused by OSA may be associated with
increased risk of cardiovascular morbidity and mortality due to angina, stroke
and heart attack.
According to a 1993 report to Congress, the National Commission on Sleep
Disorders Research estimated that approximately 40 million people in the
United States suffer from chronic disorders of sleep and wakefulness, such as
OSA, insomnia and narcolepsy. They estimate that 20 million of these people
are afflicted with OSA, of whom an estimated 6.4 million are afflicted by the
disorder at a moderate to severe level. It is estimated that less than 3% of
those afflicted with OSA are diagnosed.
5
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Enlarged Turbinates
Chronic obstruction of the nasal cavity can impact a person's health and
quality of life. Chronic nasal obstructions are most frequently caused by
enlarged turbinates. Turbinates can become chronically enlarged as a reaction
to diseases, such as chronic and drug-induced rhinitis, and allergy-causing
substances. Enlarged turbinates can partially obstruct or completely block the
nasal passages, resulting in an inefficient or non-existent nasal function.
During the day, enlarged turbinates can cause breathing through the nose to be
difficult and uncomfortable, and at night can contribute to snoring and OSA.
Snoring
Snoring occurs when throat muscles relax during sleep and tissues in the
back of the mouth and in the throat, unsupported by nearby bone structure,
collapse and partially block the upper airway. This partial obstruction causes
the sleeping person to inhale more deeply, creating a vacuum in the
collapsible part of the airway and pulling floppy tissue into the airway.
Snoring is the sound produced by these vibrating structures during breathing.
Habitual snorers are individuals who snore almost every night at a noise
level that would be considered disturbing to others in the same room. We
estimate that there are more than 40 million habitual snorers in the United
States. Factors contributing to habitual snoring include male gender, obesity,
alcohol consumption, use of tranquilizers or muscle relaxants and smoking.
Research has shown that the frequent arousals from sleep caused by snoring may
affect a person's health and productivity during the day. The disruption of
normal sleep can lead to excessive daytime sleepiness, fatigue and loss of
memory and concentration in both the individual suffering from snoring and in
his or her companion. Moreover, snoring is often associated with, and may be a
precursor to, OSA.
Current Treatments for Upper Airway Disorders
Currently, no standard modality dominates the treatment of upper airway
disorders. Traditional treatment methods for upper airway disorders range from
behavioral changes to highly invasive surgery. More recently, treatments such
as Continuous Positive Airway Pressure ("CPAP") and laser surgery have emerged
for OSA and snoring, respectively. Current treatments often result in lengthy
recovery periods, significant patient discomfort, and poor compliance by the
user and/or high medical expenses.
Treatment of OSA
The most common treatment for OSA is CPAP. With CPAP, the sleeping patient
wears a mask over the nose, and sometimes the mouth, while pressure from a
compressor forces air through the upper airway to keep excess tissues from
collapsing and obstructing the airway. CPAP machines range from compressors,
which deliver an unchanging, steady flow of air to compressors, which adjust
pressure during inspiration and expiration, to even more sophisticated
systems. Third-party reimbursement is generally available for CPAP.
While CPAP is successful in addressing the symptoms of OSA, its use has a
number of disadvantages, including:
.facial skin irritation,
.abdominal bloating,
.mask leaks,
.sore eyes and
.headaches.
6
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Additionally, CPAP is not a cure for OSA and, therefore, must be used on a
nightly basis for as long as the condition persists. The discomfort of the
mask, the inconvenience of use and the unsightly nature of the application
cause many patients to stop using CPAP machines. The American Sleep Disorders
Association ("ASDA") estimated CPAP compliance at only 46% in 1993.
For patients with severe OSA, surgical treatments exist such as the
following:
. uvulopalatopharyngoplasty ("UPPP"), the surgical resection of the uvula,
part of the soft palate, tonsils and excess tissue in the throat,
. maxillofacial surgery, a highly invasive procedure requiring the
resection of the tongue or reconstruction of the jaw bones, and
.tracheostomies, surgical openings through the neck which bypass the
obstruction.
UPPP and the other surgical alternatives have been successful in treating
OSA in certain patients. However, possibly due to the fact that UPPP does not
address obstructions at the base of tongue or in the turbinates, it has proven
effective in only about half the patients treated. The most significant
drawbacks of UPPP, maxillofacial surgery and tracheostomies are that they are
highly-invasive, involve significant post-operative morbidity, including a
painful and lengthy recovery, and are expensive.
Treatment of Enlarged Turbinates
Enlarged turbinates are associated with various causes of rhinitis, and
optimal treatment varies accordingly. The first line of treatment typically
involves the use of a variety of drugs. While antihistamines, corticosteroids
and sympathomimetic drugs are often effective for acute presentations of
enlarged turbinates, this method of treatment suffers from side-effects such
as decreased effectiveness over time, rebound congestion and even drug-induced
rhinitis. It is estimated that the 35 million people in the United States who
are currently under medical treatment represent approximately 13% of total
sufferers.
Various surgical techniques exist to treat enlarged turbinates, with
different instrumentation and degrees of invasiveness. Scalpels,
electrocautery and laser devices are the more common instruments. Resection
can be limited to the soft tissue of the turbinate or extend to part of the
underlying boney structure. These procedures are generally effective, but lead
to significant discomfort in the form of occasional post-operative bleeding,
frequent and significant crusting. This requires time consuming post-operative
management of the patient on the part of the physician.
Treatment of Snoring
There are both nonsurgical and surgical methods for treating snoring.
Nonsurgical devices and appliances used to treat snoring include:
. nasal dilators, such as adhesive nasal tapes which widen the nostrils to
create a larger passage and improve airflow, and
. oral appliances, which adjust the position of a patient's jaw or tongue
during sleep to prevent collapse of the upper airway
Surgical treatment for snoring is available today with laser-assisted
uvulopalatoplasty ("LAUP"). Published studies indicate a success rate for this
procedure in the treatment of snoring of 75% and greater. LAUP is the surgical
resection of the uvula and soft palate through the use of a surgical laser
that operates at temperatures in excess of 700(degrees)C (1,292(degrees)\F). A
LAUP procedure does not require an overnight stay in the hospital; however, it
does present a risk of significant swelling, scarring and post-operative pain.
Third-party reimbursement is not available for the treatment of snoring.
Snoring sufferers most often seek treatment for quality of life rather than
medical reasons.
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The Somnus Solution: Somnoplasty
Our proprietary Somnoplasty System is designed to use radiofrequency energy
to provide a minimally-invasive, curative and relatively painless treatment of
upper airway disorders. The Somnoplasty System includes an automated RF
control unit with temperature monitoring and a suite of proprietary, single-
use, disposable needle electrode devices which deliver controlled thermal
energy into the uvula, soft palate, tongue and turbinates to reduce tissue
volume and stiffen overly-compliant soft tissue. The Somnoplasty System allows
physicians to perform a safe, minimally-invasive surgical procedure in the
office. The use of RF energy to reduce tissue volume treats the causes of
upper airway disorders by enlarging the airway passages and may reduce or
eliminate the need for other treatments.
The procedure creates finely controlled coagulative lesions at precise
locations underneath the mucosal layer of tissue in the upper airway. An
insulating sleeve at the base of the needle electrode protects the mucosa from
thermal damage which prevents tissue sloughing, mucosal scarring, swelling,
bleeding and excessive post-operative pain. Thermocouples in the insulation
and at the tip of the needle electrode assist in the accurate monitoring of
tissue temperature. The control unit is preset to a target temperature of
approximately 75-85(degrees) C (185(degrees) F), ensuring optimal ablation in
a precisely located lesion while protecting the surface mucosa. The lesions
created by the procedure are naturally resorbed in approximately four to eight
weeks, reducing excess tissue volume.
Somnus believes that the primary advantages of the Somnoplasty System
include:
Minimal Discomfort and Reduced Recovery Time. The use of RF energy causes
significantly less swelling and post procedural pain than traditional and
laser-assisted surgery. Patients who undergo the Somnoplasty procedure for the
reduction of soft palate, uvula and enlarged turbinates typically require only
over-the-counter pain medication to treat the postoperative pain and typically
can return to work and resume their normal activities the same day.
Clinical Effectiveness. Unlike treatments such as CPAP for OSA and over-the-
counter remedies for snoring, the Somnoplasty System is designed to be a
curative treatment directly addressing the obstructive tissues in the upper
airway. We believe that the treatment outcomes from the Somnoplasty System
will be equivalent to traditional surgical procedures without the deleterious
side effects of standard and laser-assisted surgical operations.
Rapid Procedure Time. The Somnoplasty System, including patient preparation
and administration of local anesthesia, takes less than 30 minutes, for base
of tongue, enlarged turbinates, soft palate and uvula procedures with
typically less than five minutes necessary for the RF tissue coagulation
itself. We believe treatment requires a range of one to nine visits to a
trained physician and can be performed in an outpatient setting using local
anesthesia.
Ease of Use. The Somnoplasty System is designed to be easy for physicians to
use, thereby minimizing physician training requirements. The Somnoplasty
procedure is less complicated than many minor surgical procedures performed by
dentists in their offices. We believe the benefits of the Somnoplasty System
include:
.Patients: fast, curative outpatient procedure with minimal discomfort,
.Physician: new flexible office based revenue generating system with
ability to treat multiple conditions,
.Payor: improved outcomes and lower costs.
Product Description
We have developed devices for treatment of the tongue, turbinates, uvula and
soft palate. These devices deliver radiofrequency energy from our control
unit. All of our current products are commercially available in the United
States and have 510(k) clearance from the FDA. All of our products have CE
Mark approval and the control unit and uvula and soft palate device is
commercially available in Europe.
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Somnoplasty Product Line
Disposable Devices
SP 1010. The SP 1010 is a single needle deployable electrode device for the
delivery of controlled RF energy into tissue in the soft palate and uvula. The
SP 1010 has a disposable needle device with a reusable handle and cable
assembly. The devices deliver the RF energy through a coagulating needle
electrode which can be positioned using direct visualization. The angle of
deployment may be adjusted prior to the procedure, allowing the physician to
adapt the instrument to individual patient requirements.
SP 1100. The SP 1100 is a disposable single needle electrode device with a
cable assembly for use in enlarged turbinates. It delivers the RF energy
through a coagulating single needle electrode which can be positioned using
direct visualization. The angle of deployment is fixed.
SP 1200. The SP 1200 is a disposable single needle deployable electrode
device with a cable assembly designed for the delivery of controlled RF energy
for patients suffering from OSA. The SP 1200 delivers the RF energy through a
coagulating needle electrode which is positioned using direct visualization.
Control Units
Our control unit is used for the treatment of tissue obstructions in the
upper airway by allowing the physician to efficiently control and monitor the
delivery of energy needed for the RF tissue volume reduction. The physician
determines the maximum amount of power to deliver, the length of time for the
tissue coagulation, the target temperature and the total energy applied. The
user interface of each control unit is designed to require minimal
interaction, allowing the surgeon to focus on the patient. The control unit
contains proprietary software that modulates the delivery of power based on
information transmitted from the disposable needle electrode devices.
S-2 Control Unit. The S-2 control unit is a dual channel generator,
compatible with all of our needle electrode devices. A high-quality color
screen displays delivered power, energy and temperatures. An integral disk
drive captures procedure data and is also used for software upgrades as new
products are introduced.
Clinical and Regulatory Status
United States. In July 1997, we received 510(k) clearance for use of the
Somnoplasty System for coagulation of soft tissue, including the uvula and
soft palate, which reduces the severity of snoring in some individuals. The
510(k) clearance was based on the results of a 24 patient, single-center
clinical trial completed in June 1997. The data from this trial indicated that
patients may require anywhere from one to six treatments to significantly
reduce snoring. We believe that most patients only require one to three
treatments to significantly reduce snoring.
In December 1997, we received 510(k) clearance for the use of the
Somnoplasty System for the treatment of nasal obstruction due to chronic
turbinate hypertrophy. The 510(k) clearance was based on the results of 38
patients from the first two centers involved in this clinical trial. We
believe that most patients require one treatment to reduce enlarged
turbinates.
In November 1998, we received 510(k) clearance for the use of the
Somnoplasty System for the reduction of the incidence of airway obstructions
in patients suffering from OSA or Upper Airway Resistance Syndrome ("UARS").
The 510(k) clearance was based on the results of a 18-patient, single-center
clinical trial completed in June 1998. The data from this trial indicated that
patients may require 2 to 9 treatments depending upon the severity of their
disorder. Factors such as the severity of the patient's upper airway
obstruction or improper use
of the Somnoplasty System by the treating physician could require more
treatments than were documented during the clinical trials.
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Following the tongue indications mentioned above, we intend to pursue FDA
clearance for the treatment of additional upper airway obstructions, some of
which may strengthen the claim for the treatment of OSA. We expect our 510(k)
submissions for these supplemental indications will require additional
clinical trials. In addition, we are continuing to conduct clinical trials for
indications with existing 510(k) clearance to broaden our portfolio of
clinical data.
We have 510(k) clearance from the FDA for the use of the SP 1010 disposable
devices for the reduction of severity of snoring in some individuals, the SP
1100 for the treatment of enlarged turbinates, and the SP1200 for the
reduction of the incidence of airway obstructions in patients suffering from
UARS and OSA. In addition, the S-2 control unit has also received 510(k)
clearance for a general claim of tissue coagulation. Other clearances are
being pursued for various product enhancements. All Somnus products that have
been cleared by the FDA are Class II products.
International. In June 1997, we received authorization from the European
Union (through a duly appointed Notified Body) to affix the CE Mark to our
commercially available products for treatment of upper airway obstructions. We
have been certified under the ISO 9001 Quality System Regulation ("QS Reg.")
by TUV Essen, a German Notified Body. We have also received a TGA listing for
Australia. We are also approved to ship product to Canada via Health Canada
Medical Device license approval, and are pursuing additional countries.
Research and Development
We believe that we have a strong base of proprietary design, engineering,
manufacturing and prototype development capabilities. Our particular expertise
is in the core research and development areas relevant to the production of
new disposable needle electrode devices for use in conjunction with our
current RF control unit. Primarily through internal research and development
efforts, we plan to continue to develop new proprietary products, often in
collaboration with leading surgeons and sleep medicine professionals, that
allow surgeons to perform their current or future procedures in a less
traumatic manner with more precision, less surgical time and greater
simplicity. Specifically, we are developing new disposable devices which are
intended to address additional upper airway obstructions such as enlarged
tonsils. We believe that our experience in designing, developing and
manufacturing our current suite of disposable needle electrode devices gives
us a competitive advantage in implementing this strategy. In addition, we have
acquired complimentary technology through license agreements for technology
and patents and expect to continue to compliment our core business and
technological platform through acquisitions that broaden our product line and
help accelerate the market acceptance and penetration of the Sopmnoplasty
System.
In fiscal 1998, 1997 and the period from inception (January 19, 1996) to
December 31, 1996 research and development expenses were $8,220,000,
$6,033,000 and $1,303,000, respectively. As of December 31, 1998, our research
and development staff consisted of 15 employees. We perform our research and
development activities at our offices in Sunnyvale, California. No assurance
can be given that we will complete the development of or successfully
introduce any or all of our devices under development or contemplated for
future development on a timely basis, if at all.
Sales, Marketing and Distribution
In the United States, we have a direct sales force to target primarily:
.ear, nose and throat physicians,
.oral maxillofacial surgeons,
.pulmonologists,
.sleep medicine specialists and
.other physicians who treat upper airway disorders.
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As of December 31, 1998, the sales organization in the United States
consisted of 17 employees, including 2 clinical specialists. We intend to
expand our sales effort during 1999 through the addition of sales
representatives, clinical specialists and customer service representatives.
The primary customers in the United States for the Somnoplasty System are
currently the approximately 9,000 ear, nose and throat physicians and the
approximately 7,000 oral maxillofacial surgeons. We also market to the
approximately 6,800 pulmonologists, as well as sleep medicine specialists.
Certain products, such as the SP 1100 for the treatment of enlarged
turbinates, may appeal to a larger target market, including allergists and
primary care physicians. An important additional target for our sales efforts
is the approximately 1,800 sleep clinics which we believe exist in the United
States. These sleep clinics are multi-specialty practices dedicated to sleep
disorders and include specialists such as ear, nose and throat and oral
maxillofacial surgeons, pulmonologists and psychiatrists and are typically
chaired by physicians who are board certified in sleep medicine. The clinics
include facilities for overnight monitoring and have access to sophisticated
diagnostic equipment to determine the type and characteristics of sleep apnea.
To date, over 300 of these clinics have been accredited by the ASDA. Sleep
clinics are important not only as potential customers, but also for their role
in referring diagnosed patients for treatment.
In September 1998, we established a European Headquarters in The
Netherlands. This headquarters is responsible for:
.establishing and managing relationships with 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 a distributor agreement in Brazil and LOIs in
several other countries. We expect distribution agreements following these
LOIs to be finalized within the first and second quarters of fiscal 1999. We
also expect to continue to identify qualified distribution partners
intensifying our coverage of Europe.
In markets outside the United States and Europe, we are in the process of
establishing relationships with distributors that can provide us with access
to an established network for the marketing and distribution of the
Somnoplasty System.
Our marketing and education efforts have been focused on early adopters with
emphasis on leading surgeons and sleep clinics. As we have approached
saturation of the "early adopter" market we have moved the focus our marketing
and education to the mainstream medical market and, as our products mature,
ultimately, will move to consumers so as to create patient demand for the
Somnoplasty procedure.
Manufacturing
Our manufacturing facility is located in Sunnyvale, California in the United
States. The manufacturing process consists primarily of assembly of internally
manufactured and purchased components and subassemblies. We perform certain
processes in a controlled environment. Sterilization of devices is performed
by an ISO certified contract sterilizer.
Raw materials, components and subassemblies are purchased from various
approved suppliers and are subject to quality specifications and inspections.
We have the right to conduct quality audits of our key suppliers, several of
whom are experienced in the supply of components to manufacturers of medical
devices. For certain of our components and subassemblies, there are relatively
few alternative sources of supply, and establishing additional or replacement
suppliers for such components and subassemblies could not be accomplished
quickly. Delays associated with any part shortages, particularly as we scale
up our manufacturing activities in support of increasing commercial demand,
would have a material adverse effect on our business, financial condition and
results of operations.
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The S-2 control unit is assembled at our facility. Our manufacturing
facilities are subject to periodic inspection by regulatory authorities, and
our operations must undergo compliance inspections conducted by the FDA and
corresponding state agencies. Our quality control group performs tests at
various steps in the manufacturing cycle to ensure compliance with our
specifications and the requirements of the various regulatory authorities.
There can be no assurance that our procedures will be sufficient to meet all
of the requirements of all of the regulatory agencies. Failure to pass
compliance inspections could result in any of the following actions, any one
of which would have a material adverse effect on our business, financial
condition and results of operations:
.warning letters,
.more frequent and rigorous inspections,
. suspension of FDA clearance to market certain or all of our products for
a period until we meet the specifications.
Our current facility is 20,000 square feet, of which approximately 6,300
square feet is dedicated to manufacturing, warehousing and distribution.
Through a remodeling effort, our plan is to increase the manufacturing,
warehousing and distribution area by approximately 1,500 square feet in the
first quarter of fiscal 1999. Our direct labor force includes one shift five
days per week assembling control units and one shift four days per week
assembling devices. With minimal additional equipment additions, we could add
more shifts increasing the capacity in both areas sufficiently to accommodate
expected demand for the next 12 months. There can be no assurance that demand
will grow in the magnitude that we expect or that we will be able to scale up
capacity and volume production in order to meet this demand.
Dependence upon Patents and Proprietary Technology; Risk of Infringement
In the United States, at December 31, 1998, we had 27 issued patents, 5
allowed patents and an additional 20 pending patent applications. We also had
2 issued foreign patents and 51 pending foreign patent applications. These
patents and patent applications relate to our RF devices and methods for
reduction of tissue in the uvula, soft palate, tongue and tonsils, and design
of our control units and disposable devices. In addition, we may also
selectively license patents owned by others which we believe will complement
the technology and increase the value and strength of our intellectual
property portfolio. Our strategy has been to actively pursue patent protection
in the United States and foreign jurisdictions for all upper airway disorders
that can benefit from use of the Somnoplasty System.
The patent and trade secret positions of medical device companies, including
those of Somnus, are uncertain and involve complex and evolving legal and
factual questions. The coverage sought in a patent application either can be
denied or significantly reduced before or after the patent is issued.
Consequently, there can be no assurance that any patents from pending
applications or from any future patent application will be issued, that the
scope of the patent protection will exclude competitors or provide competitive
advantages to Somnus, that any of our patents will be held valid if
subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by Somnus. Since patent
applications are secret until patents are issued in the United States, or
corresponding applications are published in other countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, we cannot be certain that we were the first to file
patent applications for such inventions. In addition, there can be no
assurance that competitors, many of which have substantial resources, will not
seek to apply for and obtain patents that will prevent, limit or interfere
with our ability to make, use or sell our products either in the United States
or in international markets. Further, the laws of certain foreign countries do
not protect our intellectual property rights to the same extent as do the laws
of the United States. Litigation or regulatory proceedings, which could result
in substantial cost and uncertainty to Somnus, may also be necessary to
enforce patent or other intellectual property rights of Somnus or to determine
the scope and validity of other parties' proprietary rights. There can be no
assurance that Somnus will have the financial resources to defend our patents
from infringement or claims of invalidity.
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Somnus also relies upon unpatented proprietary technology, and no assurance
can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
or disclose our proprietary technology or that we can meaningfully protect our
rights in such unpatented proprietary technology. Our policy is to require
each of our employees, consultants, investigators and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with Somnus. These agreements generally provide that all
inventions conceived by the individual during the term of the relationship
shall be the exclusive property of Somnus and shall be kept confidential and
not be disclosed to third parties except in specified circumstances. There can
be no assurance, however, that these agreements will provide meaningful
protection of our proprietary information in the event of unauthorized use or
disclosure of such information.
Public Law 104-208 precludes medical practitioners and health care entities,
who practice these procedures, from being sued for patent infringement.
Therefore, depending upon how these limitations are interpreted by the courts,
they could have a material adverse effect on our ability to enforce any of our
proprietary methods or procedures deemed to be surgical or medical procedures
on a body.
In addition, patent applications in the United States and foreign
jurisdictions are maintained in secrecy for a period after filing. Publication
of discoveries in the scientific or patent literature tends to lag behind
actual discoveries and the filing of related patent applications. Although we
have conducted searches of certain patents issued to other companies, research
and academic institutions and others, patents issued and patent applications
filed in the United States or internationally relating to medical devices are
numerous, and there can be no assurance that current and potential competitors
and other third parties have not filed, or in the future will not file
applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by Somnus. In the event any pending
applications provide proprietary rights to third parties relating to products
or processes used or proposed to be used by Somnus, we may be required to
obtain licenses to patents or proprietary rights of others.
The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property
rights, whether with or without merit, could be time-consuming and expensive
and could divert our technical and management personnel. We may be involved in
litigation to defend against claims of infringement by Somnus, to enforce
patents issued to Somnus or to protect trade secrets of Somnus. If any
relevant claims of third-party patents are held as infringed and not invalid
in any litigation or administrative proceeding, we could be prevented from
practicing the subject matter claimed in such patents or would be required to
obtain licenses from the patent owners of each such patent or to redesign our
products or processes to avoid infringement. In addition, in the event of any
possible infringement, there can be no assurance that we would be successful
in any attempt to redesign our products or processes to avoid such
infringement or in obtaining licenses on terms acceptable to Somnus, if at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure by us to redesign our products or processes or to obtain
necessary licenses could prevent us from manufacturing and selling the
Somnoplasty System, which would have a material adverse effect on our
business, financial condition and results of operations. Although, to date, we
have not been involved in any litigation, in the future, costly and time-
consuming litigation brought by us may be necessary to enforce patents issued
to Somnus, to protect trade secrets or know-how owned by Somnus or to
determine the enforceability, scope and validity of the proprietary rights of
others.
Competition
The medical device industry is subject to intense competition. The market
for products designed to treat upper airway disorders is highly competitive,
and we expect competition to increase. Accordingly, our future success will
depend in part on our ability to respond quickly to medical and technological
change and user preference through the development and introduction of new
products that are of high quality and that address patient and surgeon
requirements. In the treatment of snoring, the Somnoplasty System is subject
to intense competition from existing products, such as nasal dilators and oral
appliances, and surgical procedures, such as LAUP. The U.S. market for the
treatment of enlarged turbinates, a market which we intend to enter in the
near
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future, is dominated by pharmacological treatments, such as nasal sprays, and
surgical procedures, such as turbinectomies. The U.S. market for products for
the treatment of OSA is currently dominated by CPAP products produced by
Healthdyne Technologies Inc., Nellcor Puritan Bennett, Inc., a wholly owned
subsidiary of Mallinckrodt Inc., ResMed Inc. and Respironics, Inc. There can
be no assurance that the Somnoplasty System will successfully compete with or
replace any existing products for these or other indications. Most of our
competitors and potential competitors have greater financial, research and
development, manufacturing and sales and marketing resources than us. In
addition, some of our competitors and potential competitors sell additional
lines of products, and therefore can bundle products to offer higher discounts
or offer rebates or other incentive programs to gain a competitive advantage.
Our inability to compete effectively against existing or future competitors
would have a material adverse effect on our business, financial condition and
results of operations.
We believe that the primary competitive factors in the market for treatment
of upper airway disorders include regulatory approvals, clinical and patient
acceptance, post-operative discomfort, ease of use, product performance,
product price, product supply, marketing and sales capability and the
enforceability of patent and other proprietary rights. We believe that we are
or will be competitive with respect to these factors. Nonetheless, because our
products have recently been introduced or are still under development, the
relative competitive position of Somnus in the future is difficult to predict.
Government Regulation
The preclinical and clinical testing, manufacturing, labeling, distribution
and promotion of our products are subject to extensive and rigorous government
regulation in the United States and other countries. Noncompliance with
applicable requirements can result in enforcement action by the FDA or
comparable foreign regulatory bodies including, among other things, fines,
injunctions, civil penalties, recall or seizures of products, refusal to grant
premarket clearances or approvals, withdrawal of marketing approvals and
criminal prosecution.
United States
A medical device may be marketed in the United States only with the FDA's
prior authorization. Devices classified by the FDA as posing less risk are
placed in either in Class I or II and require the manufacturer to seek 510(k)
clearance from the FDA. Such clearance generally is granted when submitted
information establishes that a proposed device is "substantially equivalent"
in intended use and safety and effectiveness to a "predicate device," which is
either a Class I or II device already legally on the market or a
"preamendment" Class III device (i.e., one that has been in commercial
distribution since before May 28, 1976) for which the FDA has not called for
premarket application ("PMA"). We believe that it usually takes from 3 to 12
months from the date of submission to obtain 510(k) clearance, but it may take
longer, and there can be no assurance that 510(k) clearance will ever be
obtained. During this process, the FDA may determine that it needs additional
information or that a proposed device is precluded from receiving clearance
because it is not substantially equivalent to a predicate device. After a
device receives clearance, any modification that could significantly affect
our safety or effectiveness, or would constitute a major change in the
intended use of the device, will require a new 510(k) submission.
The Somnoplasty System received 510(k) clearance on July 17, 1997 for the
intended use of coagulation (thermal ablation, tissue volume reduction) of
soft tissue, including the uvula and soft palate, and may reduce severity of
snoring in some individuals. In December 1997, we received 510(k) clearance to
use the Somnoplasty System for tissue coagulation (thermal ablation) in the
inferior turbinates to treat the symptoms of nasal obstruction due to chronic
turbinate hypertrophy. In November 1998 we received 510(k) clearance for the
use of the Somnoplasty system for the reduction of the incidence of airway
obstructions in patients suffering from UARS or OSA.
We have made modifications to our cleared devices which we believe do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of our determinations not to submit
a new 510(k) notice for any of these changes or would not require Somnus to
submit a new 510(k)
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notice for any of the changes made to the devices. If the FDA requires Somnus
to submit a new 510(k) notice for any device modification, we may be
prohibited from marketing the modified device until the 510(k) notice is
cleared by the FDA.
A device that does not qualify for 510(k) clearance is placed in Class III,
which is reserved for devices classified by FDA as posing the greatest risk
(e.g., life-sustaining, life-supporting or implantable devices, or devices
that are not substantially equivalent to a predicate device). A Class III
device generally must obtain PMA approval, which requires the manufacturer to
establish the safety and effectiveness of the device to the FDA's
satisfaction. A PMA must provide extensive preclinical and clinical trial data
and also information about the device and our components regarding, among
other things, manufacturing, labeling and promotion. As part of the PMA
review, the FDA will inspect the manufacturer's facilities for compliance with
the Quality System Regulation ("QS Reg."), which includes elaborate testing,
control, documentation and other quality assurance procedures.
Upon submission, the FDA determines if the PMA is sufficiently complete to
permit a substantive review, and if so, the application is accepted for
filing. The FDA then commences an in-depth review of the PMA, which we believe
typically takes one to two years, but may take longer. The review time is
often significantly extended as a result of the FDA asking for more
information or clarification of information already provided. The FDA also may
respond with a "not approvable" determination based on deficiencies in the
application and require additional clinical trials that are often expensive
and time consuming and can delay approval for months or even years. During the
review period, an FDA advisory committee, typically a panel of clinicians,
likely will be convened to review the application and recommend to the FDA
whether, or upon what conditions, the device should be approved. Although the
FDA is not bound by the advisory panel decision, the panel's recommendation is
important to the FDA's overall decision making process.
If the FDA's evaluation of the PMA is favorable, the FDA typically issues an
"approvable letter" requiring the applicant's agreement to specific conditions
(e.g., changes in labeling) or specific additional information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approvable letter is satisfied, the FDA will issue a PMA
for approved indications, which can be more limited than those originally
sought by the manufacturer. The PMA can include post approval conditions that
the FDA believes necessary to ensure the safety and effectiveness of the
device including, among other things restrictions on labeling, promotion, sale
and distribution. Failure to comply with the conditions of approval can result
in material adverse enforcement action, including the loss or withdrawal of
the approval. The PMA process can be expensive and lengthy, and no assurance
can be given that any PMA application will ever be approved for marketing.
Even after approval of a PMA, a new PMA or PMA supplement is required in the
event of a modification to the device, labeling or manufacturing process.
We intend to seek 510(k) clearance of the Somnoplasty System for new
indications, some of which are associated with OSA. These future submissions
likely will need to include supporting clinical trial data. There can be no
assurance, however, that these new indications will receive 510(k) clearance
in a timely fashion, or at all. Delays in market introduction resulting from
the 510(k) clearance process could have a material adverse effect on our
business, financial condition and results of operations. If the FDA determines
that any of the new indications are not eligible for 510(k) clearance, we will
need to seek PMA approval. There can be no assurance that we will submit a PMA
for any such indications or that once submitted, the PMA will be accepted for
filing, found approvable or, if found approvable, will not include unfavorable
restrictions.
A clinical trial in support of a 510(k) submission or PMA generally requires
an Investigational Device Exemption ("IDE") application approved in advance by
the FDA for a limited number of patients. The IDE application must be
supported by appropriate data, such as animal and laboratory testing results.
Clinical trials may begin if the IDE application is approved by the FDA and
the appropriate institutional review boards ("IRBs") at the clinical trial
sites. Submission of an IDE application does not give assurance that the FDA
will approve the IDE application and, if it is approved, there can be no
assurance that the FDA will determine that the data derived from these studies
support the safety and efficacy of the device or warrant the continuation of
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clinical studies. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for
the study by one or more appropriate IRBs without the need for FDA approval.
We are sponsoring several clinical trials which have been determined by the
IRBs at the participating institutions to be nonsignificant risk studies.
There can be no assurance however, that the FDA would agree with these
determinations and not require us to obtain IDE approval before continuing the
studies. During a clinical trial, we are permitted to sell products used for
the study for an amount that does not exceed recovery of the costs of
manufacture, research, development and handling. Our failure to adhere to
regulatory requirements generally applicable to clinical trials or to the
conditions of an IDE approval could have a material adverse effect on our
business, financial conditions and results of operations, including an
inability to obtain marketing clearance or approval for our products.
Any devices manufactured or distributed by Somnus pursuant to FDA clearances
or approvals will be subject to pervasive and continuing regulation by the FDA
and certain state agencies. We will be subject to routine inspection by the
FDA and the California Department of Health Services ("CDHS") and will have to
comply with the host of regulatory requirements that usually apply to medical
devices marketed in the United States, including labeling regulations, the QS
Reg., the Medical Device Reporting ("MDR") regulation and the FDA's
prohibitions against promoting products for unapproved or "off-label" uses. In
addition, Class II devices, such as our Somnoplasty System, can be subject to
additional special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines) that do not apply to
Class I devices. Our failure to comply with applicable regulatory requirements
could result in enforcement action by the FDA, which could have a material
adverse effect on our business, financial condition and results of operations.
Unanticipated changes in existing regulatory requirements, failure of Somnus
to comply with such requirements or adoption of new requirements could have a
material adverse effect on our business, financial condition and results of
operations. We also are subjected to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and hazardous substance
disposal. There can be no assurance that we will not be required to incur
significant costs to comply with such laws and regulations in the future or
that such laws or regulations will not have a material adverse effect upon our
business, financial condition and results of operations.
European Union
The primary regulatory environment in Europe is that of the European Union
("EU") which consists of 15 countries encompassing most of the major countries
in Europe. Certain other countries, such as Switzerland, have voluntarily
adopted laws and regulations that mirror those of the EU with respect to
medical devices. The EU has adopted numerous directives and standards
regulating the design, manufacture, clinical trial, labeling, and adverse
event reporting for medical devices. The principal directives prescribing the
laws and regulations pertaining to medical devices in the EU are the Medical
Devices Directive, 93/42/EEC.
Devices that comply with the requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms
with the essential requirements of the applicable directive and, accordingly,
can be commercially distributed throughout the EU. The method of assessing
conformity varies depending on the class of the product, but normally involves
a combination of self-assessment by the manufacturer and a third-party
assessment by a Notified Body. This third-party assessment may consist of an
audit of the manufacturer's quality system and specific testing of the
manufacturer's product. An assessment by a Notified Body in one country within
the EU is required in order for a manufacturer to commercially distribute the
product throughout the EU. Our Somnoplasty System received the CE Mark in June
1997.
While no additional premarket approvals or individual EU countries are
required, prior to the marketing of a device bearing the CE Mark, practical
complications with respect to market introduction may occur. For example,
differences among countries have arisen with regard to labeling requirements.
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Third-Party Reimbursement
We believe that our products will generally continue to be purchased by
private practices, clinics, hospitals and sleep clinics. In the United States,
the purchasers of medical devices generally rely on Medicare, Medicaid,
private health insurance plans, health maintenance organizations and other
sources of reimbursement for health care costs ("Third-Party Payors") to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Certain Third-Party Payors are moving toward a managed-care
system in which they contract to provide comprehensive health care for a fixed
cost per person. The fixed cost per person established by these Third-Party
Payors may be independent of the practice's cost incurred for the specific
case and the specific devices used. Medicare and other Third-Party Payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
In the United States, we do not anticipate that the Somnoplasty System will
be subject to reimbursement for the treatment of snoring. Traditionally,
sufferers of snoring have paid for surgical and non-surgical treatment and
devices directly. However, the current treatment of OSA and outpatient
surgical procedures for the uvula, soft palate and turbinates are commonly
reimbursed by most carriers, and resection of the tongue is reimbursed as an
inpatient procedure.
The Somnoplasty System is generally reimbursed for the treatment of enlarged
turbinates under existing reimbursement codes. However, there can be no
assurance that third-party reimbursement will be available for all such
procedures by all third-party payors.
We believe that the Somnoplasty System may be reimbursed for treatment of
base of the tongue and OSA under existing reimbursement codes, based on
physician endorsement and the demonstration of improved quality of life for
specific patient groups. Quality of life issues will be included in our
clinical trials to provide data in support of this reimbursement strategy.
There can be no assurance that we will be able to demonstrate improvement in
quality of life or that reimbursement will ever be available for our products.
Our clinical sites do not reimburse us for Somnoplasty System control units or
disposable devices.
Because our devices have been relatively recently launched for the treatment
of base of the tongue, OSA and enlarged turbinates, uncertainty exists
regarding the availability of third-party reimbursement for procedures that
would use our devices for such purposes. Failure by private practices,
clinics, hospitals, sleep clinics and other potential users of our devices to
obtain sufficient reimbursement from Third-Party Payors for the procedures in
which our devices are intended to be used could have a material adverse effect
on our business, financial condition and results of operations.
International market acceptance of our current products and those under
development may be dependent, in part, upon the availability of reimbursement
within prevailing health care payment systems. Reimbursement and health care
payment systems in international markets vary significantly by country, and
include both government sponsored health care and private insurance. We do not
anticipate that use of the Somnoplasty System for treatment of snoring will be
a reimbursable expense. We believe that various levels of reimbursement will
be available in international markets for treatment of base of tongue, OSA and
enlarged turbinates. However, there can be no assurance that any international
reimbursement approvals will be obtained in a timely manner, if at all.
Failure to receive international reimbursement approvals could have a material
adverse effect on market acceptance of our products in the international
markets in which such approvals are sought.
We believe that in the future, reimbursement will be subject to increased
restrictions both in the United States and in international markets. We
believe that the overall escalating cost of medical products and services will
continue to lead to increased pressures on the health care industry, both
domestic and international, to reduce the cost of products and services,
including our existing products and products currently under development.
There can be no assurance that third-party reimbursement and coverage will be
available or adequate in either the United States or international markets or
that future legislation, regulation or reimbursement policies of Third-Party
Payors will not otherwise adversely affect the demand for our existing
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products or products currently under development or our ability to sell our
products on a profitable basis. The unavailability of Third-Party Payor
coverage or the inadequacy of reimbursement could have a material adverse
effect on our business, financial condition and results of operations.
Product Liability Exposure and Availability of Insurance
Our business involves the risk of product liability claims. Although we have
not experienced any product liability claims to date, any such claims could
have a material adverse effect on us. We maintain product liability insurance
at coverage levels which we deem commercially reasonable; however, there can
be no assurance that product liability or other claims will not exceed such
insurance coverage limits or that such insurance will continue to be available
on commercially acceptable terms, or at all. We intend to periodically
evaluate, depending on changing circumstances, whether or not to obtain any
additional product liability insurance. Even if we obtain additional product
liability insurance, there can be no assurance that it would prove adequate or
that a product liability claim, insured or uninsured, would not have a
material adverse effect on our business, financial condition and results of
operations. Even if a product liability claim is not successful, the time and
expense of defending against such a claim may adversely affect our business,
financial condition and results of operations.
Employees
As of December 31, 1998, we employed 78 individuals full time. Of our total
work force, 27 employees are engaged in manufacturing, 15 employees are
engaged in research and development activities, 23 employees are engaged in
sales and marketing activities and 13 employees are engaged in finance and
administrative activities. Our employees are not represented by a collective
bargaining agreement. We believe our relations with our employees are good.
Additional Risk Factors
The risk factors set forth below contain forward-looking statements
(designated by an *), and the Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
factors, including those set forth below. If any of the following risks
actually occur, our business, financial condition or results of operations
could be materially adversely affected. As a result, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Limited Operating History; Absence of Profitability.
Somnus has generated only limited revenues from sales of the Somnoplasty
System and has 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 December 31, 1998, we
have had total revenues of approximately $9.9 million and incurred cumulative
losses of approximately $35.2 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
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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.
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
19
<PAGE>
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.
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.* We
have a distributor in Canada.
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 a distributor agreement in Brazil and LOIs in
several other countries. We expect distribution agreements following these
LOIs to be finalized within the first and second quarters of fiscal 1999.* We
also expect to continue to identify qualified distribution partners
intensifying our coverage of Europe.*
In markets outside the United States and Europe, we are in the process of
establishing relationships with distributors that can provide us with access
to an established network for the marketing and distribution of the
Somnoplasty System.* We have an agreement with a distributor in Canada.
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.
20
<PAGE>
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.
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.
21
<PAGE>
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 levels expected by security analysts
could have an immediate and significant adverse effect on the trading price of
our common stock.
ITEM 2. PROPERTIES
We lease an approximately 20,000 square foot light industrial facility in
Sunnyvale, California, under a lease that terminates in 2002, with an option
to extend to 2007. We believe that our facility is adequate to meet our
current requirements. We anticipate requiring additional space within 12 to 18
months. In addition, we lease an approximately 2,500 square foot sales office
facility in Eindhoven, The Netherlands, under a lease that terminates in 2000.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the NASDAQ National Market under the symbol
"SOMN". The following table sets forth the range of the high and low sales
prices by quarter as reported on the NASDAQ National Market from November 5,
1997, the date the Common Stock commenced trading.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
1997: Fourth Quarter (from November 5, 1997)................ $14 1/4 $9 3/7
1998: First Quarter......................................... $12 7/8 $8 1/8
1998: Second Quarter........................................ $13 5/8 $6 13/16
1998: Third Quarter......................................... $ 8 1/2 $3
1998: Fourth Quarter........................................ $ 5 1/8 $1 3/16
</TABLE>
As of December 31, 1998, the number of common stockholders of record was
157. We currently intend to retain any earnings for use in our business and do
not anticipate paying any cash dividends in the foreseeable future.
In November 1997, we completed our initial public offering (the "IPO") of
4,600,000 shares (including the exercise of the underwriter's over-allotment
option consisting of 600,000 shares) of our Common Stock, $0.001 par value per
share, at a public offering price of $10.50 per share pursuant to a
registration statement on Form S-1 (File No. 333-35401) filed with the
Securities and Exchange Commission. All of the shares registered were sold.
J.P. Morgan & Co., UBS Securities and Smith Barney Inc. were the managing
underwriters of the IPO. Aggregate gross proceeds to us from the IPO (prior to
deduction of underwriting discounts and commissions and expenses of the
offering) were $48,300,000. There were no selling stockholders in the IPO.
We paid underwriting discounts and commissions of approximately $3,400,000
and other expenses of approximately $1,100,000 in connection with the IPO. The
total expenses paid by us in the IPO were approximately $4,500,000 and the net
proceeds to us in the IPO were approximately $43,800,000.
From November 5, 1997, the effective date of the Registration Statement, to
December 31, 1998, the approximate amount of net proceeds used from the
Offering were $4.9 million for research and development, clinical trials and
regulatory matters, $3.6 million to manufacture product and further develop
manufacturing expertise and capabilities, $7.7 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
$700,000 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 or officers of Somnus, other than in the ordinary course
of business, to persons owning ten percent or more of any class of equity
securities of Somnus, or to affiliates of Somnus. The use of proceeds
described above do not represent a material change in the use of proceeds
describe in the Offering prospectus.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Period from
Inception
Year Ended Year Ended (January 19, 1996)
December 31, December 31, to December 31,
1998 1997 1996
------------ ------------ ------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Consolidated Statements of
Operations Data:
Total revenues.................... $ 7,356 $ 2,574 $ --
Costs and expenses:
Manufacturing start-up costs and
costs of revenues.............. 5,565 3,110 403
Research and development........ 8,220 6,033 1,303
Selling, general and
administrative................. 14,953 6,741 1,489
-------- -------- -------
Total costs and expenses.......... 28,738 15,884 3,195
-------- -------- -------
Loss from operations.............. (21,382) (13,310) (3,195)
Other income, net................. 2,054 553 98
-------- -------- -------
Net loss.......................... $(19,328) $(12,757) $(3,097)
======== ======== =======
Net loss per share:
Basic and Diluted............... $ (1.41) $ (3.02) $ (1.61)
======== ======== =======
Shares used in computing per share
amounts:
Basic and Diluted............... 13,717 4,224 1,922
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................ $ 32,280 $ 45,145 $ 8,829
Working capital.......................... 27,742 43,736 7,982
Total assets............................. 36,512 48,227 10,031
Long-term obligations.................... -- -- 773
Accumulated deficit...................... (35,182) (15,854) (3,097)
Total stockholders' equity............... 29,428 45,620 8,353
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth in this Item 7 below contains forward-looking
statements (designated by an *), and the Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of factors, including those set forth above under "Additional Risk
Factors."
Overview
We design, develop, manufacture and market innovative medical devices that
utilize our proprietary RF technology for the treatment of upper airway
disorders. Our SomnoplastySM 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 since
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.
Product shipments are made directly from our facility in the United States
to the distributor. We have a distributor agreement in Brazil and LOIs in
several other countries. We expect distribution agreements following these
LOIs to be finalized within the first and second quarters of fiscal 1999.* We
also expect to continue to identify qualified distribution partners
intensifying our coverage of Europe.*
In markets outside the United States and Europe, we are in the process of
establishing relationships with distributors that can provide us with access
to an established network for the marketing and distribution of the
Somnoplasty System.* We have an agreement with a distributor in Canada.
We plan to continue to hire additional management and engineering personnel
to support and develop manufacturing expertise and larger 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 fourth
quarter of fiscal 1998, we commenced 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
require operating capital on an ongoing basis. We will continue to 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.
25
<PAGE>
We are building a direct sales force to cover the United States. Presently
the sales force consists of a Vice President of North American Sales, two
domestic regional sales managers, ten domestic sales representatives and one
clinical specialist. During fiscal 1998 we hired a Vice President and General
Manager of European Sales & Marketing and business managers to manage
distributors in European countries. Medtronic previously distributed our
products in Europe. Somnus and Medtronic have cooperatively transitioned
product distribution rights back to Somnus. Additionally, we have entered into
an agreement with a distributor in Canada and plan to enter into agreements
for product distribution in Japan and other international markets.* We
anticipate significant short-term expenditures in the development of our
direct and indirect sales infrastructure.*
As of December 31, 1998, we have incurred cumulative losses from inception
of approximately $35,182,000. 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 new products and the ability of us 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 revenues
Our revenues for fiscal 1998 and fiscal 1997 are derived primarily from
sales of our Somnoplasty System, consisting of the 215 RF and S-2 control
units and disposable devices, to private practices, hospitals, clinics and
sleep clinics. Net revenues increased in fiscal 1998 to $7,356,000 from
$2,574,000 in fiscal 1997, an increase of $4,782,000 or 186%. This increase
was primarily due to the sale of control units, boosted by the introduction of
the new S-2 control unit during the third quarter and increased handpiece
shipments driven off the higher installed base plus additional indications
treatable with the Somnoplasty system. During fiscal 1998 (our first full year
of product shipments) and 1997, net revenues were attributable to sales to
customers principally in the United States. We expect that the sale of control
units will continue to constitute a significant percentage of our total
revenues in the near term as we build an installed base of users. However, we
expect disposable devices to increase as a percentage of total revenue, year
over year.*
Manufacturing start-up costs and costs of revenues.
Manufacturing start-up costs and costs of revenues increased $2,455,000, 79%
to $5,565,000 in fiscal 1998 from $3,110,000, in the prior year. Manufacturing
start-up costs and costs of revenues consist 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 establishing
and expanding manufacturing capabilities, including a one-time charge of
approximately $200,000 relating to certain manufacturing process issues in the
fourth quarter of fiscal 1998, account for the majority of the increase from
fiscal 1997 to fiscal 1998. We believe that manufacturing start-up costs and
costs of revenues will increase in absolute dollars but may fluctuate as a
percentage of revenues.*
26
<PAGE>
Research and development expenses.
Research and development costs for fiscal 1998 were $8,220,000, compared to
$6,033,000 for the prior year, an increase of $2,187,000, 36%. Research and
development expenses are comprised of salaries, prototype development costs,
costs associated with intellectual property, and clinical trial and regulatory
approval expenses.
The increase in expenses is primarily due to increased salaries and employee
related expenses of $2,533,000 in fiscal 1998 versus $1,794,000 in the prior
year, increased consulting fees of $1,145,000 compared to $400,000, increased
patent legal expenses of $835,000 versus $369,000 in the prior year period and
a higher level of general infrastructure costs, including facilities,
information systems and quality assurance. Included in the 1998 employee
related expenses is approximately $753,000 of non-cash stock compensation
charges resulting from stock option grants, compared to $548,000 for the prior
year period. These additional expenses were partially offset by lower spending
on clinical trial and prototype costs of approximately $1,640,000 as compared
to approximately $2,434,000 in the prior year period.
Selling, general and administrative.
Selling, general and administrative ("SG&A") expenses for fiscal 1998 were
$14,953,000, compared to $6,741,000 for fiscal 1997 an increase of
approximately, $8,212,000 or 122% including approximately $1,600,000 in one-
time charges. SG&A expenses consist of executive salaries, professional fees
(including consulting, accounting, legal and risk management), facilities
overhead, accounting and human resources and general office administration
expenses.
The increase in SG&A is primarily due to increased salaries and employee
related expenses of $8,051,000 for fiscal 1998, compared to $2,838,000 for the
prior year period, due to increased headcount, higher levels of commission on
higher sales volumes, the European Office and one time charges of
approximately $1,645,000 in connection with the transition of our former Chief
Executive officer and Chairman of the Board to Chief Technical Officer and
Board Director, severance of our former Chief Financial Officer and certain
other executives. These one-time charges are comprised of approximately
$790,000 in non-cash stock compensation and approximately $855,000 of cash
related compensation. Employee related expenses also include expenses of
$2,058,000 increased from $699,000 for the prior year period relating to non-
cash stock compensation charges resulting from stock option grants including
our executive employment status changes noted above and consultant awards.
Increased selling expenses included commissions, travel and entertainment
costs of $882,000, versus $194,000 for the prior year period and sales samples
costs incurred in 1998 of $320,000. Costs of development of marketing
literature and campaigns, tradeshow attendance, and an extensive ongoing
public relations effort to promote the Somnoplasty System totaled
approximately $1,494,000 in fiscal 1998, compared to $620,000 for the prior
year period.
Interest and other income.
Interest and other income for fiscal 1998 was $2,059,000, compared to
$735,000 for the prior-year period. The increase is attributable to interest
income earned by Somnus on an increased outstanding balance of cash and cash
equivalents, invested from the proceeds of the IPO. Interest expense was
$5,000 for fiscal 1998, compared to $182,000 in the prior-year period. The
decrease was due to the repayment of borrowings under the equipment lease line
of credit.
Net loss.
The net loss was $19,328,000 for fiscal 1998 and $12,757,000 for fiscal
1997, respectively. We expect that our operating losses will continue for at
least the next couple of years and may increase in the short term, as we
continue to invest substantial resources in product development, manufacturing
and sales and marketing.
27
<PAGE>
Fiscal 1997 Compared to the Period from Inception (January 19, 1996) to
December 31, 1996
Net Revenues.
Our revenues through December 31, 1997 were derived from sales of our
Somnoplasty System, consisting of the 215 RF Control unit and SP 1000 and SP
2000 disposable devices (now no longer commercially available), to private
practices, hospitals, clinics and sleep clinics. No revenues were recorded for
the period from inception (January 19, 1996) to December 31, 1996 ("fiscal
1996"). For the year ended December 31, 1997 ("fiscal 1997"), net revenues,
totaling $824,000, were attributable to sales to Medtronic and $1,750,000 to
other customers principally in the United States.
Manufacturing start-up costs and costs of revenues.
Manufacturing start-up costs and costs of revenues were $403,000 in fiscal
1996 and $3,110,000 in fiscal 1997. Manufacturing start-up costs and costs of
revenues consist of raw materials, subassemblies and completed electronics,
quality assurance and warranty costs. The cost of purchased materials, the
costs of prototypes, and the costs of establishing manufacturing capabilities
account for the majority of the increase from fiscal 1996 to fiscal 1997.
Research and development expenses.
Research and development expenses were $1,303,000 in fiscal 1996 and
$6,033,000 in fiscal 1997. Research and development expenses are comprised of
salaries, prototype development costs and clinical trial and regulatory
approval expenses. The increases between the comparison periods reflect the
increased expenditures incurred in the development of the Somnoplasty System,
new development efforts for the control units and the disposable devices,
initiation and expansion of clinical trials and expenses associated with
regulatory approvals in the United States, the European Union and Australia.
Clinical trial costs for fiscal 1997 were approximately $1,700,000 as compared
to approximately $174,000 in fiscal 1996. Salaries of research and development
personnel represented $322,000 and $1,130,000 in fiscal 1996 and fiscal 1997,
respectively. Prototype and patent legal expenses increased to approximately
$750,000 and $475,000 in fiscal 1997, as compared to $129,000 and $0 in fiscal
1996, respectively. The 1997 expenses also include approximately $548,000 of
non-cash stock compensation charges resulting from stock option grants.
Selling, general and administrative.
Selling, general and administrative (SG&A) expenses were $1,489,000 in
fiscal 1996 and $6,741,000 in fiscal 1997, respectively. 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. SG&A for fiscal 1997 included legal and accounting costs of
approximately $426,000 and professional recruitment costs and other consultant
fees of $358,000. The 1997 expenses also include $699,000 of non-cash stock
compensation charges resulting from stock option grants. The increase between
the comparison periods reflects the hiring of additional personnel, increased
legal, accounting and insurance costs associated with being a public company,
development of marketing literature and campaigns, an extensive public
relations effort to promote the Somnoplasty System in conjunction with the
product launch in June 1997 and additional market research into new product
areas. The costs of public relations and advertising for the fiscal 1997 were
approximately $890,000.
Interest and other income, net.
Interest and other income, net were $98,000 in fiscal 1996 and $553,000 for
fiscal 1997. The increases were attributable to interest income earned by
Somnus on our outstanding balance of cash and cash equivalents, invested from
the proceeds of the Series C issuance and the IPO, net of interest expense on
our lease line of credit obligations. Interest expense was $24,000 in fiscal
1996 and $182,000 in fiscal 1997. The increase was due to increased borrowings
against the equipment lease line of credit.
28
<PAGE>
Income Taxes
As of December 31, 1998, we had federal and state net operating loss
carryforwards of approximately $27,700,000 and $12,900,000, respectively. We
also had federal and California research and development tax credit
carryforwards of approximately $500,000. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2011
through 2018, if not utilized. The State of California net operating losses
will expire at various dates beginning in 2001 through 2003, if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended (the "Code"), and similar
state provisions. The annual limitation may result in the expiration of the
net operating loss carryforwards before becoming available to reduce our
federal income tax liabilities. As of December 31, 1998, we had deferred tax
assets of approximately $12,600,000, which have been fully offset by a
valuation allowance. Deferred tax assets relate primarily to the net operating
loss carryforwards.
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 fiscal 1999 to reasonably ensure Year 2000
compliance for our operations.*
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 an 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 these estimates will be
achieved and actual results could differ materially from those anticipated. We
have incurred approximately $50,000 through December 31, 1998 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. These contingency plans will be for certain mission critical
operations for the period immediately subsequent to January 1, 2000 and will
be formalized during the first half of 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
29
<PAGE>
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.
Liquidity and Capital Resources
Since inception through December 31, 1998, Somnus has 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 financing. We raised an additional $43,756,000 from our IPO,
net of costs of $4,540,000.
Cash and cash equivalents at December 31, 1998 were $32,280,000 compared to
$45,145,000 at December 31, 1997.
Net cash used in operating activities was approximately $12,438,000 for the
twelve months ended December 31, 1998, compared to $9,521,000 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 the increase in accounts payable and related accruals. These
sources of funds were offset partially by an increase in accounts receivable
and inventory, as we increase sales of our products and move more of the
manufacturing operations in-house. Net cash used in investing activities was
approximately $752,000 for the twelve months ended December 31, 1998, compared
to $1,957,000 for the prior-year period, the net cash used in investing
activities was primarily attributable to capital expenditures during these
periods. Net cash provided by financing activities was approximately $325,000
for the twelve months ended December 31, 1998 and $47,795,000 for the prior-
year period. Net cash provided by financing activities in 1998 is attributable
primarily to the exercise of options. The net cash provided by financing
activities for the twelve months ended December 31, 1997 included primarily
the issuance of preferred stock, borrowings under a lease line of credit and
proceeds from our IPO.
We recorded deferred stock compensation expense for the difference between
the exercise price and the fair value of our Common Stock for certain options
granted and related to the severance of former executives including our Chief
Executive Officer and our Chief Financial Officer. The total unamortized
deferred stock compensation at December 31, 1998 is $450,000. We amortized
deferred compensation expenses of approximately $2,811,000 in the twelve
months ended December 31, 1998 compared to $1,252,000 for the respective 1997
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 December 31, 1998, our principal sources of liquidity consisted of
$32,280,000 in cash and cash equivalents. There were no other material unused
sources of liquid assets at December 31, 1998.
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 manufacturing
expansion and headcount additions.*
In October 1998, we announced that our board of directors has 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. No shares had
been repurchased by Somnus as of December 31, 1998. Subsequently Somnus has
repurchased a nominal number of shares under the program.
We anticipate that our existing resources will enable 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 Somnus to establish and maintain strategic
distributor relationships, the time and cost in obtaining regulatory
30
<PAGE>
clearances, 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 Somnus 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 Somnus to raise capital when needed would have a material
adverse effect on our business, financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing
risk. To achieve this objective, we invest in highly liquid and high quality
debt securities. Our investments in debt securities are subject to interest
rate risk. To minimize the exposure due to adverse shift in the interest rates
we invest in short term securities and have maintained an average maturity of
3 months or less. Due to the nature of short term investments we have
concluded that we do not have a material market risk exposure.
31
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Somnus Medical Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Somnus
Medical Technologies, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years ended December 31, 1998 and 1997 and for the period from
inception (January 19, 1996) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Somnus
Medical Technologies, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1998 and 1997 and for the period from inception (January 19, 1996) to December
31, 1996 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 2, 1999
32
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Consolidated Balance Sheets
(in thousands except share and per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 32,280 $ 45,145
Accounts receivable, net of allowances of $662 and
$70 at December 31, 1998 and 1997, respectively... 1,329 662
Inventories........................................ 806 236
Other current assets............................... 411 300
-------- --------
Total current assets................................. 34,826 46,343
Property and equipment............................... 1,601 1,822
Other assets......................................... 85 62
-------- --------
$ 36,512 $ 48,227
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................... $ 1,521 $ 1,112
Accrued liabilities................................ 2,174 542
Accrued compensation............................... 1,858 509
Accrued clinical costs............................. 675 269
Deferred revenue................................... 856 175
-------- --------
Total current liabilities............................ 7,084 2,607
Commitments
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, par
value $0.001 per share, no shares were outstanding
at December 31, 1998 and 1997..................... -- --
Common stock, 50,000,000 shares authorized, par
value $0.001 per share, shares issued and
outstanding: 13,989,490 and 13,444,965 shares at
December 31, 1998 and 1997, respectively.......... 14 13
Additional paid-in capital......................... 65,046 64,782
Deferred stock compensation........................ (450) (3,321)
Accumulated deficit and accumulated comprehensive
loss.............................................. (35,182) (15,854)
-------- --------
Total stockholders' equity........................... 29,428 45,620
-------- --------
$ 36,512 $ 48,227
======== ========
</TABLE>
See accompanying notes.
33
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
Inception
Year Ended Year Ended (January 19, 1996)
December 31, December 31, to December 31,
1998 1997 1996
------------ ------------ ------------------
<S> <C> <C> <C>
Total revenues.................... $ 7,356 $ 2,574 $ --
Costs and expenses:
Manufacturing start-up costs and
costs of revenues.............. 5,565 3,110 403
Research and development........ 8,220 6,033 1,303
Selling, general and
administrative................. 14,953 6,741 1,489
-------- -------- -------
Total costs and expenses.......... 28,738 15,884 3,195
-------- -------- -------
Loss from operations.............. (21,382) (13,310) (3,195)
Interest and other income......... 2,059 735 122
Interest expense.................. (5) (182) (24)
-------- -------- -------
Net loss.......................... $(19,328) $(12,757) $(3,097)
======== ======== =======
Net loss per share:
Basic and Diluted............... $ (1.41) $ (3.02) $ (1.61)
======== ======== =======
Shares used in computing per share
amounts:
Basic and Diluted............... 13,717 4,224 1,922
======== ======== =======
</TABLE>
See accompanying notes.
34
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Consolidated Statement of Stockholders' Equity
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Deficit and
Stock Common Stock Additional Receivable Deferred Accumulated Total
-------------- ------------- Paid-In from Stock Comprehensive Stockholders
Shares Amount Shares Amount Capital Stockholder Compensation Loss Equity
------ ------ ------ ------ ---------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders at $0.001
per share in exchange
for cash and
technology............. -- $ -- 2,335 $ 2 $ -- $ -- $ -- $ -- $ 2
Issuance of common stock
at $0.10 per share for
services............... -- -- 30 -- 3 -- -- -- 3
Issuance of Series A
convertible preferred
stock at $1.00 per
share in exchange for
cash, net of issuance
costs of $16........... 1,784 2 -- -- 1,766 -- -- -- 1,768
Issuance of Series B
convertible preferred
stock at $3.00 per
share in exchange for
cash, net of issuance
costs of $845.......... 3,500 3 -- -- 9,651 -- -- -- 9,654
Issuance of common stock
upon exercise of stock
options for cash,
receivable and
associated compensation
related to 1996 stock
option grants.......... -- -- 98 -- 549 (3) (524) -- 22
Net loss and
comprehensive loss..... -- -- -- -- -- -- -- (3,097) (3,097)
------ ----- ------ --- ------- ----- ------ -------- --------
Balances at December 31,
1996................... 5,284 5 2,463 2 11,969 (3) (524) (3,097) 8,352
Issuance of Series C
convertible preferred
stock at $7.00 per
share in exchange for
cash, net of issuance
costs of $60........... 714 1 -- -- 4,939 -- -- -- 4,940
Issuance of common stock
upon exercise of stock
options for cash....... -- -- 384 -- 68 -- -- -- 68
Repayment of receivable
from stockholder....... -- -- -- -- -- 3 -- -- 3
Conversion of Series A,
B and C preferred stock
to common stock upon
consummation of IPO.... (5,998) (6) 5,998 6 -- -- -- -- --
Issuance of common stock
pursuant to IPO, net of
issuance costs of
$4,540................. -- -- 4,600 5 43,757 -- -- -- 43,762
Deferred compensation
related to grant of
stock options.......... -- -- -- -- 4,049 -- (4,049) -- --
Amortization of deferred
compensation........... -- -- -- -- -- -- 1,252 -- 1,252
Net loss and
comprehensive loss..... -- -- -- -- -- -- -- (12,757) (12,757)
------ ----- ------ --- ------- ----- ------ -------- --------
Balances at December 31,
1997................... -- -- 13,445 13 64,782 -- (3,321) (15,854) 45,620
Issuance of common stock
upon exercise of stock
options for cash....... -- -- 479 1 178 -- -- -- 179
IPO issuance costs...... -- -- -- -- (127) -- -- -- (127)
Deferred Compensation
related to stock option
grants................. -- -- -- -- 817 -- (817) -- --
Amortization of deferred
compensation........... -- -- -- -- -- -- 2,811 -- 2,811
Reduction of deferred
compensation upon
cancellation of option
grants................. -- -- -- -- (877) -- 877 -- --
Issuance of shares under
Employee Stock Purchase
Plan................... -- -- 65 -- 273 -- -- -- 273
Net loss and
comprehensive loss..... -- -- -- -- -- -- -- (19,328) (19,328)
------ ----- ------ --- ------- ----- ------ -------- --------
Balance at December 31,
1998................... -- $ -- 13,989 $14 $65,046 $ -- $ (450) $(35,182) $ 29,428
====== ===== ====== === ======= ===== ====== ======== ========
</TABLE>
35
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Period from
Inception
(January 19,
Year Ended Year Ended 1996) to
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows used in operating activities
Net loss............................... $ (19,328) $ (12,757) $ (3,097)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of deferred
compensation........................ 2,811 1,252 --
Depreciation and amortization........ 716 800 143
Net book value of property, plant and
equipment retirements............... 257 476 --
Issuance of stock for non-cash
consideration....................... -- -- 25
Changes in operating assets and
liabilities:
Other current assets............... (111) (242) (46)
Accounts receivable................ (667) (662) (12)
Inventories........................ (570) (236) --
Other assets noncurrent............ (23) (58) (4)
Accounts payable and accrued
liabilities....................... 2,041 1,022 632
Accrued compensation............... 1,349 440 69
Accrued clinical costs............. 406 269 --
Deferred revenue .................. 681 175 --
--------- --------- --------
Net cash used in operating activities.. (12,438) (9,521) (2,290)
Cash flows used in investing activities
Capital expenditures................... (752) (1,957) (1,283)
Cash flows provided by financing
activities
Net proceeds from issuance of
convertible preferred stock........... -- 4,940 11,422
Net proceeds from issuance of common
stock................................. 325 43,829 2
Repayment of shareholder loan.......... -- 3 --
Proceeds from borrowings under lease
line of credit........................ -- 1,956 977
Repayment of lease line of credit...... -- (2,933) --
--------- --------- --------
Net cash provided by financing
activities............................ 325 47,795 12,401
--------- --------- --------
Net increase (decrease) in cash and
cash equivalents...................... (12,865) 36,317 8,828
Cash and cash equivalents at beginning
of period............................. 45,145 8,828 --
--------- --------- --------
Cash and cash equivalents at end of
period................................ $ 32,280 $ 45,145 $ 8,828
========= ========= ========
Supplemental disclosure of cash flow
information
Cash paid for interest................. $ 5 $ 182 $ 24
Supplemental schedule of non-cash
investing and financing activities
Property and equipment acquired under
lease line of credit.................. $ -- $ 1,957 $ 977
Deferred compensation related to grant
of stock options, net................. $ (60) $ 4,049 $ 524
Issuance of Series B preferred stock in
exchange for services................. $ -- $ -- $ 180
</TABLE>
See accompanying notes.
36
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization, Ownership and Business
Somnus Medical Technologies, Inc. ("Somnus"), was incorporated in Delaware
on January 19, 1996. Somnus designs, develops, manufactures and markets
medical devices that utilize proprietary radiofrequency technology for the
treatment of upper airway disorders. Our Somnoplasty System is intended to
offer minimally-invasive, curative treatment alternatives for disorders of the
upper airway, including snoring, obstructive sleep apnea, enlarged turbinates
and enlarged tonsils. In 1996, we established Somnus Medical Technologies Pty.
Ltd. in Australia for purposes of conducting clinical research studies on
behalf of Somnus. In September 1998 we established Somnus Medical Technologies
B.V. in The Netherlands for purposes of managing a sales distributor network
in Europe. Collectively, the entities are referred to as Somnus.
From inception through mid 1997 our principal activities were recruiting
personnel, raising capital and performing research and development. During
1997 we received Food and Drug Administration ("FDA") 510(k) clearance for the
sale of our first products, to treat snoring and enlarged turbinates. In
November 1998 we received an additional 510(k) FDA clearance to treat
Obstructive Sleep Apnea ("OSA").
Basis of Presentation
The consolidated financial statements include the accounts of Somnus Medical
Technologies, Inc. and our wholly owned subsidiaries, Somnus Medical
Technologies Pty. Ltd and Somnus Medical Technologies, B.V. after elimination
of all material intercompany balances and transactions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
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.
Dependence on Distributors and Single-Source Suppliers
Somnus entered into a Distribution Agreement with Medtronic Inc.
("Medtronic") on April 21, 1997 for a period of three years with defined
minimum annual purchase requirements. The Agreement granted Medtronic
exclusive distribution rights of certain of Somnus products in the European
Union, Australia, Southeast Asia and certain other areas until April 21, 2000.
As of September 1998 we terminated our relationship with Medtronic and
established a European headquarters in The Netherlands. During 1998 Medtronic
Europe was not a significant customer and in 1997 net sales of approximately
$824,000 were transacted with Medtronic's European operations. There were no
other single customers whose sales made up 10% or more of our revenue in
fiscal 1998 or 1997.
During 1997 and through mid 1998 we purchased what was our only commercially
available radiofrequency ("RF") control unit from a single-source supplier.
During 1998 we launched a new control unit product which we manufacture in-
house, effectively replacing the prior version, which was manufactured by sub-
contractors. Certain components continue to be purchased from single-source
suppliers. Establishing additional or replacement suppliers for such control
unit or certain of the components used in our products, if required, may
37
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
not be accomplished quickly and could involve significant additional costs.
Any supply interruption from suppliers or failure of Somnus to obtain
alternative suppliers for the control unit or such components would limit our
ability to manufacture and sell our products and would have a material adverse
effect on our business, financial condition and results of operations.
Net Loss Per Share
Basic and diluted earnings per share have been calculated using the weighted
average common shares outstanding during the periods in accordance with
Statements of Financial Accounting Standard No. 128 (SFAS 128) "Earnings Per
Share" issued by the Financial Accounting Standards Board and Securities and
Exchange Commission Staff Accounting Bulletin No. 98 (SAB 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. For additional
disclosures regarding potentially dilutive stock options, warrants and
convertible preferred stock, see Note 7.
Employee Stock Plans
We account for our stock option plans and our employee stock purchase plan
in accordance with the provisions of the Accounting Principles Board's Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees" and have adopted
the disclosure-only alternative of SFAS 123.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from these estimates.
Research and Development
Research and development costs, which include clinical and regulatory costs,
are charged to expense as incurred.
Inventory
Inventories are stated at the lower of cost, determined on an average cost
basis, and market value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, typically 1-5 years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated life of the asset or the remaining term of the lease.
We periodically evaluate the carrying value of long-lived assets to be held
and used when events and circumstances indicate that the carrying amount of an
asset may not be recovered. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less disposal costs.
38
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Cash and Cash Equivalents
Somnus considers all highly liquid investments with a maturity from date of
purchase of three months or less to be cash equivalents. Somnus maintains
deposits with a financial institution in the United States and we invest our
excess cash in U.S. government obligations and securities which bear minimal
risk. We had no short-term investments at December 31, 1998 or 1997.
We classify our debt securities in accordance with SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities", at the time of purchase
and reevaluate such designation as of each balance sheet date. At December 31,
1998 and 1997, all debt securities are designated as available-for sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in stockholders' equity. At December 31, 1998 and
1997, the fair value of investments approximates cost. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other-
than-temporary on available-for-sale securities are included in interest
income and have been immaterial in all periods presented. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
Concentration of Credit Risk
Somnus invests cash which is not required for immediate operating needs
principally in a diversified portfolio of financial instruments issued by
institutions with strong credit ratings. By policy, the amount of credit
exposure to any one institution, with the exception of U.S. government-backed
securities, is limited. These investments are not collateralized and mature
within two years. We have not experienced significant losses on these
investments.
Somnus maintains an allowance for uncollectible accounts receivable. Somnus
performs ongoing credit evaluations of customers but does not require
collateral. There have been no material losses on individual customer
receivables.
Advertising Expenses
We expense the costs of advertising as incurred.
Comprehensive Loss
Effective January 1, 1998, We adopted SFAS No. 130 "Reporting Comprehensive
Income". We have no material components of other comprehensive loss and,
accordingly, the comprehensive loss is the same as net loss for all periods
presented.
Segment Information
Effective January 1, 1998, we adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information", which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
We have organized the business in one operating segment which includes
activities relating to development, manufacturing and marketing of medical
devices that utilize proprietary radiofrequency technology for the
39
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
treatment of upper airway disorders. Substantially all of our assets are in
the United States and through December 31, 1998 we have derived our revenue
primarily from our operations in the United States.
2. Financial Instruments
The following is a table of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Money market funds............................... $ 9,958 $ 6,958
Certificates of deposit.......................... 9,996 23,096
Commercial paper................................. 11,947 --
U.S. treasury bills.............................. -- 14,893
------- -------
$31,901 $44,947
======= =======
</TABLE>
Included in cash and cash equivalents at December 31, 1998 and 1997 are
$31,901,000 and $44,947,000, respectively, of available for sale securities,
recorded at amortized cost, which approximates market value. These securities
all mature within 3 months.
3. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Machinery and equipment.......................... $ 1,257 $1,169
Computer equipment............................... 862 699
Furniture and fixtures........................... 610 509
Purchased software............................... 317 294
------- ------
3,046 2,671
Less accumulated depreciation and amortization... (1,445) (849)
------- ------
Property and equipment, net...................... $ 1,601 $1,822
======= ======
</TABLE>
4. Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials.................................... $399 $ 71
Work-in-process.................................. 111 77
Finished goods................................... 296 88
---- ----
$806 $236
==== ====
</TABLE>
5. Commitments
We lease our Sunnyvale, California and The Netherlands facilities under
operating lease agreements which expire on March 31, 2002, and 2000,
respectively.
40
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Future payments under non-cancelable operating lease arrangements at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Years ending December 31 (in thousands):
1999............................................................. $ 449
2000............................................................. 466
2001............................................................. 441
2002............................................................. 111
2003 and thereafter.............................................. --
------
Total minimum payments........................................... $1,467
======
</TABLE>
Rent expense for the years ended December 31, 1998, and 1997 and for the
period from inception (January 19, 1996) to December 31, 1996 was
approximately $417,000, $353,000 and $71,000 respectively.
6. Related Party Transactions
Our operations, until the April 1996 issuance of Series A preferred stock,
were funded by our former Chief Executive Officer's private holding company,
VidaCare International, Inc. ("VidaCare"). The expenses consisted primarily of
payroll, consultant and legal costs incurred in the establishment of the
corporation and initial research and development efforts. Of the $214,000
incurred by VidaCare, $64,000 was converted into 64,000 shares of Series A
preferred stock in May 1996 and $150,000 was repaid in cash in April 1996.
Our Series B preferred stock issuance in September 1996 included a finder's
fee to an entity associated with a member of the Board of Directors totaling
7% of the aggregate proceeds received by Somnus from the sale of Series B
preferred stock. The agreement included a provision which allowed the entity
to receive not less than 25% of the fee owed by Somnus in equity or debt
instruments in Somnus. Pursuant to this clause, the total finder's fee owed of
$710,000 was paid with 60,000 shares of Series B preferred stock valued at
$3.00 per share and $530,000 in cash. The Series B preferred stock converted
to common stock in conjunction with our initial public offering. This
transaction has been included in the issuance costs of the Series B offering.
Additionally, in connection with the Series B preferred stock financing, the
entity associated with a director entered into an agreement with Somnus
whereby for each 1% of the shares actually sold in our initial public offering
that were purchased by investors or parties directly affiliated with the
investors placed by the entity in the Series B preferred stock financing, the
entity was granted options or warrants to purchase 1,000 shares of common
stock at a price equivalent to the initial public offering price. Such options
or warrants have a five-year term and are entitled to anti-dilution and
piggyback registration rights. A total of 5,000 warrants were issued in
January 1998 in consideration of this provision.
During fiscal 1996, a company affiliated with a stockholder and member of
the board of directors leased equipment with a value of $78,000 to Somnus. The
lease agreement provides terms comparable to other lease agreements entered
into by Somnus.
In March 1998, we entered a Technology License Agreement with a certain
company affiliated with a stockholder and member of the board of directors.
This agreement allows us to make, sell or use our model 215 RF control unit
with a certain field of radiofrequency volume tissue reduction related to the
treatment of airway obstructions and other disorders of the head and neck.
During fiscal 1998 we recorded a $50,000 one-time royalty fee. In June 1998 we
introduced our new generation S-2 Control Unit and discontinued making the 215
RF product. No further payments are required under this agreement.
In December 1998, we granted an irrevocable non-exclusive, worldwide right
and license to a company affiliated to a stockholder and certain members of
the board of directors to manufacture, use and sell RF control units based on
41
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
the licensed technology to treat structures, organs and tissues of the
digestive tract and specifically excludes treatment of any body structure
located above the upper esophageal sphincter. Under this agreement we received
175,000 shares of Series A Preferred Stock of that Company. We also received a
technology license fee of $125,000 payable in two installments of $62,500 in
December 1998 and $62,500 in February 1999. Documentation fees for design and
manufacturing of $35,000 each are due in January 1999. The agreement also
provides for reimbursement of 50% of an engineer's time commencing December
1998 and the provision of up to 20 control unit kits for $9,000 each. No kits
had been purchased as of December 31, 1998. For the life of this agreement
Somnus shall receive a royalty of 2.5% of the selling price on all RF control
units using this technology, sold by the licensee.
7. Stockholders' Equity
Preferred Stock
On November 6, 1997, we completed an initial public offering of our shares
pursuant to which we issued 4,600,000 common shares for net proceeds of
approximately $43,800,000. Upon the closing of the initial public offering,
all 5,998,000 outstanding shares of Convertible Preferred stock of Somnus were
automatically converted into Common Stock on a share for share basis.
In November 1998, we announced the adoption of a Preferred Shares Purchase
Agreement (the agreement). Pursuant to the agreement, there will be a dividend
distribution of one Preferred Share Purchase Right on each outstanding share
of our Common Stock, commencing on November 18, 1998. Each right will entitle
stockholders to buy one one-thousandth of a share of Preferred Stock at an
exercise price of $18.00. The Rights will become exercisable following the
tenth day after a person or group announces acquisition of, or commencement of
a tender offer which would result in the acquisition of 15% or more of our
Common Stock. Subject to certain restrictions, we will be entitled to redeem
the Rights at $0.001 per Right at any time before they become exercisable.
Subject to certain restrictions, at any time after an event triggering
exercisability of the Rights at a discounted price and prior to the
acquisition by the acquiring person of 50% or more of the outstanding Common
Stock, the Board of Directors of Somnus may exchange the Rights (other than
those owned by the acquiring person or our affiliates) for Common Stock of
Somnus at an exchange ratio of one share of Common Stock per Right.
Common Stock
During 1996, we sold 2,335,000 and 30,000 shares of common stock to founders
for $0.001 and $0.10 per share, respectively, of which certain shares are
subject to repurchase rights which generally expire ratably over four years.
Upon termination of service, any unvested shares may be repurchased by Somnus
at the issuance price. The shares are not contingent upon any conditions other
than a time period of employment. At December 31, 1997 and 1998, 707,000 and
340,000 shares, respectively, were subject to these repurchase rights held by
Somnus. No shares have been repurchased by Somnus as of December 31, 1998.
Somnus has reserved approximately 4,110,000 shares of common stock for
future issuance under all stock option plans and stock purchase plans at
December 31, 1998.
1996 Stock Plan
Under our 1996 Stock Plan (the "plan"), which was adopted in March 1996,
options may be granted for common stock or common stock may be issued,
pursuant to actions by the board of directors, to eligible participants.
Options granted are either incentive stock options or nonstatutory stock
options and are exercisable within the times or upon the events determined by
the board of directors as specified in each option agreement. Incentive stock
options granted under the Plan are at prices not less than 100% of the fair
value at the date of grant, as determined by the board of directors.
Nonstatutory options granted under the plan are at prices not less
42
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
than 85% of the fair value on the date of the grant. Stock options granted to
a 10% stockholder shall not be less than 110% of the fair value at the date of
grant. Stock sold under issuances are subject to repurchase by Somnus upon
termination of the purchaser's employment or services at the price paid upon
issuance. Options granted generally vest over a period of four years, with 25%
of the options vesting on the first anniversary of the grant. The term of the
plan is ten years.
1997 Director Option Plan
In August 1997, our Board of Directors (the "Board") adopted the 1997
Director Option Plan ("Director Option Plan").
1997 Employee Stock Purchase Plan
In August 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"), which is designed to allow eligible
employees of Somnus to purchase shares of common stock at semiannual intervals
through their periodic payroll deductions. The Purchase Plan has been
implemented in a series of successive offering periods, each with a maximum
duration of 24 months. Eligible employees can have up to 10% of their base
salary deducted that is to be used to purchase shares of common stock on
specific dates determined by the Board of Directors provided that in no event
shall an employee be permitted to purchase during each purchase period more
than 2,500 shares of our common stock, subject to a maximum of $25,000 worth
of common stock per calendar year. The price of common stock purchased under
the Purchase Plan will be equal to 85% of the lower of the fair market value
of the common stock on the commencement date of each offering period or the
specified purchase date. We do not recognize compensation cost related to
employee purchase rights under the Purchase Plan.
The following table summarizes stock option activity (shares in thousands):
<TABLE>
<CAPTION>
Outstanding Stock Options
-------------------------
Weighted
Average
Exercise
Shares Number of Price
Available Shares Per Share
--------- ------------ -------------
<S> <C> <C> <C>
Original authorization of shares. 865
Additional shares authorized
for issuance.................. 1,055
Options granted................ (1,752) 1,752 $ 0.17
Options exercised.............. -- (98) $ 0.10
Options canceled............... 16 (16) $ 0.10
------ ------------ -------------
Balance at December 31, 1996..... 184 1,638 $ 0.17
Additional shares authorized
for issuance.................. 1,780
Options granted................ (1,463) 1,463 $ 3.59
Options exercised.............. -- (383) $ 0.19
Options canceled............... 281 (281) $ 1.12
------ ------------ -------------
Balance at December 31, 1997..... 782 2,437 $ 2.12
Additional shares authorized
for issuance.................. 1,250
Options granted................ (1,547) 1,547 $ 4.88
Options exercised.............. -- (479) $ 0.42
Options canceled............... 893 (893) $ 6.22
------ ------------ -------------
Balance at December 31, 1998..... 1,378 2,612 $ 2.70
====== ============ =============
</TABLE>
43
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
At December 31, 1998 and 1997 options to purchase 915,000 and 385,000
shares, respectively, were exercisable.
The following table summarizes information about options outstanding at
December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Weighted Exercisable Options
------------------------ Average ------------------------
Weighted Remaining Weighted
Range of Number of Average ContractualLife Number of Average
Exercise Price Shares Exercise Price (in years) Shares Exercise Price
-------------- --------- -------------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.10 - 0.10 404 $ 0.10 7.55 224 $ 0.10
0.30 - 0.70 413 0.45 8.12 186 0.41
3.00 - 3.50 1,554 3.23 8.24 408 3.08
6.38 - 10.75 241 7.48 8.77 97 7.33
----- ------ ---- --- ------
$ 0.10 - 10.75 2,612 $ 2.70 8.16 915 $ 2.26
===== ====== ==== === ======
</TABLE>
On September 18, 1998, we effected an option exchange program to allow
employees (excluding executive officers) to exchange 436,168 options to
purchase shares with an exercise price between $7.50 and $10.75 for options
with an exercise price of $3.375 (the fair value of our stock on September 18,
1998). All of the re-priced options continue to vest under the original terms
of the option grants. In exchange for the offer to re-price stock options,
employees agreed to a moratorium on exercising re-priced options until
September 18, 1999. Additionally, if an employee voluntarily terminates
employment with Somnus prior to September 18, 1999, all vested shares at the
date of termination relating to re-priced stock options will be canceled and
forfeited.
In October 1998, we announced that our board of directors has 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. No shares had
been repurchased by Somnus as of December 31, 1998. Subsequently Somnus has
repurchased a nominal number of shares under the program.
Pro Forma Disclosures
We elected to follow APB No. 25, "Accounting for Stock Issued to Employees"
and related interpretations, in accounting for our employee stock options
because, as discussed below, the alternative fair value accounting provided
for under SFAS No. 123 "Accounting for Stock-Based Compensation", requires use
of option valuation models that were not developed for use in valuing employee
stock options. Somnus, under APB No. 25, generally does not recognize
compensation expense as the exercise price of our employee stock options
equals the market price of the underlying stock on the date of the grant.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
we accounted for our employee stock options granted subsequent to December 31,
1995 under the fair value method of this statement.
The fair value for options granted prior to our initial public offering in
November 1997 and granted in 1998 were estimated at the date of grant using
the minimum value method, assuming no dividends, an expected life of four
years for 1998 and between two and three years for 1997 and the period from
inception (January 19, 1996) to December 31, 1996, volatility of 70% for 1998
and nominal volatility for 1997 and the period from inception (January 19,
1996) to December 31, 1996 and a risk free interest rate of 5.2% for 1998 and
5.3% for 1997 and for the period from inception (January 19, 1996) to December
31, 1996.
44
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Had compensation cost for our stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No.123, our net loss and loss per share
would have been increased to the pro forma amounts indicated below.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period (for stock
options) and the six month purchase period for stock purchases under the Stock
Purchase Plan. Our pro forma information is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Period from
Inception
Year Ended (January 19,
December 31, 1996) to
-------------------- December 31,
1998 1997 1996
--------- --------- ------------
<S> <C> <C> <C>
Pro forma net loss..................... $ (21,818) $ (12,868) $ (3,102)
Pro forma basic and diluted net loss
per share............................. $ (1.60) $ (3.05) $ (1.61)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1995, our pro forma effect will not be fully reflected until
subsequent years. The effects on pro forma disclosures of applying SFAS No.
123 are not likely to be representative of the effects on pro forma
disclosures in future years.
Warrants
In connection with equipment term loans in 1996, we issued warrants to
purchase 37,500 shares of Series A preferred stock at $1.00 per share and
25,000 shares of Series B preferred stock at $3.00 per share which were
converted to common stock warrants in conjunction with the IPO. These warrants
may be exercised at any time prior to June 24, 2006 and October 1, 2001,
respectively. The values of these warrants were determined by Somnus to be
immaterial for financial statement purposes. Warrants outstanding at December
31, 1998 were 62,500.
Stock Compensation
We recorded deferred compensation of approximately $4,049,000 and $546,000
during the year ended December 31, 1997 and during the period from inception
(January 19,1996) through December 31, 1996, respectively. These amounts
represent the difference between the exercise price and the deemed fair value
of certain of our stock options granted in these periods. Deferred
compensation recorded is amortized over the period that the options vest and
is adjusted for options which have been canceled. During the fiscal years
ended December 31, 1998 we recorded deferred compensation with respect to
stock options granted to consultants and as a result of changing the vesting
terms of certain employee stock options totaling $817,000. There were no
significant grants of stock options to consultants in 1997. Deferred
compensation expense was $2,811,000, $1,252,000 and $22,000, respectively,
during 1998, 1997 and the period from inception (January 19, 1996) to December
31, 1996.
At December 31, 1998, Somnus has a total of $450,000 remaining to be
amortized over the corresponding vesting period of each respective option,
generally four years.
8. Employee Benefit Plan
We have a 401(k) Plan which stipulates that all full-time employees with at
least 60 days of employment can elect to contribute to the 401(k) Plan,
subject to certain limitations, up to 15% of salary on a pretax basis. We have
the option to provide matching contributions but have not done so to date.
45
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements--(Continued)
9. Income Taxes
As of December 31, 1998, we had federal and state net operating loss
carryforwards of approximately $27,700,000 and $12,900,000, respectively. We
also had federal and California research and development tax credit
carryforwards of approximately $500,000. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2011
through 2018, if not utilized. The State of California net operating losses
will expire at various dates beginning in 2001 through 2003, if not utilized.
Utilization of our net operating loss carryforwards and credits may be
subject to an annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of our deferred tax
assets for federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net Operating Loss Carryforwards................. $ 10,200 $ 5,000
Research Credits Carryforwards................... 700 400
Capitalized Research and Development............. 900 400
Other............................................ 800 --
---------- ---------
Total Deferred Tax Assets........................ $ 12,600 $ 5,800
Valuation Allowance.............................. (12,600) (5,800)
---------- ---------
Net Deferred Tax Assets.......................... $ -- $ --
========== =========
</TABLE>
Because of our lack of earnings history, the deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance increased by
$4,600,000 during the year ended December 31, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
46
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of our fiscal year pursuant to Regulation 14A with respect
to the 1998 Annual Meeting of Stockholders (the "Proxy Statement") and certain
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No.
1 -- Election of Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board of
directors, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
John G. Schulte(1)............. 50 President, Chief Executive Officer
And Director
Donald R. Bruce(2)............. 48 Vice President, Worldwide Sales
Robert D. Campbell............. 44 Vice President, Sales
Eve A. Conner, Ph.D............ 53 Vice President, Clinical And
Regulatory Affairs
Eric N. Doelling............... 40 Executive Vice President, Chief
Operating Officer
Stuart D. Edwards(3)........... 53 Chief Technical Officer and Director
Robert D. McCulloch............ 37 Vice President, Finance, Chief
Financial Officer (Principal
Financial and Accounting Officer)
Robert McNamara(2)............. 42 Executive Vice President, Chief
Financial Officer
</TABLE>
- --------
(1) Assumed this position on January 1, 1999.
(2) Discontinued employment during fiscal 1998.
(3) Transitioned from Chief Executive Officer and Chairman of the Board on
January 1, 1999.
JOHN G. SCHULTE has served as President, Chief Executive Officer and
Director of the Company since January 1999. From 1997 until December 1998, Mr.
Schulte was President, Surgical Products Division of Genzyme. Corporation.
From 1996 to 1997, he was Senior Vice President and General Manager for Target
Therapeutics, Inc. From 1992 to 1996, Mr. Schulte was President of the US
Catheters and Instruments Division of C. R. Bard, Inc.. Prior to that, Mr.
Schulte served as President and Chief Executive Officer of Crystals Products,
Inc., a start-up diagnostics firm. He is a member of the Board of Directors of
Spectranetics Corporation. Mr. Schulte holds a B.A. from the College of the
Holy Cross and an M.B.A. from Boston University.
DONALD R. BRUCE served as Vice President, Worldwide Sales of the Company
from March 1997 to December 1998. 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.
ROBERT D. CAMPBELL has served as Vice president of Sales for the Company
since June 1998. From 1997 to June 1998, Mr. Campbell was Western Regional
Sales Manager, Director of Sales and VP of North
47
<PAGE>
American Sales for the Company. From 1995 to 1997 Mr. Campbell was a sales
representative with Karl Storz Endoscopy Inc. From 1994 to 1995, he was
Regional Manager for Enterprise Systems, Inc., a manufacturer of software for
hospital inventory management and scheduling. From 1992 to 1994 Mr. Campbell
owned and managed a business in a non-related industry. Prior to that Mr.
Campbell was Vice President of Corporate Accounts for Criticare Systems, Inc.,
and held several sales management positions at Nellcor Puritan Bennett Inc., a
developer of diagnostic and therapeutic products for respiratory disorders.
EVE A. CONNER, PH.D. served as Vice President, Clinical and Regulatory
Affairs of the Company from August 1996 to December 1998. 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.
ERIC N. DOELLING has served as Executive Vice President, Chief Operating
Officer of the Company since July 1996 and as a Director since November 1996.
From 1993 until 1996, Mr. Doelling was Vice President, Manufacturing of
Cardiac Pathways Corporation, a medical device company. Prior to that Mr.
Doelling was Vice President of Operations for Spectranetics, Inc. Mr. Doelling
holds both a B.S. and an M.B.A. from Rensselaer Polytechnic Institute.
STUART D. EDWARDS is founder of the Company and has served as Chief
Technical Officer and Director of the Company since January 1999. From 1996 to
December 1998, Mr. Edwards served as Chairman of the Board, Chief Executive
Officer and President of the Company. From 1992 to 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 1995. Mr. Edwards holds a Certificate
in Mechanical Engineering from the Union of Educational Institutions in
England.
ROBERT D. MCCULLOCH has served as Vice President of Finance and Chief
Financial Officer of the Company from August 1998. From October 1997 to August
1998, he served as Controller of the Company. From 1996 to 1997, Mr. McCulloch
was Director of Accounting and Corporate Controller at Target Therapeutics,
Inc. From 1991 to 1995 he served as General Accounting Manager/Business
Process Manager at Anthem Electronics, Inc. He previously served eight years
in public accounting with Price Waterhouse Coopers, LLP. Mr. McCulloch is a
Chartered Accountant, a Certified Public Accountant, Cost and Management
Accountant and holds a Bachelor of Commerce and Certificate in the Theory of
Accountancy from Rhodes University.
ROBERT E. MCNAMARA served as Chief Financial Officer of the Company from
August 1997 to August 1998. 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 1994
until 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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following Financial Statements of Somnus Medical Technologies,
Inc. and Report of Ernst & Young LLP, have been provided as Item 8,
above:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations, for the years ended December
31, 1998 and 1997 and for the period from inception (January 19, 1996)
to December 31, 1996.
Consolidated Statement of Stockholders' Equity, for the period from
inception (January 19, 1996) to December 31, 1998
Consolidated Statements of Cash Flows, for the years ended December
31, 1998 and 1997 and for the period from inception (January 19, 1996)
to December 31, 1996.
Notes to Consolidated Financial Statements
2.FINANCIAL STATEMENT SCHEDULES
The financial statement schedule entitled "Valuation and Qualifying
Accounts" is included at page 53 of this Form 10-K.
All other schedules are omitted because they are not applicable or
the required information is shown in the Financial Statements or the
notes thereto.
3.EXHIBITS
Refer to (c) below.
(B) REPORTS ON FORM 8-K
Somnus was not required to and did not file any reports on Form 8-K
during the period from December 31, 1998 to date of filing.
49
<PAGE>
(C) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- --------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) Bylaws of the Registrant.
4.1(1) Specimen Common Stock Certificate.
10.1(1) Form of Indemnification Agreement for directors and officers.
10.2(1) Amended and Restated 1996 Stock Plan and form of agreement
thereunder.
10.3(1) Restated Investors' Rights Agreement between the Registrant
and the parties named therein dated as of April 21, 1997.
10.4(1) Letter Agreement dated June 6, 1996 between the Registrant and
Musket Research Associates.
10.5(1) Lease dated February 4, 1997 for the Registrant's headquarters
in Sunnyvale, California.
10.6(1) Amended and Restated Loan and Security Agreement dated April
2, 1997 between the Registrant and Venture Lending.
10.7(1) Employment Letter Agreement dated May 8, 1996 between the
Registrant and Eric N. Doelling, and amendment thereto dated
August 26, 1996.
10.8(1) 1997 Employee Stock Purchase Plan.
10.9(1) 1997 Director Option Plan.
10.10(1) Lease Agreement dated July 1, 1996 between the Registrant and
RGL Leasing Co.
10.11 Employment Letter Agreement dated July 15, 1998 between the
Registrant and Robert D. McCulloch.
10.12 Employment Letter Agreement dated October 20, 1998 between the
Registrant and John G. Schulte.
10.13 Amended Employment Letter Agreement dated November 2, 1998
between the Registrant and Stuart D. Edwards.
10.14* International Distribution Agreement dated July 20, 1998
between the Registrant and Ferrari Ind. Com. Aparelhos Medicos
Ltda.
10.15* Patent License Agreement dated January 30, 1998 between the
Registrant and Medtronic, Inc.
10.16* Exclusive Distributor Agreement dated November 20, 1998
between the Registrant and Carl Zeis Canada.
10.17 Further Amendment to Employment Letter Agreement dated October
21, 1998 between the Registrant and Eric N. Doelling.
21.1(1) List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
25.1 Power of Attorney (see page 52).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Confidential Treatment has been requested for certain portions of this
Exhibit.
(1) Filed as an Exhibit to Somnus Registration Statement on Form S-1 (File No.
333-35401) and incorporated herein by reference.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SOMNUS MEDICAL TECHNOLOGIES, INC.
/s/ John G. Schulte
By:________________________________
John G. Schulte
President and Chief Executive
Officer
51
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Schulte and Robert McCulloch, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that said attorneys-in-fact, or his or their substitute or substitutes,
may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this report
signed below by the following person on behalf of the Registrant and in the
capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ John G. Schulte President, Chief March 29, 1999
- ----------------------------- Executive Officer and
(John G. Schulte) Director
/s/ Robert D. McCulloch VP Finance, Chief March 29, 1999
- ----------------------------- Financial Officer
(Robert D. McCulloch) (Principal Financial and
Accounting Officer)
/s/ Gary R. Bang Chairman of the Board of March 29, 1999
- ----------------------------- Directors
(Gary R. Bang)
/s/ Abhi Acharya Director March 29, 1999
- -----------------------------
(Abhi Acharya)
/s/ David L. Douglass Director March 29, 1999
- -----------------------------
(David L. Douglass)
/s/ Stuart D. Edwards Chief Technical Officer March 29, 1999
- ----------------------------- and Director
(Stuart D. Edwards)
/s/ David B. Musket Director March 29, 1999
- -----------------------------
(David B. Musket)
/s/ Woodrow A. Myers, Jr. Director March 29, 1999
- -----------------------------
(Woodrow A. Myers, Jr.)
52
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at
Beginning of Balance at
Year Charged to Costs End of Year
------------- ----------------- -----------
<S> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended December 31, 1998....... $ 70 $ 591 $ 661
Year ended December 31, 1997....... $ -- $ 70 $ 70
Year ended December 31, 1996....... $ -- $ -- $ --
</TABLE>
53
<PAGE>
Exhibit 10.11
July 15, 1998
Mr. Robert McCulloch
31 Linden Drive
Santa Clara, CA 95050
Dear Robert,
On behalf of Somnus Medical Technologies, Inc. (the "Company") I am pleased
to offer you the position of Vice President of Finance and Chief Financial
Officer. The purpose of this letter is to set forth the terms of this offer.
We are offering you the following:
1. Your position will be as a regular full-time employee. Your position is
classified as exempt. You will continue to receive the same benefits as
in your previous position, pursuant to Somnus' policies and procedures.
2. Your bi-weekly salary will be $5,769.23. This equates to a monthly
---------
salary of $12,500. Your salary will be payable in accordance with the
Company's standard payroll policies (subject to normal required
withholding). You will be entitled to three weeks paid vacation, which
may be taken or accrued pursuant to our vacation policy.
3. There is no change in your coverage of major medical, vision and dental
insurance, or life insurance plans. These benefits as well as all other
Company compensation and benefits programs are subject to change from
time to time as deemed appropriate and necessary by the Company.
4. Your stock options as granted under the offer letter dated September
26, 1997 remain in affect with no changes to stock options amount or
vesting period. In addition to the previous grant; subject to grant by
the Board of Directors, you will receive an option to purchase 132,000
shares of Common stock at the fair market value on the date of grant,
which shall vest at the rate of 1/48 each month of completed employment
thereafter (so that if you remain in our employ, at the end of four
years your option would be fully vested.
5. You will continue to held to the confidentiality and assignment of
proprietary inventions contract signed October 1997.
6. In the event of termination within the first two (2) years of your
original hire date (September 29, 1997), without cause, you are
entitled to (i) twelve (12) months
<PAGE>
Mr. Robert McCulloch
July 15, 1998
Page Two
compensation following the date of termination including the cost of
your COBRA coverage and (ii) continuation of vesting of your options
for twelve (12) months following termination and (iii) continuation of
the bonus plan for twelve (12) months following termination. In the
event of a Constructive Termination your termination shall be treated
as a termination of employment without cause. For the purposes of this
agreement, a Constructive Termination shall mean a material reduction
of salary or benefits or a material change of responsibilities.
7. In the event of acquisition, merger or sale of the majority of the
Company's assets, you are entitled to (i) six (6) months compensation
including the cost of your COBRA coverage, (ii) continuation of bonus
plan for six (6) months and (iii) all your options in Somnus Medical
Technologies, Inc. will vest fully and immediately.
8. You will agree to follow the Company's strict policy that employees
must not disclose any information regarding salary, bonuses, or stock
purchase or option allocation to other employees, either directly or
indirectly.
Acceptance of this offer may be acknowledged by signing below and returning
this document to me.
Again, let me indicate how pleased we all are to extend this offer, and how
much we look forward to working together with you in this new position.
Sincerely,
/s/ Stuart D. Edwards
Stuart D. Edwards
President & CEO of Somnus Medical
Technologies, Inc.
SDE/mwg
Signature /s/ Robert McCulloch
Date: 7/8/98
<PAGE>
EXHIBIT 10.12
Stuart D. Edwards
President & CEO
Chief Technical Officer
Chairman of the Board
October 20, 1998
John Schulte
6 Kenilworth Road
Wellesley, MA 02482
(781) 237-5358
Dear John,
On behalf of Somnus Medical Technologies, Inc. (the "Company"), I am pleased to
offer you the position of President and Chief Executive Officer of the Company,
reporting to the Chairman of the Board of Directors and Chief Technical Officer.
The purpose of this letter is to set forth the terms of this offer.
We are offering you the following:
1. Your position will be as a regular full-time employee beginning on a
mutually agreeable date. Your position is classified as exempt. You
will be a regular full-time employee entitled to vacation and sick
leave, paid holidays and benefits, pursuant to "Company" policies and
procedures.
2. Your bi-weekly salary will be $9615.38. This equates to a monthly
salary of $20,833.33. Your salary will be payable in accordance with
the Company's standard payroll policies (subject to normal required
withholding). You will be entitled to accrue 3 weeks vacation and 10
days of sick per year, which may be taken or accrued pursuant to our
policy. You will also receive a car allowance of $500.00 per month and
a competitive relocation package. The relocation compensation (for you
and your family) will be calculated and paid according to reasonable
geographical costs customarily associated with such relocations. This
includes a temporary housing allowance for a period that is customary
and reasonable. In addition, you will participate in the current
executive bonus program (see attached). As agreed this date (October
19, 1998), your bonus range as CEO will be based on the plan parameters
(minimums and maximums) of 40% to 60% of bonus target level.
3. Somnus has major medical, vision and dental insurance, as well as life
insurance for all regular full-time employees. The details of this
program will be available upon first day orientation with Personnel.
These benefits as well as all other Company compensation and benefits
programs are subject to change from time to time as deemed appropriate
and necessary by the Company.
<PAGE>
4. Subject to grant by the Board of Directors, upon joining the Company as
an employee, you will receive an option to purchase 500,000 shares of
Common Stock at the Company's current fair market value on the date of
grant. Additionally, for every one cent ($0.01) by which your exercise
price exceeds $2.50, your stock option shall be increased by an
additional four hundred (400) shares of Common Stock, up to a maximum
of 100,000 additional shares. 12/48 of the shares shall vest twelve
full calendar months following the date of grant and 1/48 of such
shares shall vest at the end of each full calendar month thereafter
until all such shares are exercisable, based upon your continued
relationship with the Company (so that if you remain in our employ, at
the end of four years your option would be fully vested).
5. You will be required to sign a confidentiality and assignment of
proprietary inventions contract. Further, by accepting this offer, you
agree that you will not bring with you to "Company", or use in any way
during your employment at "Company", any confidential information,
trade secrets, or proprietary materials or processes of any former
employer, company or individual for whom you have performed services.
You further confirm that by accepting this offer you will not breach
any contract or agreement to which you are a party.
6. All employment at "Company" is at-will as provided by California law.
This means that the employment relationship may be terminated by either
party at any time with or without notice or cause.
7. You will agree to follow the Company's strict policy that employees
must not disclose any information regarding salary, bonuses, or stock
purchase or option allocation to other employees, either directly or
indirectly.
8. In compliance with the Federal Immigration Reform and Control Act,
you must present to "Company", the required documents on your first day
of employment. You will also be asked to verify and attest, on a form
provided by the US Department of Justice, that you are authorized to
work in the United States. It is extremely important that you comply
with these requirements. If you fail to comply, we will not be able to
allow you to work and our offer of employment may be withdrawn.
9. In the event the Company is acquired and such acquisition leads to the
elimination of your position or the transfer of the position to a
location outside of the Bay Area, "Company" will extend to you a twelve
(12) month severance package consisting of your base salary plus any
bonuses for which you may have been eligible, and the reimbursement of
Cobra premiums for twelve (12) months provided you elect Cobra
coverage. In addition, the shares of stock referenced in item #4 of
this letter shall vest immediately upon said event.
10. In the event that you are terminated without cause within a two-year
period of your start date, the "Company" will extend to you a twelve
(12) month severance package consisting of your base salary plus any
bonuses for which you would have been eligible, and the reimbursement
of Cobra premiums for twelve (12) months provided
-2-
<PAGE>
you elect Cobra coverage. In addition, the shares of stock referenced
in item #4 of this letter shall vest immediately upon said event.
Acceptance of this offer may be acknowledged by signing below and returning this
document to me. This offer expires October 30, 1998, at 12:00 noon if not
accepted. Again, let me indicate how pleased we all are to extend this offer,
and how much we look forward to working together.
Sincerely,
/s/ Stuart D. Edwards
Stuart D. Edwards
President & CEO
SDE/
Signature /s/ John Schulte
----------------
John Schulte
Date: 11/2/98
-------
Start Date: 1/1/99 full time, part time effective immediately
-------------------------------------------------
-3-
<PAGE>
EXHIBIT 10.13
November 2, 1998
Stuart D. Edwards
658 Westridge Dr.
Portola Valley, CA 94028
Dear Stu:
This letter is to confirm the following terms governing our mutual decision
and agreement to terminate the employment relationship between you and Somnus
("Agreement"), which terms are effective November 2, 1998 (the "Effective
Date"). We have agreed on the following points:
We have agreed to terminate our employment relationship effective December
31, 1998. We have agreed that:
(i) you will receive as severance twenty-four (24) months compensation,
calculated at your current salary rate, less applicable withholding, and less
$2,540.00 per month that shall constitute repayment to the Company of amounts
owing;
(ii) you will receive a severance adder of $100,000 on December 31, 1998,
less applicable withholding;
(iii) your August 1997 stock option becomes fully vested on the Effective
Date. This option shall be exercisable for up to 90 days after December 31, 1998
as an "incentive stock option" (as defined in Section 422(d) of the Internal
Revenue Code of 1986, as amended (the "Code") (to the extent possible under the
$100,000 rule of Section 422 of the Code)) and shall be exercisable thereafter
and until June 30, 2001 as a nonstatutory stock option;
(iv) you have been granted an option for 100,000 shares of Common Stock
pursuant to the Company's 1996 Stock Plan, which shares shall all vest
immediately on January 1, 1999. The shares carry an exercise price of $3.25, the
fair market value on the Effective Date, which is also the date of grant. This
option is exercisable for up to 90 days after December 31, 1998 as an incentive
stock option (to the extent possible under the $100,000 rule of Section 422 of
the Code) and shall be exercisable thereafter until June 30, 2001 as a
nonstatutory stock option;
(v) you shall continue with the Company on the board of directors as
Chairman and as an officer with the title of Chief Technical Officer (and as
such shall continue to be eligible for such benefits as are afforded other board
members, including reimbursement of board-related expenses and participation in
the director option program), for a minimum of two years from the Effective
Date, subject to your continued election to the Board by the Company's
stockholders. These positions may be voluntarily terminated by you at any time
without adversely affecting the severance benefits stated in the preceding
paragraphs.
<PAGE>
We agree that this Agreement shall be governed by the laws of California.
You agree that you shall continue to maintain the confidentiality of all
confidential and proprietary information of the Company and shall continue to
comply with the terms and conditions of any confidentiality agreement you
entered into with the Company.
We agree that the payments and arrangement described above is in full
settlement of any claims, liabilities, demands or causes of action, known or
unknown, that Somnus or you ever had, now have, or may claim to have had against
the other party (in the case of Somnus, this shall include any of its directors,
officers, and employees) as of the date of this Agreement. Each party releases
any and all such claims against the other party (and, in the case of Somnus, any
of its directors, officers, and employees) as of the date of this Agreement.
This includes claims arising under common law, statutory law or the federal or
state constitution, federal, state or local laws prohibiting discrimination in
employment, and any and all other claims arising from your employment
relationship with Somnus or the termination of that relationship. We agree that
the release set forth in this section shall be and remain in effect in all
respects as a complete general release as to the matters released. This release
does not extend to any obligations incurred under this Agreement.
4. You acknowledge that the Company has paid all salary, wages, bonuses,
accrued vacation, commissions and any and all other benefits due to you once the
payments described above have been made.
5. Civil Code Section 1542. We each represent that we are not aware of any
claim by either of us other than the claims that are released by this Agreement.
We acknowledge that we have been advised by legal counsel and are familiar with
the provisions of California Civil Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Being aware of said code section, we each agree to expressly waive any
rights we may have thereunder, as well as under any other statute or common law
principles of similar effect.
6. We each agree to use our best efforts to maintain in confidence the
existence of this Agreement, the contents and terms of this Agreement, and the
consideration for this Agreement (hereinafter collectively referred to as
"Settlement Information"). We each agree to take every reasonable precaution to
prevent disclosure of any Settlement Information to third parties, and each
agree that there will be no publicity, directly or indirectly, concerning any
Settlement Information. We each also agree to take every precaution to disclose
Settlement Information only to those employees, officers, directors, attorneys,
accountants, governmental entities, and family members who have a reasonable
need to know of such Settlement Information.
7. You also agree to waive and release any rights that you may have under
the Age Discrimination in Employment Act ("ADEA") in exchange for this
separation payment and benefits from Somnus. Your are making this waiver and
release knowingly and voluntarily. You
-2-
<PAGE>
acknowledge that the benefits that you receive in exchange for this waiver and
release agreement is in addition to anything of value to which you were already
entitled. You and Somnus agree that this waiver and release does not apply to
any rights or claims that may arise under the ADEA after the effective date of
this Agreement.
You acknowledge that prior to signing this Agreement, you have had time to
consult with a financial advisor, accountant, attorney or anyone else whose
advice you need. After you sign this Agreement, you have seven (7) working days
to revoke your consent. Any revocation should be in writing and delivered to
the Company by close of business on the seventh business day from the date that
you signed this document. This Agreement will not become effective and you will
not receive any payment until the seven-day revocation period has passed.
8. The provisions of this Agreement set forth the entire agreement between
you and Somnus concerning the separation of your employment. Any other promises,
written or oral, are replaced by the provisions of this Agreement and are no
longer effective unless they are contained in this document. Further, Somnus and
you agree that any dispute regarding this Agreement shall be settled by final
and binding arbitration to be held in accordance with the California Employment
Dispute rules then in effect at the American Arbitration Association.
By singing below, you acknowledge that you are entering into this Agreement
knowingly and voluntarily. In addition, you also acknowledge by your signature
that you have carefully read and fully understand all the provisions of this
Agreement and the releases that it contains. This document has serious legal
consequences and you should consult an attorney before signing it.
Somnus Medical Technologies, Inc.
/s/ Robert McCulloch
Date: 12/9 , 1998
--------
Robert McCulloch
By my signature, I agree to the terms set forth above:
/s/ Stuart D. Edwards
Date: 12/9 , 1998
--------
Stuart D. Edwards
-3-
<PAGE>
EXHIBIT 10.14
INTERNATIONAL DISTRIBUTION AGREEMENT
This International Distributor Agreement (the "Agreement") is entered into as of
7/20/98 1998, between Somnus Medical Technologies, Inc., a corporation organized
under the laws of Delaware, United States of America, with principal offices at
285 N. Wolfe Road, Sunnyvale; California 94086, United States of America
("Somnus") and Ferrari Ind. Com. Aparelhos Medicos Ltda, a corporation organized
under the laws of Brazil with offices at Rua Indare 101 CEP 04317-010, Sao
Paulo-SP-Brazil (Distributor").
NOW THEREFORE, mutual promises contained herein, the parties agree as follows:
1. DEFINITIONS
1.1 "Effective Date" means the date set forth above.
1.2 "Products" means those products listed on attached Exhibit A, as
amended from time to time. Products may be changed, abandoned or added by Somnus
at any time, at its sole discretion. Except as may be expressly provided hereto,
Somnus shall be under no obligation to continue the production of any Product.
1.3 "Territory" means Brazil.
1.4 "Somnus Trademarks" means the marks listed in Exhibit E together
with trademarks, tradenames and servicemarks of which Somnus may become the
proprietor on or in relation to the Products at any time during this Agreement.
2. APPOINTMENT
2.1 Appointment. Somnus hereby appoints Distributor as its distributor
for the promotion, marketing and resale of the Products in the Territory, and
Distributor agrees to act in that capacity, subject to the terms and conditions
of this Agreement. Somnus shall not:
(a) appoint any other person, firm or company in the
Territory as a distributor for the Products in the Territory; or
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
(b) supply to any other person, firm or company in the
Territory any of the Products, whether for use or resale.
Distributor shall be entitled to describe itself as Somnus's
"Authorized Distributor" for the Products, but shall not hold itself out as
Somnus's agent for sales of the Products or as being entitled to bind Somnus in
any way.
2.2 Subdistributors. Distributor may exercise its distribution rights
to distribute Products in the territory through the use of third party
subdistributors ("Subdistributors") subject to: (i) the written agreement by
each such Subdistributor to the restrictions on Distributor contained in
Sections 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, and 15 of this Agreement, (ii)
Somnus's prior written approval of the Subdistributor, which approval shall not
be unreasonably withheld, and (iii) each Subdistributor providing and
maintaining a level of training and technical expertise equal to that required
of Distributor under Section 3.5 below. Distributor shall deliver to Somnus an
English language copy of Distributor's agreement with the Subdistributor, which
shall be in a form acceptable to Somnus, concurrently with any request for
approval of a Subdistributor.
2.3 Reservation of Rights. Somnus reserves the right to appoint other
authorized distributors or resellers outside the Territory without restriction
as to number and location. Nothing in this Agreement shall be construed to
preclude Somnus from marketing, selling, leasing or servicing any of the
Products outside the Territory.
2.4 Independent Contractors. The relationship of Somnus and
Distributor established by this Agreement is that of independent contractors,
and nothing contained in this Agreement shall be construed (i) to give either
party the power to direct or control the day-to-day activities of the other or
(ii) to constitute the parties as partners, joint ventures, co-owners or
otherwise as participants in a joint or common undertaking. All financial
obligations associated with Distributor's business are the sole responsibility
of Distributor. All sales and other agreements between Distributor and its
customers are Distributor's exclusive responsibility and shall not affect
Somnus's obligations under this Agreement. Distributor shall be solely
responsible for, and shall indemnify, defend and hold Somnus harmless from,
all
<PAGE>
liabilities, claims, damages, and lawsuits arising from the acts and
omissions of Distributor, its employees, servants, agents or any of them.
2.5 Conflict of Interest. Distributor agrees that any efforts by
Distributor to sell competing products in the Territory would constitute a
conflict of interest with respect to Distributor's obligations to market the
Products, and Distributor warrants that it does not currently manufacture or
offer for sale any products which compete with the Products. If Distributor
chooses to market, promote or distribute products that compete with the
Products, Distributor shall notify Somnus of its intent at least sixty (60) days
prior to commencing such activity and Somnus shall have the right to terminate
this Agreement upon thirty (30) days notice to Distributor without any liability
to Somnus. Failure to so notify Somnus shall be deemed to be a material breach
of this Agreement. A product shall be deemed to compete with the Products if it
has substantially the same functionality as a Product.
2.6 Territory. Distributor agrees that it shall not promote, market or
establish any branch or maintain any distribution depot for the Products outside
of the Territory. Distributor shall promptly submit to Somnus, for Somnus's
attention and handling, the originals of all inquiries received by Distributor
from potential customers outside the Territory.
3. OBLIGATIONS FOR DISTRIBUTOR
3.1 Promotion of the Products. Distributor shall use its best efforts
to vigorously promote the Products in the Territory and realize the maximum
sales potential for the Products in the Territory. Such promotion shall include,
without limitation, active participation and advertisement of the Products in
trade publications within the Territory, active participation in the trade shows
and exhibitions with Somnus participation as appropriate, and direct
solicitation of orders from customers for the Products. Distributor shall stock
an adequate inventory of products as appropriate to fulfill the demand for
Products in the Territory. In no event shall Distributor make any
representation, guarantee or warranty concerning the Products except as
expressly authorized by Somnus.
3.2 Attendance at Meetings. Distributor shall, at Distributor's own
expense, send at least one suitably qualified representative to:
(a) attend the meeting of the American Academy of
Otolaryngology held in
<PAGE>
September (or such other month) of each year;
(b) attend such meetings organized by Somnus as Somnus shall
reasonable request, including, without limitation, the Somnus distributor
meeting;
(c) attend each year, at least one other relevant international
meeting.
3.3 Inventory. Distributor shall, at Distributor's own expense,
maintain a sufficient inventory of the disposable Products at all times during
the term of this Agreement as necessary in order to meet the requirements of any
customer or potential customer within the Territory within one (1) week after
receipt by Distributor of an inquiry or purchase order form such a customer or
potential customer.
3.4 Distributor Monthly Report. During the term of this Agreement,
within five (5) days after the end of each month Distributor will provide Somnus
with a report in the format set out in Exhibit E.
3.5 Personnel. The parties agree that the Products cannot be effectively
marketed, supported or maintained unless Distributor hires, trains and supports
sufficient sales and technical staff to meet its obligations under this
Agreement. Therefore, Distributor shall ensure at least one individual is
trained and dedicated solely to supporting Somnus products and:
(a) employ a sufficient number of competent full time sales
personnel to promote the Products and to generate substantial sales in the
Territory. Distributor shall equip its sales personnel with adequate training,
marketing, technical and sales literature, including such materials as may be
made available by Somnus;
(b) employ a sufficient number of full time technical staff
having the knowledge and training necessary to meet Distributor's obligations to
maintain and support the Products distributed within the Territory;
(c) have at least one (1) of Distributor's employees who are
responsible for training others with respect to marketing and clinical use
attend at least one (1) day of training
<PAGE>
each year by Somnus at a location within the territory specified by Somnus. If
at any time Distributor employs fewer than five (5) employees who have completed
such training, Distributor shall so notify Somnus, and upon request by Somnus
shall have the required number of its employees attend such training; and
(d) promptly notify Somnus of any change in Distributors
marketing, sales, administrative or technical support services or staff which
could affect Distributor's ability to meet its obligations under this Agreement.
3.6 Customer and Sales Reporting. Distributor shall at its own expense
and consistent with the marketing and distribution policies of Somnus from time
to time:
(a) provide adequate contact with existing and potential
customers within the Territory on a regular basis, consistent with good business
practice;
(b) keep Somnus promptly apprised of potential competitors and
competitive products in the Territory;
(c) assist Somnus in assessing customer requirements for the
Products, including modifications and improvements thereto, in terms of quality,
design, functional capability, and other features;
(d) submit market research information, as reasonably requested
by Somnus, regarding competition and changes in the market within the Territory;
(e) with respect to each RF Generator sold pursuant to this
Agreement, provide Somnus with the name and address of each purchaser of such
Generator, the serial number of such Generator, and the telephone and facsimile
numbers of each such purchaser;
(f) provide Somnus, as frequently as reasonably requested by
Somnus, but not more often than once every two months, with a list of
Distributor's customers, their addresses, the quantities and types of Products
purchased by such customers; and
<PAGE>
3.7 Books and Records. Distributor shall maintain and make available
to Somnus accurate books, records, and accounts relating to the business of
Distributor with respect to the Products.
3.8 Right of Inspection. Subject to agreement with Distributor, Somnus
shall have the right, upon reasonable notice and during normal business hours,
to inspect Distributor's place of business and records for the purpose of
determining that Distributor is meeting its obligations under this Agreement.
3.9 Import Permits. Distributor shall be responsible for obtaining the
appropriate licenses or permits required to import Products into each
destination country in the Territory. To the extent permitted by law within the
Territory, all such licenses and permits shall specify Somnus as the approved
entity for importation of the Products in the Territory, and Somnus shall have
the exclusive rights to all such licenses or permits if this Agreement is
terminated for any reason.
3.10 Registrations. Licenses. and Permits. Distributor shall be
responsible, at its expense, for obtaining any registrations, licenses, and
permits required to comply with the laws and regulations of each country in the
Territory for sale and distribution of the Products and the conduct of its
business operations in accordance with this Agreement provided, however, that
such activities shall be conducted in Somnus's name and on Somnus's behalf, and
no activities in connection with obtaining such registrations, licenses, or
permits required to sell and distribute the Products in the Territory are not
obtained within six (6) months after the Effective Date of this Agreement,
Distributor and Somnus jointly shall review all actions taken and determine what
further actions, if any, should be undertaken. Somnus shall have the exclusive
right to use all such registrations, licenses or permits if this Agreement is
terminated for any reason.
3.11 Health and Safety Laws and Regulations. Distributor shall comply
fully with any and all applicable health and safety laws and regulations of the
Territory as they relate to the Products. In addition, Distributor shall monitor
the appropriate information sources closely for changes in such laws and
regulations, and other requirements in the Territory relating to the
distribution of Products in the Territory, and notify Somnus promptly in writing
of any and all such changes.
3.12 Preclinical and Clinical Trials. Distributor shall assist and
support Somnus in
<PAGE>
organizing and conducting preclinical and clinical trials required to obtain
registrations, licenses, and permits required to comply with the laws and
regulations of the Territory for sale and distribution of the Products;
provided, however, that no activities in connection with organizing and
conducting such trials shall bc initiated by Distributor without Somnus's prior
written approval.
3.13 Representations. Distributor shall not make any false or
misleading representations to customers or others regarding Somnus or the
Products. Distributor shall not make any representations, warranties or
guarantees with respect to the specifications, features or capabilities of the
Products that are not consistent with Somnus's documentation accompanying the
Products or Somnus's literature describing the Products, including Somnus's
standard limited warranty and disclaimers.
3.14 Finances. Distributor shall maintain a net worth and working
capital sufficient, in Somnus's reasonable judgment, to enable Distributor to
perform fully and faithfully Distributor's obligations under this Agreement.
3.15 Instance. Distributor shall insure, at its own cost, with a
reputable insurance company, all stocks of the Products as are held by it
against all risks to at least the full replacement value of such stocks and to
produce to Somnus on demand full particulars of such insurance and the receipt
for the then current premium.
3.16 Changes to Distributor's Business. Distributor shall inform Somnus
immediately of any changes in Distributor's organization or method of doing
business which might affect the performance of Distributor's duties under this
Agreement.
4. OBLIGATIONS OF SOMNUS
4.1 Supply of Promotional Material. Somnus shall make available to
Distributor a reasonable account of promotional material developed by Somnus
(e.g., brochures, data sheets, advertising materials), at Somnus's standard
charges to distributors for such items. Distributor shall not translate any
manuals or written materials supplied by Somnus
<PAGE>
without Somnus's prior written approval. Somnus shall have a right of prior
approval of any sales promotion materials, sales aids or advertisements
pertaining to Products which the Distributor intends to use or publish in the
Territory.
4.2 Joint Marketing Campaign. Somnus shall agree with Distributor a
joint marketing campaign for the Territory to last for the duration of this
Agreement. Such campaign shall include advertisements and other promotional
material, seminars and conferences and such other methods of promotion as the
parties shall agree in order to effectively market the Products in the
Territory. The form and content of all methods of promotion (and any alterations
thereto) shall be agreed by the parties in advance. The costs of such campaign
shall be borne by Distributor unless previously agreed otherwise by Somnus.
4.3 Training. Somnus shall provide the one (1) training course per
year required under section 3.5(c) above without charge. Additional training
shall be available at Somnus's then-standard rates for such teaming. Distributor
shall pay all travel and living expenses for its own personnel to attend such
training.
4.4 Technical Support. Distributor and Somnus shall meet regularly
(approximately once every three to six months) to ensure that Distributor
receives adequate and necessary technical support for Distributor's sale
activities.
4.5 Telephone Marketing and Technical Support. Somnus shall provide a
reasonable level of telephone marketing and technical support to employees of
Distributor who have been trained by Somnus during Somnus's normal business
hours to answer Distributor's questions related to
5. PRICING AND PAYMENT
5.1 Prices. Somnus shall sell Products to the Distributor for the
prices set forth on attached Exhibit A.
Somnus may publish recommended resale prices in respect of the Products
in the Territory at whatever competitive price will ensure growing acceptance of
the product in the territory,
5.2 Price Changes. Somnus may revise the prices on Exhibit A at any
time upon thirty (30) days prior written notice to Distributor. Upon notice of a
change in such prices and prior to the effective date of such change,
Distributor shall have the
<PAGE>
right to order any quantity of Product within sixty (60) days of the date on
which Somnus notified Distributor of such change.
5.3 Payment. Distributor shall make full payment in US dollars on all
orders on open account, net forty-five (45) days after invoice. Invoices will be
dated on or after the date of shipment. Invoices not paid within forty-five (45)
days will be charged interest at the rate of one and one-half percent (1.5%) per
month on any outstanding overdue balance, but in no event to exceed the maximum
allowable by law. If invoices are not paid in a timely manner, Somnus may
decline to make further deliveries except for cash in advance of shipment or
letter of credit acceptable to Somnus. Distributor must give Somnus written
notice of any discrepancies amount the purchase order, the invoice, and the
Products received, within thirty (30) days after receipt of the Products or the
invoice, whichever occurs later. Somnus reserves the rights, at its sole
discretion, to (i) suspend shipment or Products or (ii) convert this exclusive
distributor agreement into a non-exclusive distributor agreement, in the event
that Distributor fails to maintain payment of invoices on a current basis or
fails to comply with any other terms of Agreement.
5.4 Costs. Charges and Taxes. Any and all expenses, costs and charges
incurred by distributor in the performance of its obligations under this
Agreement shall be paid by Distributor. In addition, Distributor shall be
responsible for the collection, remittance and payment of any or all taxes,
charges, levies, assessments and other fees of any kind imposed by governmental
or other authority in respect of the purchase, sale, importation, lease or other
distribution of the Products.
5.5 Retention of Title. Title to the Products shall not pass to
Distributor until Somnus has received payment in full of the price therefor.
Until title in the Products has passed, Distributor shall be in possession of
the Products in a fiduciary capacity and shall not part with possession of the
Products, shall take proper care of the Products and shall keep them free from
any charge, lien or other encumbrance and store the Products in such a way to
show clearly that they belong to Somnus.
<PAGE>
6. PURCHASES BY DISTRIBUTOR
6.1 Forecasts. Distributor will provide Somnus each month with a
rolling binding forecast of its expected unit sales of Products and revenues
from such sales during the six (6) month period beginning with the month in
which the forecast is provided to Somnus. The first such forecast shall be due
within five (5) days after the Effective Date, with subsequent forecasts due on
the fifth day of each calendar month during the term of this Agreement.
6.2 Order and Acceptance. All orders for Products submitted by
Distributor shall be initiated by written purchase orders sent to Somnus and
requesting a delivery date, during the term of this Agreement; provided,
however, that an order may initially be placed by facsimile if a written
confirming purchase order is received by Somnus within five (5) days after said
facsimile order. To facilitate Somnus's production scheduling, Distributor shall
submit purchase orders to Somnus at least thirty (30) days prior to the
requested delivery date. No order shall be binding upon Somnus until accepted by
Somnus in writing, and Somnus shall have no liability to Distributor with
respect to purchase orders that are not accepted. No partial shipment of an
order shall constitute the acceptance of the entire order, absent the written
acceptance of such entire order. Distributor shall accept or reject Products
delivered hereunder within thirty (30) days of receipt.
6.3 Terms of Purchase Orders. The purchase and delivery of Products
sold by Somnus to Distributor hereunder shall be governed by the terms and
conditions of this Agreement and nothing contained in any purchase order,
acknowledgment or other such document issued by either party shall in any way
modify such terms of purchase or add any additional terms or conditions.
6.4 Minimum Purchase Commitment. Distributor agrees to the initial
product purchase commitment set forth in Exhibit B, and agrees to order, pay for
and accept delivery of Products to achieve this initial product purchase
commitment. Distributor agrees to place an initial stocking order immediately
upon execution of this Agreement for shipment within thirty (30) days, for the
quantity of Products set forth in attached Exhibit B.
<PAGE>
6.5 Cancellation and Reschedule of Orders. Shipment of Products under
order in accordance with this Agreement may be deferred or canceled by
Distributor, upon prior approval by Somnus, subject to the provisions and
charges specified in attached Exhibit B.
6.6 Shipping. Unless the parties otherwise agree in writing, all
Products delivered pursuant to the terms of this Agreement shall be suitably
packed for shipment in Somnus's standard shipping cartons, marked for shipment
at Distributor's address set forth below, and delivered to Distributor or its
carrier agent F.O.B. Somnus's manufacturing plant or such other shipping
location as Somnus may designate at its sole discretion, at which time title to
such Products and risk of loss shall pass to Distributor. Unless otherwise
instructed in writing by Distributor, Somnus shall select the carrier. All
freight, insurance, and other shipping expenses, as well as any special packing
expenses, shall be paid by Distributor. Distributor shall also bear all
applicable taxes, duties, and similar charges that may be assessed against the
Products after delivery to the carrier at Somnus's plant.
6.7 Acceptance. The Products delivered by Somnus will be subject to
inspection and test by Distributor, and in the event any Product is defective in
material or workmanship, Distributor shall have the right to reject it within
[*] days after delivery (the "Rejection Period"). Products rejected by
Distributor shall have a failure report attached, and shall be forwarded to
Somnus freight collect. The rejected Products will be repaired or replaced at
Somnus's option and returned to Distributor freight prepaid. Somnus shall use
commercially reasonable efforts to repair or replace the defective Products
within [*] days of its receipt. In the event Somnus is unable to repair
or replace such defective Products, Somnus shall refund the purchase price paid
by Distributor for such defective Products. If rejected Products are found not
to be defective after return to Somnus, the Products will be reshipped to
Distributor at Distributors expense, and each such unit will be subject to a
service charge of [*].
6.8 Returns. In the event Distributor returns to Somnus any Product
which is not defective, Somnus shall charge Distributor a restocking fee upon
return of each product equal to [*] of the price paid by Distributor for that
Product and shall credit the balance of this price to Distributors account.
Distributor shall be responsible for all charges incurred in respect of the
redelivery of the Products. Before returning any Product
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
to Somnus for repair and servicing, Distributor shall request a Return Material
Authorization ("RMA") from Somnus, and instructions for returning Products, any
and all returned Products shall be accompanied by such RMA.
7. MAINTENANCE
7.1 Maintenance. Somnus will provide all maintenance and repair
services to the Distributor and end user customers for both Products under
warranty (in accordance with Section 8.1 below) and for Products whose warranty
has expired. Products whose warranty has expired shall be repaired at Somnus's
maintenance and repair fees then in effect. Distributor shall not, without
Somnus's prior written consent, perform any maintenance or repairs with respect
to the Products. Distributor shall request a RMA before returning any Product
for repair.
7.2 Non-Warranty Repair Service. Products that do not qualify under
the Somnus warranty may be returned to Somnus for repair. Charges will be on a
time and materials basis at Somnus's then current rates. Before returning any
Product to Somnus for repair or servicing, Distributor shall request a RMA from
Somnus, and instructions for returning Products, any and all returned Products
shall be accompanied by such RMA. Somnus shall use reasonable endeavors to ship
Products sent in for repair within thirty (30) work days of receipt. Distributor
is responsible for shipping charges to Somnus. Somnus will return ship by the
method recommended by Distributor. Distributor will be responsible for any
charges for shipping and handling in addition to such other reasonable charges
in respect of labor and materials as Somnus shall from time to time require.
7.3 Problem Reporting. Distributor will keep Somnus informed as to
problems encountered with respect to the Products and any resolutions, and to
communicate promptly to Somnus any and all modifications, design changes or
improvements of the Products suggested by any customer, or any employee or agent
of Distributor, and Distributor hereby assigns to Somnus any right, title or
interest that Distributor may have in such information.
<PAGE>
8. WARRANTY
8.1 Warranty to Distributor, Somnus warrants to Distributor that the
Products delivered pursuant to this Agreement will conform to Somnus' Product
Specifications and will conform with the product warranty.
8.2 Limitation. The warranties in Section 8.1 shall not apply to
Products that have been modified or altered in any manner by anyone other than
Somnus, which have been used in any manner other than for which the Product was
intended, or to defects caused (a) through no fault of Somnus during shipment or
transportation to or from Distributor; (b) by the use or operation in an
application or environment other than that intended or recommended by Somnus;
(c) by service by anyone other than employees of, or persons approved in writing
by, Somnus; or (d) by accident, negligence, misuse, other than normal electrical
or physical stress, or other causes other than normal use. Replacement Products
and parts supplied under this warranty shall carry only the unexpired portion of
the original warranty.
8.3 Warranty Repair. In the event that Somnus receives notice from
Distributor during the warranty period that a Product ("Nonconforming Item")
does not conform to its warranty, Somnus's sole liability, and Distributor's
exclusive remedy, shall be for Somnus, at its sole option, to either repair or
replace the Nonconforming Item. Nonconforming Items replaced under the terms of
any such warranty may be refurbished or now equipment substituted at Somnus's
option. A Nonconforming Item may only be returned under the prior written
approval of Somnus. Any such approval shall reference a Return Material
Authorization (RMA) number issued by authorized Somnus personnel. Transportation
costs, if any, incurred in connection with the return of a defective
Nonconforming Item to Somnus shall be borne by Distributor. Any transportation
costs incurred in connection with the redelivery of an Nonconforming Item to
Distributor returned in the manner provided above shall be borne by Somnus if
actually nonconforming. In the event a returned Nonconforming Item is found not
to be Nonconforming, all costs to return such item to Distributor shall be borne
by Distributor, and such items will be subject to a service charge of [*], which
mounts shall be invoiced to Distributor and shall be payable within thirty days
of the date of invoice. All claims by Distributor pursuant to the foregoing
warranty shall be made in a writing (including a telecopy) stating (1) the
serial or lot number of the allegedly defective Nonconforming Item, (2) the date
[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
such Nonconforming Item was delivered to or installed for a customer, and (3) a
reasonably detailed description of the defect.
8.4 DISCLAIMER EXCEPT AS SET FORTH ABOVE, SOMNUS MAKES NO WARRANTIES
OR CONDITIONS, EXPRESSED, IMPLIED STATUTORY OR OTHERWISE, RESPECTING PRODUCTS,
SPARE PARTS OR THIS AGREEMENT. ALL CONDITIONS, WARRANTIES AND REPRESENTATIONS
EXPRESSED OR IMPLIED BY LAW IN RELATION TO THE PRODUCTS ARE HEREBY EXCLUDED.
9. LIMITATION OF LIABILITY
SOMNUS'S LIABILITY ARISING OUT OF THIS AGREEMENT AND/OR THE SALE OF THE
PRODUCT WHETHER FOR NEGLIGENCE, BREACH OF CONTRACT, MISREPRESENTATION OR
OTHERWISE SHALL IN NO CIRCUMSTANCE EXCEED THE AMOUNT PAID BY DISTRIBUTOR FOR THE
PRODUCTS IN QUESTION.
IN NO EVENT SHALL SOMNUS BE LIABLE FOR:
(A) DAMAGE TO OR LOSS OF THE PRODUCTS OR ANY PART OF THEM WHILST IN TRANSIT:
(B) FOR DEFECTS IN THE PRODUCTS CAUSED BY ABNORMAL OR UNSUITABLE CONDITIONS OF
STORAGE OR USE OR ANY ACT, NEGLECT OR DEFAULT OF THE DISTRIBUTOR OR OF ANY THIRD
PARTY;
(C) THE COST OF PROCUREMENT OF SUBSTITUTE PRODUCTS BY DISTRIBUTOR;
(D) (EXCEPT IN RESPECT OF DEATH OR PERSONAL INJURY CAUSED BY SOMNUS'S
NEGLIGENCE), SOMNUS SHALL NOT BE LIABLE TO DISTKIBUTOR FOR ANY LOSS, DAMAGE OR
INJURY OR FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL LOSS OR DAMAGE (WHETHER FOR
LOSS OF PROFIT OR OTHERWISE), COSTS, EXPENSES OR OTHER CLAIMS WHICH ARISE OUT OF
OR IN CONNECTION WITH THE SUPPLY OF THE PRODUCTS OR THEIR USE OR RESALE BY
DISTRIBUTOR.
10. PROPERTY RIGHTS
10.1 Property Rights. Except as expressly set forth herein,
Distributor Somnus agrees that Somnus owns all right, title, and interest in the
Products and in all of Somnus's patents, Somnus Trade Marks, trade names,
inventions, copyrights, know-how, and trade secrets relating to the design,
manufacture, operation or service of the Products. The use by Distributor of any
of these property rights is authorized only for the purposes hereto set forth,
and upon termination of this Agreement for any reason such authorization shall
cease.
10.2 Somnus makes no representation or warranty as to the validity or
enforceability of the Somnus Trade Marks nor as to whether the Somnus Trade
Marks infringe upon any intellectual property rights of third parties within the
Territory.
<PAGE>
10.3 Use of SOMNUS TRADE MARKS. During the term of this Agreement,
Distributor shall indicate to the public that the Distributor is an authorized
distributor of Somnus's Products and advertise within the Territory such
Products under the Somnus Trade Marks. Distributor shall not alter or remove any
Somnus Trade Mark applied to the Products. Except as set forth in this Section
10.3, nothing contained in this Agreement shall grant to Distributor any right,
title and interest in the Somnus Trade Marks. At no time during or after the
term of this Agreement shall Distributor attempt to register any trademarks,
mask or trade names confusingly similar to the Somnus Trade Marks.
10.4 Approval of Representations. All representations of the Somnus
Trade Marks that Distributor intends to use shall first be submitted to Somnus
for approval, which shall not be unreasonable withheld, of design, color, and
other details or shall be exact copies of the Somnus Trade Marks. If any of the
Somnus Trade Marks are to be used in conjunction with another trademark on or in
relation to the Products, then the Somnus Trade Marks shall be presented equally
legibly, equally prominently, and of greater size than the other by nevertheless
separated from the other so that each appears to be a mark in its own right,
distinct from the other mark
10.5 Sale Conveys no Right to Manufacture Copy or Modify. The Products
are offered for sale and are sold-by Somnus subject in every case to the
condition that such sale does not convey any license, expressly or by
implication, to manufacture, duplicate or otherwise copy or reproduce or modify
any of the Products. Distributor shall take appropriate steps with Distributor's
customers, as Somnus may request to inform them of and assure compliance with
the restrictions contained in this Subsection 10.5.
10.6 Distributor shall, at the expense of Somnus, take all such steps
as Somnus may reasonably require to assist Somnus in maintaining the validity
and enforceability of the Somnus Trade Marks and any other intellectual property
of Somnus during the term of this Agreement. In addition, Distributor shall
promptly and fully notify Somnus of any actual, threatened or suspected
infringement in the Territory of any Somnus Trade Mark or other intellectual
property of Somnus which comes to Distributor's notice and Distributor shall, at
the request and expense
<PAGE>
of Somnus, do all such things as may be reasonably required to assist Somnus in
taking or resisting any proceedings in relation to any such infringement or
claim.
10.7 Patent Marking. Distributor shall not remove from the Products
any patent notices marked on the Products, and shall label the packaging
materials of the Products with such patent notices as Somnus may request.
11. INDEMNITY
11.1 Intellectual Property Indemnity. Somnus shall indemnify, defend
and hold Distributor harmless against all liabilities and expenses paid to third
parties as a result of any claim or suit for an alleged direct infringement of
any third party intellectual property rights arising from the sale or use by
Distributor of the Products as contemplated herein; provided that Distributor
(a) promptly notifies Somnus of the claim, (b) grants Somnus full control over
the defense or settlement thereof. If a Product is, or in the opinion of Somnus
may become, the subject of any claim or suit for infringement of any such
rights, then Somnus may become, the subject of any claim or suit for
infringement of any such rights, then Somnus may, at its option and expense: (i)
procure for Distributor the right to distribute or use, as appropriate, such
Product; or (ii) modify or replace the Product, or part thereof, with other
suitable Products or parts that are substantially equivalent in functionality
and performance; or (iii) accept return of such Product, or pan thereof, and
refund the aggregate payments paid therefor by Distributor, less a reasonable
sum for use and damage as amortized over a forty-eight (48) month period.
Notwithstanding the above, Somnus shall not be liable for any costs or expenses
incurred without its prior written authorization.
11.2 Limitation. Notwithstanding the provisions of Subsection 11.1
above, Somnus assumes no liability for (i) infringement claims with respect to
any product or process in or with which any of the Products may be used but not
covering the Products standing alone; (ii) any trademark infringements involving
any marking or branding not applied by Somnus or involving any marking or
branding applied at the request of Distributor; or (iii) the modification of the
Products, or any part thereof, unless such modification was made by Somnus.
11.3 Entire Liability. THE FOREGOING PROVISIONS OF THIS SECTION 11
STATE THE ENTIRE LIABILITY AND OBLIGATION OF SOMNUS AND THE EXCLUSIVE REMEDY OF
DISTRIBUTOR AND ITS CUSTOMERS, WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF
PATENTS OR OTHER INTELLECTUAL PROPERTY
<PAGE>
RIGHTS BY THE PRODUCTS OR ANY PART THEREOF. ALL WARRANTIES OF NON-INFRINGEMENT,
STATUTORY, IMPLIED OR OTHERWISE, ARE HEREBY EXPRESSLY DISCLAIMED.
12. CONFIDENTIALITY
12.1 Distributor acknowledges that by reason of Distributors relationship
to Somnus hereunder Distributor will have access to certain information and
materials concerning Somnus's business, plans, customers, technology and
products that are confidential and of substantial value to Somnus, which value
would be impaired if such information were disclosed to third parties.
Distributor agrees that Distributor will not use in any way for Distributor's
own account of the account of any third party, nor disclose to any third party,
any such confidential information revealed to Distributor by Somnus. Distributor
shall take every reasonable precaution to protect the confidentiality of such
information. Upon request by Distributor. Somnus shall advise whether or not
Somnus considers any particular information or materials to be confidential.
Distributor shall not publish any technical description of the Products beyond
the description published by Somnus (except to translate that description into
appropriate languages for the Territory). In the event of termination of this
Agreement, there shall be no use or disclosure by Distributor of any
confidential information of Somnus, and Distributor warrants that it shall not
at any time manufacture any compositions, devices, components or assemblies
utilizing any of Somnus's confidential information.
13. COMPLIANCE WITH THE LAW
13.1 Export Control Regulations. Any and all obligations of Somnus to
provide the Products, as well as any technical assistance, shall be subject in
all respects to such United States Laws and regulations as shall from time to
time govern the license and delivery of technology and products abroad by
persons subject to the jurisdiction of the United States, including the United
States Foreign Assets Control Regulations, Transaction Control Regulations and
Export Control Regulations, as amended, and any successor legislation issued by
the Department of Commerce, International Trade Administration, or Office of
Export Licensing. Without in any way limiting the provisions of this Agreement,
Distributor agrees that, unless prior
<PAGE>
authorization is obtained from the office of Export Licensing, it shall not
export, reexport, or transship, directly or indirectly, to country groups Q, S,
W, Y, or Z ( as defined in the Export Administration Regulations), or
Afghanistan or the people's Republic of China (excluding Taiwan) any of the
technical data disclosed to Distributor or the direct product of such technical
data.
13.2 Governmental Consent, Distributor represents and warrants that, as
of the Effective Date of this Agreement, no consent, approval or authorization
of, or designation, declaration or filing with, any governmental authority in
the Territory which has not been made or obtained by Distributor prior to the
Effective Date is required in connection with the valid execution, performance
and delivery of this Agreement. Distributor shall be responsible for timely
filings of this Agreement with any required governmental agencies or commissions
in the Territory. In the event any such agency or governmental entity objects to
or disapproves of this Agreement or any provision hereof, Somnus shall have the
right to immediately terminate the Agreement.
13.3 Currency Control. Distributor represents and warrants that, on the
Effective Date of this Agreement, no currency control laws applicable in the
Territory prevent the payment to Somnus of any sums due under this Agreement.
13.4 Foreign Corrupt Practices Act. In conformity with the United
States Foreign Corrupt Practices Act and with Somnus's established corporate
policies regarding foreign business practices, Distributor and its employees and
agents shall not directly or indirectly make an offer, payment, promise to pay,
or authorize payment, or offer a gift promise to give, or authorize the giving
of anything of value for the purpose of influencing an act or decision of an
official of any government within the Territory or the United States Government
(including a decision not to act) or including such a person to use his
influence to affect any such governmental act or decision in order to assist
Somnus in obtaining, retaining, or directing any such business.
13.5 Intellectual Property Rights Registrations. Distributor shall
promptly notify Somnus in writing of, and shall assist Somnus with any
registrations or filings required to obtain patent, copyright, trademark or
other intellectual property rights protection, in Somnus's name, for the
Products in the Territory under applicable law. Somnus shall be responsible for
all fees
<PAGE>
or expenses incurred in connection with such intellectual property fights
registrations or filings.
13.6 Non-Compliance as Material Default. Non-compliance by Distributor
or its employees or agents with this Section 13 shall be deemed to constitute a
material default under this Agreement.
14. TERM AND TERMINATION
14.1 Term. This Agreement shall continue in force for a term of three
(3) years from the Effective Date, unless terminated earlier under the
provisions of this Section 14. At the end of such term, this Agreement shall
terminate automatically without notice unless prior to that time the parties
have agreed in writing to renew the Agreement.
14.2 Termination for Convenience, This agreement may be canceled by
either party for any reason, by giving the other party hereto ninety (90) days
written notice.
14.3 Termination for Cause. If either party materially breaches any
provision of this Agreement, the other party may elect to give to the breaching
party written notice describing the alleged breach. If the breaching party has
not cured such breach within thirty. (30) days after receipt of such notice, the
notifying party will be entitled, in addition to any other rights it may have
under this Agreement, to terminate this Agreement effective immediately..
14.4 Termination for Insolvency. This Agreement shall terminate,
without notice, (I) upon the institution by or against Distributor of
insolvency, receivership or bankruptcy proceedings or any other proceedings for
the settlement of Distributor's debts, (ii) upon Distributor's making an
assignment for the benefit of creditors, or (iii) upon Distributor's
dissolution.
14.5 Limitation on Liability. In the event of termination by either
party in accordance with any of the provisions of this Agreement, neither party
shall be liable to the other, because of such termination,-for compensation,
reimbursement or damages on account of the loss of prospective profits or
anticipated sales or on account of expenditures, inventory, investments, leases
or commitments in connection with the business or goodwill of Somnus or
Distributor. Termination shall not, however, relieve either party of obligations
<PAGE>
incurred prior to the termination.
14.6 Effect of Termination.
(a) Distributor shall be permitted for a period of 3 months
following termination to sell and distribute such stocks of the Products as it
may at the time have in its possession or under its control. At the end of such
period, Distributor shall give Somnus the right to purchase Distributor's
remaining inventory of Products (if any) at the prices Distributor paid for such
Products, F.O.B. Somnus's facility. Should Somnus elect to exercise its right to
repurchase then Somnus shall only repurchase Products in a marketable condition.
(b) Termination shall not, under any circumstances, relieve the
Distributor of its obligation to pay any sums owed to Somnus under the terms of
this Agreement.
(c) Upon expiration or termination of this Agreement, Somnus may
cancel any or all untilled orders.
(d) Within thirty (30) days after the termination of this
Agreement, Distributor shall return all samples, instruction books, technical
pamphlets, catalogues, advertising materials, specifications and other
materials, documents or papers whatsoever sent to Distributor and relating to
Somnus's business at Somnus's expense. Distributor shall not make, use, dispose
of or retain copies of any confidential items or information which may have been
entrusted to Distributor.
(e) Upon termination, Distributor shall immediately cease to use
the Somnus Trade Marks and any other intellectual property rights of Somnus and
the license granted pursuant to Section 10.1 shall immediately terminate.
(f) Sections 9, 10, 11, 12, 13, 14, and 15 shall survive
termination of this Agreement for any reason.
15. GENERAL PROVISIONS
15.1 Governing Law. This Agreement shall be governed by, construed and
interpreted in accordance with English law.
15.2 Choice of Language. The original of this Agreement has been
written in English. Distributor hereby waives any right it may have under the
law of Distributor's country to have this Agreement written in the language of
Distributor's country.
<PAGE>
15.3 Waiver. Any delay or omission by either party to exercise any
right or remedy under this Agreement shall not be construed to be a waiver of
any such right or remedy or any other right or remedy hereunder. All of the
rights of either party under this Agreement shall be cumulative and may be
exercised separately or concurrently.
15.4 Force Majeure Neither party shall be liable to the other for its
failure to perform any of its obligations hereunder during any period in which
such performance is delayed by circumstances beyond its reasonable control
including, but not limited to, fire, flood, earthquake, war, embargo, strike,
not, inability to secure materials and transportation facilities, failure of
suppliers, or the intervention of any governmental authority (" Force Majeure").
If either party is affected by Force Majeure, it shall forthwith notify the
other of the nature and extent thereof. If such Force Majeure shall continue for
more than ninety (90) days, the party injured by the inability of the other to
perform shall have the right upon written notice to either (I) terminate the
Agreement with respect to Products not already shipped, or (2) treat this
Agreement as suspended during the delay and reduce any commitment in proportion
to the duration of the delay.
15.5 Publicity. Neither party shall issue press release or similar
public disclosure of any nature regarding this Agreement without the other
party's prior written approval, which approval shall not be unreasonably
withheld. However, such approval shall be deemed to have been given to the
extent such disclosure is required by professional business advisors and
financing sources of Distributor, or to comply with governmental requirements.
15.6 Headings. The headings used in this Agreement are inserted for
convenience only and shall not affect the construction or interpretation of any
provision.
15.7 Notices. Any notice required or permitted by to this Agreement
shall be made in writing. All notices shall be sent by registered or certified
mail, return receipt requested, or by commercial carrier, in each case postage
prepaid. All such notices shall be deemed to have been given three (3) days
after dispatch in such manner, addressed as shown below or to such other address
as a party may indicate by notice:
<PAGE>
To Somnus: Somnus Medical Technologies, Inc.
285 N. Wolfe Road
Sunnyvale, California 94086
United States of America
Attention: Mr. Donald R. Bruce
To Distributor: Ferrari Ind. Com. Aparelhos Medicos Ltda
Rua Indare
101 CEP 04317-010
Sao Paulo-SP-Brazil
Attention: Mr. Ronaldo Luiz Ferrari
15.8 Severability If any provision of this Agreement is held invalid by
any law, rule, order or regulation of any government, or by the final
determination of any court of competent jurisdiction, such invalidity shall not
affect the enforceability of any other provisions not held to be invalid.
15.9 Non-Assignability and Binding Effect. A mutually agreed
consideration for Somnus's entering this Agreement is the reputation, business
standing, and goodwill already honored and enjoyed by Distributor under
Distributor's present ownership, and, accordingly, Distributor agrees that
Distributor's rights and obligations under this Agreement may not be transferred
or assigned directly or indirectly without the prior written consent of Somnus.
Somnus may assign this Agreement in connection with the sale of all or
substantially all its business assets relating to this Agreement, whether by
merger, sale or otherwise. Subject to the foregoing sentence, this Agreement
shall be binding upon and inure to the benefit of the parries hereto and their
successors and assigns.
15.10 Entire Agreement. This Agreement with its Exhibits, sets forth
the entire agreement and understanding of the parties relating to the subject
matter herein and supersedes all prior discussions and negotiations, whether
oral or written, between
<PAGE>
them. No modification of or amendment to this Agreement, nor any waiver of any
rights under this Agreement, shall be effective unless in writing signed by the
party to be charged.
15.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
SIGNED by Mr. Donald R. Brace
for and on behalf of )
SOMMNUS MEDICAL TECHNOLOGIES, INC. )
/s/ Donald R. Bruce Signature
Donald R. Bruce Print Name
SIGNED by Ronaldo Luiz Ferrari
for and on behalf of )
Ferrari Ind. Com. Aparelhos Medicos Ltda )
/s/ Ronaldo Luiz Ferrari Signature
Ronaldo Luiz Ferrari Print Name
EXHIBIT A
PRODUCT PRICES
The Products and Prices of this Agreement shall be as follows. Prices are quoted
in US Dollars.
<PAGE>
- --------------------------------------------------------------------------------
Name Somnus Model No. Distributor Price in
US Dollars
- --------------------------------------------------------------------------------
RF Generator S2 [*] each
- --------------------------------------------------------------------------------
Somnoplasty Single Needle Coagulating 1100 [*] each
Electrode
- --------------------------------------------------------------------------------
Somnoplasty Single Needle Coagulating 1010 [*] Each
Electrode handpiece
- --------------------------------------------------------------------------------
All prices are FOB Factory Sunnyvale, California United States of America
and subject to FOB port, insurance, and shipping charges to be paid by
Distributor. Distributor is responsible for all import duties, taxes, and other
charges levied in Distributor's country.
EXHIBIT B1
INITIAL PRODUCT PURCHASE REQUIREMENTS
The initial purchase requirement concurrent with the execution of this Agreement
are as follows:
Item Description Quantity
Price to Total Price in
Distributor US$
1.
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
2.
3.
4.
5.
6.
Total Initial
Order
$
NOTE: These goods have already been purchased and paid for.
All prices are FOB Factory Sunnyvale, California United States of
America and subject to FOB port, insurance, and shipping charges to be paid by
Distributor. Distributor is responsible for all import duties, taxes, and other
charges levied in Distributor's country.
EXHIBIT B2
MINIMUM PRODUCT PURCHASE REQUIREMENTS
The minimum purchase of this Agreement are as follows:
Year Amount($)
1 [*]
2 [*]
3 [*]
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
Three (3) months prior to anniversary agree minimums for the following year.
EXHIBIT C
RESCHEDULE AND CANCELLATION
In the event Somnus agrees to cancel or reschedule an order,
Distributor agrees to pay to Somnus cancellation or rescheduling charges in
accordance with the following schedule:
- --------------------------------------------------------------------------------
Number of days prior to scheduled Cancellation or rescheduling Charges*:
delivery date that cancellation or
rescheduling notice is received:
- --------------------------------------------------------------------------------
10-15 days [*] of order total
- --------------------------------------------------------------------------------
15-30 days [*] of total order
- --------------------------------------------------------------------------------
over 30 days No Charge
- --------------------------------------------------------------------------------
* The charges listed in this table are specified as a percentage of the price of
the canceled or rescheduled order.
The notice period for computing cancellations shall be based on the originally
scheduled delivery date in the event a Product previously rescheduled is
subsequently rescheduled or canceled.
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
Somnus will use commercially reasonable efforts to meet rescheduled delivery
dates. Cancellation or rescheduling requests made by Distributor less than ten
(10) days prior to the scheduled delivery date shall be accepted or rejected at
Somnus's discretion.
EXIHIBIT D
SOMNUS TRADEMARKS AND SERVICEMARKS
Somnus and the Somnus Medical Technologies, Inc. logo are trademarks of Somnus
Medical Technologies, Inc.
"Sound sleep without the sound" is a trademark of Somnus Medical Technologies,
Inc.
Somnoplasty is a servicemark of Somnus Medical Technologies, Inc.
<PAGE>
EXHIBIT E
DISTRIBUTOR MONTHLY REPORT
Distributor Name:
Country:
Month:
Sales for Month
Units Sold Average Price Beginning Stock End Stock
Evaluations for Month
Units Name or' Customer Terms
New Accounts this Month:
Number of RF Generators Placed:.
Hospital Name:
Total Number of RF Generators Now in Market:
Number of Physicians Trained:
Physicians Name:
<PAGE>
Total Number of Trained Physicians in Market:
DISTRIBUTOR MONTHLY REPORT
Key Activities this Month:
Key Activities Next Month:
What support do you need from Somnus?
<PAGE>
Thank you for taking the time to complete this report
With kind regards,
Somnus Customer Service
<PAGE>
EXHIBIT 10.15
PATENT LICENSE AGREEMENT
THIS PATENT LICENSE AGREEMENT (the "Agreement"), effective as of January 30,
1998 (the "Effective Date"), is entered by and between Medtronic, Inc., with an
address at 7000 Central Avenue NE, Minneapolis, Minnesota 55432 ("MEDTRONIC")
and SOMNUS, Inc., a Delaware corporation, with principal offices at 285 North
Wolfe Road, Sunnyvale, California 94086 ("SOMNUS").
WHEREAS, MEDTRONIC is the sole and exclusive owner of U.S. Patent Number
5,573,533, entitled METHOD AND SYSTEM FOR RADIOFREQUENCY ABLATION OF CARDIAC
TISSUE attached as Exhibit A hereto and Patent Rights associated therewith; and
WHEREAS, SOMNUS desires to obtain an exclusive license to the Patent Rights
thereto, and MEDTRONIC desires to grant such a license to SOMNUS, on the terms
and conditions herein.
NOW, THEREFORE, MEDTRONIC and SOMNUS agree as follows:
1. DEFINITIONS
1.1 "Affiliate" means any corporation or other entity which is directly or
indirectly controlling, controlled by or under the common control with SOMNUS.
For the purpose of this Agreement, "control" shall mean the direct or indirect
ownership of at least 50% of the outstanding shares or other voting rights of
the subject entity to elect directors.
1.2 "Licensed Product" means any product, the manufacture, use, import, offer
for sale or sale of which by an unlicensed third party would constitute an
infringement of a Valid Claim in the country for which such Licensed Products
are manufactured, used or sold. By way of example and not limitation, each of
the radiofrequency power generator and the catheter defined by a Valid Claim are
Licensed Products.
1.3 "Patent Rights" means the rights associated with U.S. Patent Number
5,573,533 owned by MEDTRONIC described in Exhibit A hereto, and all foreign
patents issuing on patent applications corresponding to U.S. Patent Number
5,573,533.
1.4 "Valid Claim" means any of claims 10-15 of U.S. Patent Number 5,573,533.
2. LICENSE
2.1 License Grant. MEDTRONIC hereby grants to SOMNUS a non-exclusive,
-------------
worldwide, fully-paid (subject to Section 3.2) license under the Patent Rights
to make, have made, import, use, offer for sale, sell and otherwise distribute
and exploit the Licensed Products but only in the field of radio frequency
ablation for the treatment of upper airway disorders.
2.2 Ownership. SOMNUS acknowledges and agrees that MEDTRONIC is and shall
---------
remain the sole and exclusive owner of the Patent Rights and that SOMNUS
acquires no rights in or to any of the foregoing, other than the license rights
specifically granted in Section 2.1.
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
Page 1
<PAGE>
3. PAYMENTS
3.1 Royalty. SOMNUS will pay MEDTRONIC a royalty of [*].
-------
3.2 Partial Payments. SOMNUS will pay MEDTRONIC a first partial payment of
----------------
[*] on the Effective Date, and a second partial payment of [*] no later than six
months after the Effective Date.
4. CONFIDENTIALITY
4.1 General. MEDTRONIC and SOMNUS shall each hold in confidence and not
-------
disclose to any third party unless authorized in advance in writing any product,
technical, manufacturing, process, marketing, financial, business or other
information, ideas, or know-how delivered by the other party and identified in
writing as confidential or oral information disclosed by one party to another
pursuant to this Agreement, provided that such information is designated as
confidential at the time of disclosure and within thirty (30) days after its
oral disclosure is reduced to a written summary by the disclosing party, which
summary is marked in a manner to indicate its confidential nature and delivered
to the receiving party (collectively "Confidential Information").
4.2 Protection of Confidential Information. Each party shall implement
--------------------------------------
reasonable procedures to prohibit the disclosure, unauthorized duplication, use
or removal of such Confidential Information and shall not disclose Confidential
Information received from the disclosing party to any third party except as may
be necessary and required in connection with the rights and obligations of such
party under this Agreement, and subject to confidentiality obligations at least
as protective as those set forth herein. Without limiting the foregoing, each
of the parties shall use at least the same procedures and degree of care which
it uses to prevent the disclosure of its own proprietary information to prevent
the disclosure of Confidential Information.
4.3 Exceptions. Notwithstanding the above, Confidential Information shall not
----------
include information which: (i) was generally known and available in the public
domain at the time it was disclosed, or becomes generally known and available in
the public domain through no fault or act of the receiving party; (ii) was known
to the receiving party at the time of disclosure, as shown by written records;
(iii) is disclosed with the prior written approval of the disclosing party; (iv)
was independently developed by the receiving party without the use of or
reliance on any Confidential Information, as shown by written records prepared
contemporaneously with such independent development; (v) becomes known to the
receiving party from a third party without any obligation of confidentiality to
the disclosing party; (vi) is disclosed pursuant to the order or requirement of
a court, administrative agency, or other governmental body; provided, that the
receiver shall provide reasonable advance notice thereof to enable the owner to
seek a protective order or otherwise prevent such disclosure; or (vi) is
disclosed to accountants, banks, or another financing source (or their advisors)
or in connection with a merger, acquisition or securities offering, subject to a
non-disclosure agreement containing the same terms and conditions of Sections
4.1, 4.2 and this Section 4.3.
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
Page 2
<PAGE>
5. REPRESENTATIONS AND WARRANTIES
5.1 MEDTRONIC represents and warrants that: (i) MEDTRONIC is the sole and
exclusive owner of all title and interest in the Patent and Patent Rights; (ii)
the Patent and Patent Rights are free and clear of any lien, encumbrance,
security interest and restriction on license; (iii) MEDTRONIC has not previously
granted, and will not grant during the term of this Agreement, any right,
license or interest in and to the Patent and Patent Rights, or any portion
thereof, inconsistent with the license granted to SOMNUS herein; and (vi) there
are no actions, suits, investigations, claims or proceedings pending or
threatened in any way relating to the Patent and Patent Rights.
5.2 SOMNUS represents and warrants that (i) it is a corporation duly organized
validly existing and in good standing under the laws of the State of Delaware;
and (ii) the execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action on the part of SOMNUS.
5.3 Effect of Representations and Warranties. It is understood that if the
----------------------------------------
representations and warranties made by a party under this Article 5 are not true
and accurate, and the other party incurs damages, liabilities, costs or other
expenses as a result of such falsity, the party making such representations and
warranties shall indemnify and hold the other party harmless from and against
any such damages, liabilities, costs or other expenses incurred as a result of
such falsity.
6. PATENT ENFORCEMENT
6.1 Enforcement. If either party hereto becomes aware that any Patent Rights
-----------
are being or have been infringed by any third party, or become involved in a
declaratory judgment action, interference or opposition, such party shall
promptly notify the other party hereto in writing describing the facts relating
thereto in reasonable detail. MEDTRONIC shall have the initial right, but not
the obligation, to institute, prosecute and control any action, suit or
proceeding (an "Action") with respect to such Action, including any declaratory
judgment action, at its expense, using counsel of its choice. SOMNUS shall
cooperate reasonably with MEDTRONIC, at MEDTRONIC's request, in connection with
any such Action. SOMNUS shall not make any admission regarding the invalidity
or unenforceability of the Patent Rights without MEDTRONIC's prior written
consent.
6.2 Infringement Claims. If the practice by SOMNUS of the license granted
-------------------
herein results in any claim of infringement of a patent right of a third party
against SOMNUS, SOMNUS shall have the exclusive right to defend any such claim,
suit or proceeding, at its own expense, by counsel of its own choice and shall
have the sole right and authority to settle any such suit; provided, however,
MEDTRONIC shall cooperate with SOMNUS, at SOMNUS's reasonable request, in
connection with the defense of such claim.
7. ARBITRATION
7.1 MEDTRONIC and SOMNUS agree that any dispute or controversy arising out of,
in relation to, or in connection with this Agreement, or the validity,
enforceability, construction,
Page 3
<PAGE>
performance or breach thereof, may, with mutual consent, be finally settled by
binding arbitration in San Francisco, California, United States of America,
under the then-current Licensing Agreement Rules of the American Arbitration
Association by one (1) arbitrator appointed in accordance with such Rules. The
rules of discovery determined by the arbitrator shall apply thereto. The parties
agree that judgment upon the decision and/or award rendered by the decision may
be entered in any court of competent jurisdiction. The parties agree that, any
provision of applicable law notwithstanding, they will not request, and the
arbitrator shall have no authority to award, punitive or exemplary damages
against any party. The costs of the arbitration, including administrative fees
and fees of the arbitrator, shall be shared equally by the parties. Each party
shall bear the cost of its own attorneys' fees and expert fees.
8. TERM AND TERMINATION
8.1 Term. This Agreement shall become effective on the Effective Date and
----
shall remain in full force and effect until the expiration of the last-to-expire
patent included within the Patent Rights, or until this Agreement is otherwise
terminated as provided by this Agreement.
8.2 Termination for Cause. If either party materially breaches this Agreement,
---------------------
the other party may elect to give the breaching party written notice describing
the alleged breach. If the breaching party has not cured such breach within
sixty (60) days after receipt of such notice, the notifying party will be
entitled, in addition to any other rights it may have under this Agreement, to
terminate this Agreement effective immediately; provided, however, if either
party receives notification from the other of a material breach and if the party
alleged to be in default notifies the other party in writing within thirty (30)
days of receipt of such default notice that it disputes the asserted default,
the matter may be submitted to arbitration as provided in Article 7 of this
Agreement. In such event, the nonbreaching party shall not have the right to
terminate this Agreement until it has been determined in such arbitration
proceeding that the other party materially breached this Agreement, and the
breaching party fails to cure such breach within ninety (90) days after the
conclusion of such arbitration proceeding.
8.3 Termination for Insolvency. MEDTRONIC may terminate this Agreement if
--------------------------
SOMNUS becomes the subject of a voluntary or involuntary petition in bankruptcy
or any proceeding relating to insolvency, receivership, liquidation, or
composition or the benefit of creditors, if that petition or proceeding is not
dismissed with prejudice within sixty (60) days after filing.
8.4 Permissive Termination. SOMNUS may terminate this Agreement with respect
----------------------
to any country or any Patent Right with thirty (30) days written notice to
MEDTRONIC.
8.5 Licenses. Upon any expiration or termination of this Agreement, all rights
--------
and licenses granted to SOMNUS hereunder shall terminate, and each party shall
return to the other all documents in its possession, or in the possession of its
Affiliates or sublicensees, embodying, evidencing, or derived from Confidential
Information of the other party.
8.6 Accrued Rights. Termination of this Agreement shall not release either
--------------
party from any obligation theretofore accrued.
Page 4
<PAGE>
8.7 Survival. Articles 4, 5, 7, and 9 of this Agreement shall survive
--------
termination of this Agreement for any reason.
9. MISCELLANEOUS
9.1 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, without reference to
conflict of laws principles.
9.2 Independent Contractors. The relationship of MEDTRONIC and SOMNUS
-----------------------
established by this Agreement is that of independent contractors. Nothing in
this Agreement shall be construed to create any other relationship between
SOMNUS and MEDTRONIC. Neither party shall have any right, power or authority to
assume, create or incur any expense, liability or obligation, express or
implied, on behalf of the other.
9.3 Assignment. The parties agree that their rights and obligations under this
----------
Agreement may not be delegated, transferred or assigned to a third party without
prior written consent of the other party hereto. Notwithstanding the foregoing,
SOMNUS may, after receipt of written approval that MEDTRONIC will not
unreasonably withhold, transfer or assign its rights and obligations under this
Agreement to a successor to all or substantially all of its business or assets
relating to this Agreement whether by sale, merger, operation of law or
otherwise. In such event, SOMNUS will provide MEDTRONIC at least thirty days
notice of the intent to transfer substantially all SOMNUS business or assets,
including identification of the intended transferee. MEDTRONIC will reply to
SOMNUS within fifteen days of receipt of the notice of intent to transfer.
Notwithstanding the foregoing, MEDTRONIC may assign part or all of its rights
with respect to the receipt of royalties from SOMNUS to a trust or other entity
for the payment thereof to beneficiaries.
9.4 This Agreement shall be binding upon and accrue to the benefit of the
successors, heirs and permitted assigns of the parties hereto.
9.5 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR
-----------------------
ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES ARISING OUT OF THIS
AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY.
9.6 Right to Develop Independently. Nothing in this Agreement will impair
------------------------------
SOMNUS's right to independently acquire, license, develop for itself, or have
others develop for it, technology performing similar functions as the Patent
Rights or to market and distribute products based on such other technology.
9.7 Notices. Any required notices hereunder shall be given in writing by
-------
certified mail or overnight express delivery service (such as DHL) at the
address of each party below, or to such other address as either party may
substitute by written notice. Notice shall be deemed served when delivered or,
if delivery is not accomplished by reason or some fault of the addressee, when
tendered.
Page 5
<PAGE>
If to MEDTRONIC: MEDTRONIC, Inc.
7000 Central Avenue NE
Minneapolis, Minnesota 55432
Attn: General Counsel
If to SOMNUS: SOMNUS Medical Technologies, Inc.
285 North Wolfe Road
Sunnyvale, California 94086
Attn: Stuart D. Edwards
9.8 Confidential Terms. Except as expressly provided herein, each party agrees
------------------
not to disclose any terms of this Agreement to any third party without the
consent of the other party, except as required by securities or other applicable
laws, to prospective investors and to such party's accountants, attorneys, other
professional advisors and to the beneficiaries referenced in Section 9.3 above.
9.9 Force Majeure. Neither party will be responsible to the other party for
-------------
nonperformance or delay in performance of any terms or conditions of this
Agreement due to acts of God, earthquake, fire, acts of government, wars, riots,
strikes, accidents in transportation, or other causes beyond its reasonable
control.
9.10 Compliance with Laws. Each party shall perform this Agreement in
--------------------
compliance with all applicable federal, national, state and local laws, rules
and regulations and shall indemnify the other party and its customers for loss
or damage sustained because of such party's noncompliance with any such law,
rule or regulation. Each party shall furnish to the other party any information
requested or required by that party during the term of this Agreement or any
extensions hereof to enable that party to comply with the requirements of any
U.S. or foreign federal, state and/or government agency.
9.11 Severability. In the event that any provisions of this Agreement are
------------
determined to be invalid or unenforceable by a court of competent jurisdiction,
the remainder of the Agreement shall remain in full force and effect without
said provision. The parties shall in good faith negotiate a substitute clause
for any provision declared invalid or unenforceable, which shall most nearly
approximate the intent of the parties in entering this Agreement.
9.12 Further Assurances. At any time or from time to time on and after the
------------------
date of this Agreement, either party shall at the request of the other party (i)
deliver to the other party such records, data or other documents consistent with
the provisions of this Agreement, (ii) execute, and deliver or cause to be
delivered, all such consents, documents or further instruments of transfer or
license, and (iii) take or cause to be taken all such reasonable actions, as the
other party may reasonably deem necessary or desirable in order for the other
party to obtain the full benefits of this Agreement and the transactions
contemplated hereby.
Page 6
<PAGE>
9.13 Modification; Waiver. This Agreement may not be altered, amended or
--------------------
modified in any way except by a writing signed by both parties. The failure of
a party to enforce any provision of the Agreement shall not be construed to be a
waiver of the right of such party to thereafter enforce that provision or any
other provision or right.
9.14 Entire Agreement. The parties hereto acknowledge that this Agreement and
----------------
its Exhibits set forth the entire agreement and understanding of the parties
hereto as to the subject matter hereof, and supersedes all prior discussions,
agreements and writings in respect hereto.
9.15 Counterparts. This Agreement may be executed in two or more counterparts,
------------
each of which shall be deemed an original and which together shall constitute
one instrument.
Page 7
<PAGE>
IN WITNESS WHEREOF, MEDTRONIC and SOMNUS have executed this Agreement by their
respective duly-authorized representatives.
SOMNUS MEDICAL TECHNOLOGIES, INC. MEDTRONIC, INC.
By: /s/ Stuart D. Edwards By: /s/ Leslie Bottorff
---------------------------- ------------------------------
Stuart D. Edwards Leslie Bottorff
- -------------------------------- ------------------------------
(Print) (Print)
Title: President, CEO Title: VP Sales & Marketing
-------------------------- -----------------------
Medtronic CardioRhythm
Page 8
<PAGE>
EXHIBIT A
US. PATENT NUMBER 5,573,533
METHOD AND SYSTEM FOR RADIOFREQUENCY ABLATION OF CARDIAC TISSUE
Page 9
<PAGE>
EXHIBIT 10.16
EXCLUSIVE DISTRIBUTOR AGREEMENT
This EXCLUSIVE DISTRIBUTOR AGREEMENT, including the attached Exhibits (the
"Agreement"), is made and entered into as of November 20, 1998 (the "Effective
Date"), by and between Somnus Medical Technologies, Inc., a Delaware corporation
with offices at 285 North Wolfe Road, Sunnyvale, California ("Somnus"), and Carl
Zeis Canada, a corporation with offices at 45 Valleybrook Drive, Ontario M3B3S6,
Canada ("Distributor").
A. Somnus is engaged in the business of manufacturing, distributing, and
selling Products (as defined below) and desires to engage a marketing and
distribution partner in the Territory (as defined below);
B. Distributor desires to solicit orders for Products from customers in
the Territory, and desires to be Somnus' sole marketing and distribution partner
in the Territory for Products solely for use within the Field (as defined
below); and
C. Distributor desires to purchase, and Somnus desires to sell to
Distributor, such Products for the purpose of resale to customers in the
Territory; and
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. DEFINITIONS
-----------
1.1 "Affiliate" shall mean any entity which controls, is controlled by
---------
or is under common control with Somnus or Distributor. An entity shall be
regarded as in control of another entity for purposes of this definition if it
owns or controls more than fifty percent (50%) of the shares of the subject
entity entitled to vote in the election of directors (or, in the case of an
entity that is not a corporation, for the election of the corresponding managing
authority).
1.2 "Field" shall mean use of radiofrequency energy for the treatment
-----
of upper airway medical conditions.
1.3 "House Accounts" means those accounts in the Territory on attached
--------------
Exhibit A.
1.4 "Products" means those products listed in Exhibit B, as amended
--------
from time to time. Products may be changed, discontinued or added by Somnus, at
its sole discretion.
1.5 "Territory" means the geographic area set forth in Exhibit C
---------
hereto, including any Territory and province under the direct governmental
control of the government(s) of such geographic area.
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
2. GRANT OF DISTRIBUTION RIGHTS
----------------------------
2.1 Appointment. Subject to the terms and conditions of this
-----------
Agreement, Somnus hereby grants to Distributor the exclusive right to market,
sell and distribute Products in the Territory solely for use in the Field.
Distributor agrees not to market, promote or distribute any Product for use
outside the Field or outside the Territory. Notwithstanding anything herein to
the contrary, Distributor shall market, promote, sell, and otherwise distribute
Products in accordance with all applicable law and regulations. Distributor's
sole authority shall be to purchase Products from Somnus and to promote, market
and resell such Products for delivery to customers in accordance with the terms
of this Agreement. Distributor may authorize subdistributors to market, sell or
distribute any Product in accordance with this Section 2.1, provided that
Distributor obtains Somnus' prior written authorization for such assignment to
subdistributors, and uses best efforts to ensure that such subdistributors
comply with the applicable provisions of this Agreement.
2.2 Reservation of Rights. Notwithstanding the exclusive rights to
---------------------
distribute and market granted under this Agreement, nothing in this Agreement
will prevent Somnus from using the Products or intellectual property therein to
make, have made, develop, sell, license, distribute and/or market new products.
Somnus further reserves the right to market its products directly within the
Territory. For direct sales to House Accounts (as listed on Exhibit A hereto),
Somnus shall pay no compensation to Distributor. Somnus reserves the right to
appoint other authorized distributors or resellers outside the Territory without
restriction as to number and location, provided such other distributors or
resellers are prohibited from selling in the Territory.
2.3 No Rights Beyond Products. Nothing in this Agreement shall be
-------------------------
deemed to grant to Distributor rights in products or technology other than the
Products; nor shall any provision of this Agreement be deemed to restrict
Somnus' right to exploit Products, or patents or any other intellectual property
rights, outside the Field, outside the Territory or in products other than
Products.
2.4 Sale Conveys No Right to Manufacture or Copy. The Products are
--------------------------------------------
offered for sale and are sold by Distributor subject in every case to the
condition that such sale does not convey any license, expressly or by
implication, to manufacture, duplicate or otherwise copy or reproduce any of the
Products.
2.5 Conflict of Interest. Distributor agrees that any efforts by
--------------------
Distributor to sell competing products in the Territory would constitute a
conflict of interest with respect to Distributor's obligations to market the
Products, and Distributor warrants to Somnus that it does not currently
represent or promote any lines or products that compete with the Products.
During the term of this Agreement, in the event that Distributor represents,
promotes or otherwise tries to sell within the Territory any lines or products
that, in Somnus' judgment, compete with either the Products covered by this
Agreement, or other Somnus products in the Field, Somnus shall have the right to
terminate this Agreement upon thirty (30) days prior written notice to
Distributor pursuant to Section 9.2 below.
-2-
<PAGE>
2.6 Changes to Territory. The Territory may be amended from time to
--------------------
time by Somnus at its sole discretion. Somnus shall give Distributor thirty (30)
days notice of any amendment to the Territory. Such amendment shall not
significantly diminish or otherwise alter the nature of the territory.
3. PRICE AND PAYMENT
-----------------
3.1 Prices. The difference between Somnus' transfer price and
------
Distributor's price to its customers shall be Distributor's sole remuneration
for the sale of the Products. The transfer price paid by Distributor for each
Product shall be as set forth in Exhibit D. Additionally, the list price at or
below which the Distributor shall be permitted to sell each Product also shall
be as set forth in Exhibit D. List Price will be mutually agreed upon by Somnus
and the Distributor. Distributor agrees not to sell products above the agreed
upon list price.
3.2 Price Changes. Somnus may revise the transfer prices on Exhibit D
-------------
at any time upon thirty (30) days prior written notice to Distributor. Upon
notice of a change in such prices and prior to the effective date of such
change, Distributor shall have the right to order a quantity of Product greater
than the amount already forecasted by the Distributor and as agreed to by Somnus
in writing within thirty (30) days of the date on which Somnus notified
Distributor of such change.
3.3 Payment Terms. Distributor shall make payments to Somnus under this
-------------
Agreement by wire transfer in United States dollars in immediately available
funds to a bank account designated by Somnus. Except as provided in Section 4.2
below, payment for Products supplied hereunder shall be made net thirty (30)
days after the date of shipment. Any payments due hereunder which are not paid
on the date such payments are due shall bear interest at the lesser of one and
one-half percent (1.5%) per month or the maximum rate permitted by California
law, calculated on the number of days such payment is delinquent. In the event
that Distributor's payments due hereunder are delinquent, Distributor shall
provide Somnus with a letter of credit. This Section 3.3 shall in no way limit
any other remedies available to Somnus.
3.4 Taxes. Any and all amounts payable hereunder do not include any
-----
government taxes (including without limitation, withholding, sales, use, excise,
and value added taxes) or duties imposed by any governmental agency that are
applicable to the export, import, or purchase of the Products (other than taxes
on the net income of Somnus), and Distributor shall bear all such taxes and
duties. When Distributor has the legal obligation to collect and/or pay such
taxes, the appropriate amount shall be added to Somnus invoice and paid by
Distributor, unless Somnus provides Distributor with a valid tax exemption
certificate authorized by the appropriate taxing authority.
4. TERMS OF PURCHASE AND SALE
--------------------------
4.1 Terms and Conditions. All Product purchases hereunder shall be
--------------------
subject to the terms and conditions of this Agreement. Nothing contained in any
purchase order submitted pursuant to this Agreement shall in any way modify or
add any terms or conditions to said purchases, unless otherwise agreed in
writing by the parties.
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<PAGE>
4.2 Initial Stocking Order. An initial stocking order placed by
----------------------
Distributor on the Effective Date is attached hereto as Exhibit E. Such initial
stocking order will be Distributor's minimum performance requirements for the
first calendar year of this Agreement.
4.3 Forecasts and Cycle Counts. Beginning on the Effective Date, and
--------------------------
thereafter on or before the first day of each month, Distributor shall provide
to Somnus a good faith, monthly written forecast of the number of units of each
Product, on a Product-by-Product basis, that Distributor expects to purchase
over the following twelve (12) months ("Forecasts"). Distributor shall submit
purchase orders for Products in accordance with the number of units of Products
forecasted in the first calendar month of each Forecast, and Somnus shall supply
Products in accordance with the first calendar month of the Forecast. The
parties acknowledge that the last eleven (11) calendar months included in each
Forecast are for planning purposes only and shall not be binding upon the
parties. Somnus reserves the right to assist Distributor in determining their
forecast requirements to meet minimum stocking levels and to prevent
overstocking of any product. Somnus and Distributor shall meet no less
frequently than once per Calendar quarter to review Forecasts and cycle counts.
4.4 Order and Acceptance. All orders shall be by means of signed
--------------------
written purchase orders by an agent designated by Distributor to a Somnus
employee designated by Somnus, sent to Somnus at Somnus' address for notice
hereunder and requesting a delivery date that is consistent with the Forecasts
and not less than thirty (30) days after Somnus' receipt of such purchase order.
Orders shall be placed by a signed written purchase order which may be provided
to Somnus by fax. Somnus shall use reasonable efforts to fulfill purchase orders
submitted in accordance with Somnus' standard lead times, it being understood
that no purchase order shall be binding upon Somnus until accepted by Somnus by
fax or in writing. No partial shipment of an order shall constitute, the
acceptance of the entire order, absent the written acceptance of such entire
order. Distributor may cancel or reschedule purchase orders for Products only
with Somnus' prior written approval, and may be subject to a penalty for any
such cancellation.
4.5 Invoicing. Somnus shall submit an invoice to Distributor upon
---------
shipment of each Product ordered by Distributor. Each such invoice shall state
Distributor's aggregate and unit purchase price for Products in a given
shipment, plus any freight, taxes or other costs incident to the purchase or
shipment initially paid by Somnus but to be borne by Distributor hereunder.
4.6 Shipping. All Products delivered pursuant to the terms of this
--------
Agreement shall be suitably packed for surface or air shipment, in Somnus'
discretion, in Somnus' standard shipping cartons, and delivered to Distributor
or its carrier agent F.O.B. Somnus' manufacturing plant, or such other shipping
location as Somnus may designate at its sole discretion, at which time risk of
loss shall pass to Distributor. Somnus shall ship Products using the carrier
specified in Distributor's purchase order provided that if Distributor does not
provide instructions with respect to the carrier to be used, Somnus shall select
the carrier. All freight, insurance, and other shipping expenses, as well as any
special packing expenses, shall be paid by Distributor. Distributor shall also
bear all applicable taxes, duties and similar charges that may be assessed
against the Products after delivery to the carrier F.O.B. the shipping location.
All shipments and freight charges shall be
-4-
<PAGE>
deemed correct unless Somnus receives from Distributor, no later than ten (10)
days after the shipping date of a given shipment, a written notice specifying
the shipment, the purchase order number, and the exact nature of the discrepancy
between the order and shipment or discrepancy in the freight cost, as
applicable.
4.7 Product Returns. Except as set forth in Article 6 below,
---------------
Distributor may only return Products within [*] days of receipt. Such
Products shall be subject to a restocking fee in an amount equal to [*]
of the transfer price paid by Distributor to Somnus for such Products and
shall be returned F.O.B. the destination point designated by Somnus. Products
may not be returned to Somnus after more than [*] days.
5. ACCEPTANCE
----------
Distributor shall inspect all Products promptly upon receipt thereof and
may reject any Product that fails to conform to the warranties set forth in
Article 6 below at the time of delivery to Distributor, provided that
Distributor complies with the provisions of Section 6.2 below. Except as set
forth in Section 4.7, Article 5 and Article 6 below, Distributor shall return
Products to Somnus only with Somnus' prior written approval.
6. WARRANTY
--------
6.1 Product Warranty. Somnus warrants to Distributor that at the time
----------------
of delivery to Distributor the Products purchased by Distributor shall (i) meet
the specifications for the Products as the same may be amended from time to
time, and (ii) be free from defects in materials or workmanship, all applicable
laws in the place of manufacture. This warranty is contingent upon proper use of
Products in the application for which they were intended as indicated in the
Product label claims, and Somnus makes no warranty (express, implied, or
statutory) for Products that are modified (except as expressly contemplated
herein), or subjected to accident, misuse, neglect, unauthorized repair, or
improper testing or storage.
6.2 Exclusive Remedy. In the event that any Product purchased by
----------------
Distributor from Somnus fails to conform to the warranty set forth in Section
6.1 above or is recalled pursuant to Section 7.9.2, Distributor's sole and
exclusive liability and Distributor's exclusive remedy shall be, at Somnus' sole
election, to repair or replace the Product, or component thereof or credit
Distributor's account for the amount actually paid for any such Product, or
component thereof, provided that (i) Distributor promptly notifies Somnus in
writing that such Product failed to conform and furnishes an explanation of any
reported nonconformity and requests a return material authorization number; (ii)
such Product is returned to Somnus by Distributor F.O.B. the address designated
by Somnus during the warranty period with the return material authorization
number affixed prominently to the outside packaging; and (iii) the reported
nonconformities actually exist and were not caused by accident, misuse, neglect,
alteration, repair or improper testing or storage. If such Product fails to so
conform, Somnus will reimburse Distributor for shipment charges for return of
the nonconforming Product.
6.3 Exclusion of Other Warranties. EXCEPT FOR THE LIMITED WARRANTIES
-----------------------------
PROVIDED IN SECTION 6.1 ABOVE, SOMNUS GRANTS NO OTHER
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[**] Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, IN ANY COMMUNICATION
WITH DISTRIBUTOR OR ITS CUSTOMERS, OR OTHERWISE, REGARDING THE PRODUCTS OR
VALIDITY OF SOMNUS' TECHNOLOGY, AND SOMNUS SPECIFICALLY DISCLAIMS THE IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND
NONINFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. SOMNUS NEITHER
ASSUMES NOR AUTHORIZES ANY OTHER PERSON TO ASSUME ANY OTHER LIABILITIES ARISING
OUT OF OR IN CONNECTION WITH THE SALE OR USE OF ANY SOMNUS PRODUCT.
7. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR
-------------------------------------
7.1 Marketing Approval. The Distributor and Somnus shall mutually
------------------
agree who is responsible for costs associated with preparation and filing of all
regulatory documents, product clinical trials, registering, licensing and
permits required to comply with the laws of regulations of the Territory for
sale and distribution of Products. If either party determines that these costs
are prohibitive to doing business within the Territory then the contract would
be terminated.
7.2 Minimum Performance Requirements. Distributor shall use reasonable
--------------------------------
efforts to (i) maximize Product sales for use in the Field in the Territory and
(ii) ensure that Somnus gains appropriate market access in the Territory. During
each calendar year Distributor shall meet the minimum performance requirements
set forth in Exhibit F (collectively, "Minimum Performance Requirements"). If
Distributor does not meet the Minimum Performance Requirements at any time
during the Term, Somnus shall have the right to terminate Distributor's rights
under this Agreement pursuant to Section 9.2 below. It is understood and agreed
that notwithstanding any other provision of this Agreement, Somnus shall be
under no obligation to continue the production of any Product. In the event that
Somnus abandons or discontinues production of any Product, the Minimum
Performance Requirements under this Section 7.2 with respect to such Product
shall no longer apply to such Product.
7.3 Inventory. Distributor shall maintain a quantity of each Product
---------
at all times during the Term (as defined in Section 9.1, below) of this
Agreement as reasonably necessary in order to meet the demand of Distributor's
customers and potential customers.
7.4 Translation. Distributor shall at its cost provide any and all
-----------
resources necessary to translate all required manuals, instructions, literature,
and package insert data sheets for use in the Territory, and shall provide
Somnus and the applicable regulatory authorities sufficient quantities of such
materials to meet governmental and/or regulatory, and market support
requirements.
7.5 Reports. Distributor shall provide Somnus, within ten (10) working
-------
days after the end of each calendar quarter, a general description of
Distributor's activities in promoting the Products in the Territory during the
previous calendar quarter. Such report shall also list all of Distributor's
agents and employees engaged in the sales and marketing of the Products.
Additionally, Distributor shall provide Somnus, within five (5) working days
after the end of each month, a monthly inventory roll forward by product in
units and in United States dollars, including,
-6-
<PAGE>
but not limited to, the following information: beginning inventory, sales in,
sales out (including a listing of all product shipments by customer for each
month), and ending inventory. Distributor shall also provide inventory aging and
cycle count reports. Somnus, at Somnus' own expense with ten (10) days notice to
Distributor, reserves the right to conduct a physical inventory, perform cycle
counts, have independent auditors observe or perform the inventory, or otherwise
request independent confirmation of Distributor's inventory. Further,
Distributor shall provide Somnus with non-confidential financial reports on an
annual basis unless mutually agreed otherwise in writing.
7.6 Product Packaging and Labeling. Distributor shall not repackage
------------------------------
Products supplied to Distributor by Somnus hereunder without the prior written
consent of Somnus. In addition, except for the addition of information required
by applicable laws and regulations, Distributor shall not relabel Products
supplied to Distributor by Somnus hereunder without the prior written consent of
Somnus.
7.7 Market Research. Distributor shall assist Somnus in assessing
---------------
customer requirements for the Products, including modifications and improvements
thereto, in terms of quality, design, functional capability, and other features.
Distributor shall advise Somnus on market conditions as reasonably requested by
Somnus.
7.8 Training. Distributor shall maintain knowledgeable sales and
--------
marketing personnel to provide instructions to customers in the use of the
Products. Distributor agrees that each of Distributor's employees or agents who
will be selling or marketing any of the Products shall first, at Somnus'
expense, attend a hands-on sales training session provided by Somnus with
respect to the Products as set forth in Section 8.3, unless such training is
waived in advance in writing by Somnus. Somnus reserves the right to limit the
number of Distributor's personnel present at each training session.
7.9 Other Reporting.
---------------
7.9.1 Somnus shall provide, at Somnus' expense, within sixty (60) days
after publication, copies of any and all articles, manuscripts, abstracts or
other literature relating to the Products generated by investigators or others
in the Territory in each case to the extent reasonably available to Somnus.
7.9.2 Pursuant to the FDA's Medical Device Reporting (MDR)
Regulations, Somnus may be required to report to the FDA information that
reasonably suggests that a Product may have caused or contributed to the death
or serious injury or has malfunctioned and that the device would be likely to
cause or contribute to a death or serious injury if the malfunction were to
recur. Each of Somnus and Distributor agree to supply to the other any such
information promptly after becoming aware of it so that each of Somnus and
Distributor can comply with governmental reporting requirements. It is
understood and agreed that reporting to Somnus shall be within twenty-four (24)
hours after notification to Distributor to enable Somnus to comply with FDA
reporting requirements. In the event that Somnus is required by any regulatory
agency to recall the Products or if Somnus voluntarily initiates a recall of the
Products, Distributor shall cooperate with and assist Somnus in locating and
retrieving if necessary, the recalled Products from Somnus' customers.
-7-
<PAGE>
Distributor shall maintain records of sales of Products to customer by lot
number, and/or Distributor shall make such records available to Somnus in the
event of a Product recall or other quality related issue, upon reasonable
request from Somnus. Distributor shall be responsible for obtaining all records
of Distributor's sales to end users in the event of a Product recall or other
quality related issue. During the time that the Products are commercially
marketed, distributed, or sold by Distributor, Distributor also shall, within
five (5) business days, forward all Product complaints which it receives to
Somnus. Distributor shall make available to Somnus for inspection, Distributor's
process and records for adverse event and other regulatory reporting purposes at
mutually agreed upon times and further shall ensure that Distributor's processes
comply with all applicable laws and regulations in the United States and the
Territory.
7.10 Business Obligations. Any and all obligations associated with
--------------------
Somnus' business shall remain the sole responsibility of Somnus. Any and all
sales and other agreements between Distributor and its customers are and shall
remain Distributor's exclusive responsibility and shall have no affect on
Somnus' obligations pursuant to this Agreement.
7.11 Copyright and Trademark Protection. Distributor shall, at Somnus'
----------------------------------
request and at Somnus' expense, promptly notify Somnus of the requirements for
copyright and trademark protection and registration for the Products in the
Territory and at Somnus' request shall assist Somnus in fulfilling such
requirements.
7.12 Advertising and Promotions. Distributor shall be responsible for
--------------------------
all Product marketing commitments and procedures in the Territory in the Field.
Distributor shall list the Products in its catalogs and make such Products
available to its customers. Distributor shall vigorously advertise and promote
the Products and shall transmit Product information and promotional materials to
its customers, as reasonably necessary in order to maximize Product sales in the
Territory. Such advertising and promotion may take the form of, but shall not be
limited to, magazine advertising, direct mail promotion, trade show displays,
educational seminars and other activities related to promoting Products.
7.13 Materials. Distributor shall provide to Somnus for purposes of
---------
review, comment and prior approval by Somnus all promotional, advertising, and
educational materials and programs, package data sheets, and other literature
relating to the Products at least thirty (30) days prior to the commercial
release of such materials or commencement of such programs.
8. ADDITIONAL OBLIGATIONS OF SOMNUS
--------------------------------
8.1 Samples. Somnus at its discretion and at its Products expense
-------
shall provide to Distributor samples of its Disposable Handpieces for
Distributor's use in obtaining marketing approval.
8.2 Promotional Materials. Somnus, at Somnus' expense, shall provide
---------------------
to Distributor English language samples of promotional support materials for the
Products. Such materials shall include, without limitation, brochures and
advertising literature.
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<PAGE>
8.3 Training. Somnus will provide training for Distributor personnel
--------
in connection with the marketing, sale, installation, maintenance and support of
Products. All reasonable expenses, as determined by Somnus, incurred by
Distributor's personnel in connection with all training including, without
limitation, travel and lodging expenses, shall be borne by Somnus. Somnus
reserves the right to limit the number of Distributor's personnel present at
each training session. Training shall be conducted at mutually agreed
facilities.
8.4 Technical Support. During the Term of the Agreement, Somnus shall
-----------------
provide technical support to Distributor in respect of the Products, as
reasonably requested by Distributor; provided, however, that Somnus shall not be
obligated to provide Distributor with more than eight (8) hours of such support
during any calendar month. In the event Distributor reasonably requests more
than eight (8) hours of technical support in a given month, Somnus shall have
the right to receive payment with respect thereto, in accordance with its
standard rates and conditions of support.
8.5 Scientific and Technical Information. Somnus shall provide to
------------------------------------
Distributor scientific and technical information required to obtain and maintain
registrations, licenses and permits required for sale and distribution of the
Products in the Territory, or to respond to inquiries from customers, or
governmental or regulatory authorities.
9. TERM AND TERMINATION
--------------------
9.1 Term. This Agreement shall become effective as of the Effective
----
Date and shall continue in full force and effect for a period of one (1) year
from the Effective Date ("Initial Term"), unless earlier terminated in
accordance with this Article 9. Thereafter, this Agreement will automatically
renew for two additional renewal terms of one (1) year each (each a "Renewal
Term"), unless earlier terminated by either party pursuant to this Article 9
below by written notice to the other party at least sixty (60) days prior to the
expiration of the Initial Term or any Renewal Term. The Initial Term and Renewal
Terms are referred to collectively herein as the "Term."
9.2 Termination for Cause. In addition to Somnus' right to terminate
---------------------
this Agreement pursuant to Sections 2.5 or 7.2 above, either Somnus or
Distributor may terminate this Agreement by written notice stating each party's
intent to terminate in the event the other shall have breached or defaulted in
the performance of any of its material obligations hereunder, and such default
shall have continued for thirty (30) days after written notice thereof was
provided to the breaching party by the non-breaching party.
9.3 Termination for Bankruptcy. Either party may terminate this
--------------------------
Agreement effective upon written notice to the other party in the event the
other party declares bankruptcy or becomes the subject of any voluntary or
involuntary proceeding under the U.S. Bankruptcy Code, foreign equivalent or
state insolvency proceeding and such proceeding is not terminated within ten
(10) days of its commencement.
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<PAGE>
9.4 Effect of Termination.
---------------------
9.4.1 In the event of termination by either party in accordance with
any of the provisions of this Agreement, neither party shall be liable to the
other, because of such termination, for compensation, reimbursement or damages
on account of the loss of prospective profits or anticipated sales or on account
of expenditures, inventory, investments, leases or commitments in connection
with the business or goodwill of Somnus or Distributor. Expiration or
termination of this Agreement for any reason shall not release any party hereto
from any liability which, at the time of such termination, has already accrued
to the other party or which is attributable to a period prior to such
termination nor preclude either party from pursuing any rights and remedies it
may have hereunder or at law or in equity with respect to any breach of this
Agreement. It is understood and agreed that monetary damages may not be a
sufficient remedy for any breach of this Agreement and that the non-breaching
party may be entitled to injunctive relief as a remedy for any such breach. Such
remedy shall not be deemed to be the exclusive remedy for any such breach of
this Agreement, but shall be in addition to all other remedies available at law
or in equity.
9.4.2 Within ten (10) days after the effective date of termination of
this Agreement, Distributor shall provide Somnus with a complete list of all
individuals or entities that, during the ninety (90) days preceeding
termination, Distributor had contacted regarding the purchase of a Somnus
Generator (the "Prospects List"). With regard to any Generators sold by Somnus
within sixty (60) days of termination to individuals or entities identified on
the Prospects List, Somnus shall compensate Distributor [*] of the difference
between the net sales price and the transfer price, (a "Commission"). Somnus'
obligation to pay Distributor any such Commission is subject to and conditional
upon Distributor's cooperation with any replacement Distributor. Somnus may
withhold, for up to six (6) months, the payment of any Commission if Somnus
determines that there may be sufficient credits or other adjustments which
warrant such action. If Somnus is owed any amounts by Distributor, Somnus shall
have the right, in its absolute discretion, to offset any Commission payable by
Somnus to Distributor by such obligation owed to Somnus by Distributor.
9.4.3 Within ten (10) days after the effective date of termination of
this Agreement, Distributor shall use its reasonable efforts to provide Somnus
with a complete inventory of unsold, resalable Products in the Territory, and in
transit to Somnus from Distributor.
9.4.4 Upon expiration or any termination of this Agreement, Somnus or
its designee may, at its sole option, repurchase and Distributor shall sell to
Somnus or its designee, all of Distributor's inventory of Products existing on
the effective date of termination. The price of inventory repurchased upon
termination of this Agreement pursuant to Section 9.2 shall be the transfer
price paid by Distributor net of any prior price adjustment, credits or other
allowances. If Somnus terminates this Agreement pursuant to Section 7.2 or 9.2,
then a restocking charge of [*] of the repurchase price shall be added to the
transfer price for Products repurchased upon termination. Products repurchased
from Distributor by Somnus pursuant to this Section 9.6.3 shall be shipped
promptly by Distributor, at Distributor's expense, to a location specified by
Somnus. Aged inventory over 6 months will be valued at [*] of original transfer
cost.
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE>
9.4.5 Upon expiration or any termination of this Agreement,
Distributor shall transfer any ownership not then residing in Somnus of any and
all Product authorizations, registrations, permits, and approvals of any kind
with respect to Products and applications therefor, including without limitation
marketing approval applications, and any other governmental approvals,
registrations and the like to Somnus, at Somnus' cost and expense and shall
execute such documents and perform such acts as may be necessary, useful, or
convenient to perfect such transfer. It is understood that Somnus may use and
disclose the foregoing for any purpose.
9.4.6 Upon termination of this Agreement, Distributor will fill orders
received by Distributor prior to the date of notice of such termination.
9.4.7 Return of Materials. All trademarks, marks, trade names,
-------------------
patents, copyrights, designs, drawings, formulas or other data, photographs,
samples, literature, and sales and promotional aids of every kind relating to
the Products shall remain the property of Somnus except those items Distributor
has solely developed or translated. Effective upon the termination of this
Agreement, Distributor shall cease to use all trademarks and trade names of
Somnus.
9.4.8 No Renewal, Extension or Waiver. Acceptance of any order from,
-------------------------------
or sale of, any Product to Distributor after the date of termination of this
Agreement shall not be construed as a renewal or extension hereof, or as a
waiver of termination by Somnus.
9.4.9 Survival of Certain Terms. The provisions of Articles 6, 10, 12,
-------------------------
13, 14 and Sections 2.3, 2.4, and 9.4, shall survive the expiration or
termination of this Agreement for any reason.
10. CONFIDENTIALITY
---------------
10.1 Confidential Information. Except as expressly provided herein,
------------------------
the parties agree that, for the term of this Agreement and for three (3) years
thereafter, the receiving party shall not publish or otherwise disclose and
shall not use for any purpose, except as expressly permitted herein any
information furnished to it by the other party hereto pursuant to this Agreement
which if disclosed in tangible form is marked "Confidential" or with other
similar designation to indicate its confidential or proprietary nature, or if
disclosed orally is confirmed as confidential or proprietary by the party
disclosing such information at the time of such disclosure or within thirty (30)
days thereafter ("Confidential Information"). Notwithstanding the foregoing, it
is understood and agreed that Confidential Information shall not include
information that, in each case as demonstrated by written documentation:
a. was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure;
b. was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving party;
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<PAGE>
c. became generally available to the public or otherwise part of
the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this Agreement; or
d. was subsequently lawfully disclosed to the receiving party by
a person other than a party hereto or developed by the receiving party without
reference to any information or materials disclosed by the disclosing party.
10.2 Permitted Disclosures. Notwithstanding the provisions of Section
---------------------
10.1 above, each party hereto may disclose the other's Confidential Information
to the extent such disclosure is reasonably necessary in prosecuting or
defending litigation, complying with applicable governmental regulations, or
submitting information to tax or other governmental authorities provided that if
a party is required to make any such disclosure of another party hereto's
Confidential Information, to the extent it may legally do so, it will give
reasonable advance written notice to the latter party of such disclosure and
will use its reasonable efforts to secure confidential treatment of such
Confidential Information prior to its disclosure (whether through protective
orders or otherwise). If the party whose Confidential Information is to be
disclosed has not filed a patent application with respect to such Confidential
Information, it may require the other party to delay the proposed disclosure (to
the extent the disclosing party may legally do so), for up to thirty (30) days
after receipt of written notice from the disclosing party of its intent to
disclose, to allow for the filing of such an application. In addition, Somnus
may disclose the existence of this Agreement and the terms and conditions hereof
to advisors, prospective investors, and others under circumstances that
reasonably ensure the confidentiality thereof.
11. TRADEMARKS AND TRADE NAMES
--------------------------
11.1 Marks. During the term of this Agreement, Distributor shall have
-----
the right and agrees to, advertise and promote the Products in the Territory
under Somnus' trademarks and trade names identified on Exhibit G as modified by
Somnus pursuant to this Section 11.1 ("Marks"). Somnus reserves the right to
modify Marks or substitute alternative marks for any or all of the Marks at any
time upon ten (10) days prior written notice, provided that Somnus shall not
modify the Marks unreasonably after the filing of the Marketing Approval
Application. The rights granted under this Section 11.1 shall automatically
terminate on termination or expiration of this Agreement. Somnus shall endeavor
to register the Marks with the European Patent Office as trademarks in the
appropriate classes and maintain the registrations of such Marks, and
Distributor shall cooperate and upon Somnus' reasonable request, provide full
information and reasonable assistance to Somnus in registering and maintaining
the Marks, including without limitation providing evidence of use of the Marks
as reasonably required to renew registrations or defend actions for
cancellations.
11.2 Use. Distributor shall not remove, modify, or obscure Marks
---
affixed to Products without the prior written consent of Somnus, unless required
by law. Except as set forth in this Section 11.2, nothing contained in this
Agreement shall grant to Distributor any right, title or interest in or to Marks
whether or not specifically recognized or perfected under applicable laws of the
Territory, and Distributor irrevocably assigns to Somnus all such right, title
and interest, if any,
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<PAGE>
in any Marks. At no time during or after the term of this Agreement shall
Distributor challenge or assist others to challenge Marks or the registration
thereof or attempt to register any trademarks, marks or trade names confusingly
similar to Marks. All representations of Marks that Distributor intends to use
shall first be submitted to Somnus for review of design, color, and other
details or shall be exact copies of those used by Somnus. In addition,
Distributor shall fully comply with all reasonable guidelines, if any,
communicated by Somnus concerning the use of Marks.
11.3 Foreign Corrupt Practices Act. In conformity with the United
-----------------------------
States Foreign Corrupt Practices Act and with Somnus' established corporate
policies regarding foreign business practices, Distributor and its employees and
agents shall not directly or indirectly make any offer, payment, promise to pay,
or authorize payment, or offer a gift, promise to give, or authorize the giving
of anything of value for the purpose of influencing an act or decision of an
official of any government within the Territory or the United States Government
(including a decision not to act) or inducing such a person to use his influence
to affect any such governmental act or decision in order to assist Somnus in
obtaining, retaining or directing any such business in violation of the Foreign
Corrupt Practices Act.
12. INTELLECTUAL PROPERTY
---------------------
12.1 Somnus Defense. Distributor agrees that Somnus has the right to
--------------
defend, or at its option to settle, and Somnus agrees, at its own expense, to
defend or at its option to settle, any claim, suit or proceeding brought against
Distributor by any third party for infringement of any patent by the Products.
Somnus shall have sole control of any such action or settlement negotiations,
and Somnus agrees to pay, subject to the limitations hereinafter set forth, any
final judgment entered against Distributor on such issue in any such claim, suit
or proceeding defended by Distributor. Distributor agrees that Somnus, at its
sole option, shall be relieved of the foregoing obligations unless Distributor
(i) notifies Somnus promptly in writing of such claim, suit or proceeding; (ii)
gives Somnus authority to proceed as contemplated herein; and (iii) at Somnus'
expense, gives Somnus proper and full information and assistance to settle or
defend any such claim, suit or proceeding for infringement of any patent.
Notwithstanding the foregoing, Somnus' obligation to defend Distributor under
this Section 12.1 shall not apply to any claims, suits, or proceedings to the
extent they allege infringement of third party components. Somnus shall not be
liable for any costs or expenses incurred without its prior written
authorization. Notwithstanding the provisions of this Article 12, Somnus assumes
no infringement liability for (x) combination of Products with other products
not provided by Somnus, which infringement would not arise from such Products
standing alone, or (y) the modification of such Products, where such
infringement would not have occurred but for such modifications.
12.2 Remedy. Notwithstanding the foregoing, if it is adjudicatively
------
determined that any Product infringes, or in Somnus sole opinion, may be found
to infringe a third party's patent, or if the sale or use of the Products is, as
a result, enjoined, then Somnus may, at its option and expense, either: (i)
procure for Distributor the right under such patent to sell or use, as
appropriate, the Products; or (ii) replace the Products with other non-
infringing functionally equivalent products; or (iii) modify the Products to
make the Products functionally equivalent and non-infringing; or
-13-
<PAGE>
(iv) if the use of the Products is prevented by injunction, discontinue Product
sales under the Agreement and remove any Products in Distributor's inventory and
refund the aggregate payments paid therefor by Distributor.
12.3 DISCLAIMER. THE FOREGOING PROVISIONS OF THIS ARTICLE 12 STATE
----------
THE ENTIRE LIABILITY OF SOMNUS AND THE EXCLUSIVE REMEDY OF DISTRIBUTOR AND ITS
CUSTOMERS, WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS,
TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS OR ANY PART
THEREOF.
13. INDEMNIFICATION
---------------
13.1 Indemnification of Distributor. Somnus shall indemnify, defend,
------------------------------
and hold harmless Distributor, and its directors, officers, employees, and
agents and the successors and assigns of any of the foregoing (the "Distributor
Indemnitees") from and against all claims, losses, costs, and liabilities
(including, without limitation, payment of reasonable attorneys' fees and other
expenses of litigation), and shall pay any damages (including settlement
amounts) finally awarded with respect to claims, suits, or proceedings (any of
the foregoing, a "Claim") brought by third parties against a Distributor
Indemnitee, alleging bodily injury, death or property damage caused by (a) a
breach by Somnus of warranties and representations, or (b) the negligence or
willful misconduct of Somnus, its employees or agents, except to the extent such
Claim is covered under Section 13.2 below or is caused by the negligence or
willful misconduct of a Distributor Indemnitee.
13.2 Indemnification of Somnus. Distributor shall indemnify, defend,
-------------------------
and hold harmless Somnus, and its directors, officers, employees and agents, and
the successors, and assigns of any of the foregoing (the "Somnus Indemnitees")
from and against all claims, losses, costs, and liabilities (including, without
limitation, payment of reasonable attorneys' fees and other expenses of
litigation), and shall pay any damages (including settlement amounts) finally
awarded with respect to a Claim brought by third parties against a Somnus
Indemnitee, arising out of or relating to (a) Products used, sold, or otherwise
distributed by Distributor, except to the extent such claim is covered under
Section 13.1 above; (b) breach of any of the representations or warranties made
by Distributor hereunder, or (c) the negligence or willful misconduct of
Distributor, its employees or agents.
13.3 Indemnification Procedures. A party (the "Indemnitee") that
--------------------------
intends to claim indemnification under this Article 13 shall promptly notify the
other party (the "Indemnitor") in writing of any claim in respect of which the
Indemnitee or any of its directors, officers, employees, agents, licensors,
successors, or assigns intends to claim such indemnification, and the Indemnitor
shall have sole control of the defense and/or settlement thereof, provided that
the indemnified party may participate in any such proceeding with counsel of its
choice at its own expense. The indemnity agreement in this Article 13 shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the consent of the Indemnitor, which consent shall not be withheld
unreasonably. The failure to deliver written notice to the Indemnitor within a
reasonable time after the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve
-14-
<PAGE>
such Indemnitor of any liability to the Indemnitee under this Article 13, but
the omission to so deliver written notice to the Indemnitor shall not relieve
the Indemnitor of any liability that it may otherwise have to any Indemnitee
than under this Article 13. The Indemnitee under this Article 13, its employees
and agents, shall cooperate fully with the Indemnitor and its legal
representatives and provide reasonable information in the investigation of any
Claim covered by this indemnification. Notwithstanding anything to the contrary
contained in this Article 13, neither party shall be liable for any costs or
expenses incurred without its prior written authorization.
14. LIMITATION OF LIABILITY
-----------------------
EXCEPT FOR LIABILITY ARISING UNDER SECTION 13.1 AND ARTICLE 12, SOMNUS'
LIABILITY ARISING OUT OF THIS AGREEMENT, THE TERMINATION THEREOF, AND/OR SALE OF
THE PRODUCTS SHALL BE LIMITED TO THE AMOUNT PAID BY DISTRIBUTOR FOR THE PRODUCT.
IN NO EVENT SHALL SOMNUS BE LIABLE TO DISTRIBUTOR FOR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS, LOST PROFITS, OR ANY OTHER SPECIAL, CONSEQUENTIAL, OR
INCIDENTAL DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY ARISING OUT
OF THIS AGREEMENT WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR
OTHERWISE. THESE LIMITATIONS SHALL APPLY WHETHER OR NOT SOMNUS HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL
PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN.
15. DISPUTE RESOLUTION
------------------
15.1 Disputes. If Somnus and Distributor are unable to resolve any
--------
dispute between them, either Somnus or Distributor may, by written notice to the
other, have such dispute referred to the chief executive officers (or
equivalent) of Somnus and Distributor, for attempted resolution by good faith
negotiations within thirty (30) days after such notice is received. Unless
otherwise mutually agreed, the negotiations between the designated officers
shall be conducted by telephone, within ten (10) days, and at times within the
period stated above as offered by the designated officers of Somnus to the
designated officer of Distributor for consideration.
15.2 Arbitration. Any dispute, controversy or claim arising out of or
-----------
relating to the validity, construction, enforceability or performance of this
Agreement, including disputes relating to alleged breach or to termination of
this Agreement, shall be settled by final, binding arbitration in the manner
described in this Section 15.2. The arbitration shall be conducted pursuant to
the Commercial Arbitration Rules of the American Arbitration Association then in
effect ("Rules"). Notwithstanding those Rules, the following provisions shall
apply to arbitration hereunder:
1. Arbitrators. The arbitration shall be conducted by a panel of
-----------
three (3) arbitrators ("the Panel"). Each party shall have the right to appoint
one (1) member of the Panel, with the third member to be mutually agreed by the
two (2) Panel members appointed by the parties or appointed in accordance with
the rules of the American Arbitration Association. The arbitrators shall be
persons in the medical device industry with experience in the matters in
dispute.
-15-
<PAGE>
2. Proceedings. The parties and the arbitrators shall use their best
-----------
efforts to complete the arbitration within one (1) year after the appointment of
the Panel under Section 15.2.1 above, unless a party can demonstrate to the
Panel that the complexity of the issues or dispute other reasons warrant the
extension of the time table. In such case, the Panel may extend such time table
as reasonably required. Notwithstanding the foregoing, any arbitration of
whether a payment is due under Article 3 above shall be completed and a decision
reached within thirty (30) days after the appointment of the Panel. The Panel
shall, in rendering its decision, apply the substantive law of the State of
California, without regard to its conflict of laws provisions, except that the
interpretation of and enforcement of this Article 15 shall be governed by the
U.S. Federal Arbitration Act. The proceeding shall take place in the city of
San Francisco, California. The fees of the Panel shall be paid by the losing
party which party shall be designated by the Panel. If the Panel is unable to
designate a losing party, it shall so state and the fees shall be shared equally
between the parties.
16. MISCELLANEOUS PROVISIONS
------------------------
16.1 Independent Contractors. The relationship of Somnus and
-----------------------
Distributor established by this Agreement is that of independent contractors,
and nothing contained in this Agreement shall be construed to (i) give either
party the power to direct or control the day-to-day activities of the other,
(ii) constitute the parties as partners, joint venturers, co-owners or otherwise
as participates in a joint or common undertaking, or (iii) allow a party to
create or assume any obligation on behalf of the other party for any purpose
whatsoever.
16.2 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be sent by prepaid registered or certified mail,
return receipt requested, internationally-recognized courier or personal
delivery, addressed to the other party at the address shown at the beginning of
this Agreement or at such other address for which such party gives notice
hereunder. Such notice shall be deemed to have been given when delivered:
If to Somnus: Stuart D. Edwards
Somnus Medical Technologies, Inc.
285 North Wolfe Road
Sunnyvale, California 94086
United States of America
If to Distributor: Robert Wehkamp
Carl Zeis Canada
45 Valleybrook Drive
Ontario M3B3S6
Canada
16.3 Force Majeure. Nonperformance of any party hereto (except for
-------------
payment obligations) shall be excused to the extent that performance is rendered
impossible by strike, fire, earthquake, flood, governmental acts or orders or
restrictions, delay or failure of suppliers, or any
-16-
<PAGE>
other reason where failure to perform is beyond the reasonable control and not
caused by the gross negligence or willful misconduct of the nonperforming party.
16.4 Assignment. This Agreement shall not be assignable by either
----------
party to any third party hereto without the written consent of the other party
hereto, except that either party will assign this Agreement without the other
party's consent to an entity that acquires all or substantially all of the
business or assets of the assigning party pertaining to the subject matter
hereof, in each case whether by merger, acquisition, or otherwise.
16.5 No Implied Waivers; Rights Cumulative. No failure on the part of
-------------------------------------
Somnus or Distributor to exercise and no delay in exercising any right under
this Agreement, or provided by statute or at law or in equity or otherwise,
shall impair, prejudice or constitute a waiver of any such right, nor shall any
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right.
16.6 Partial Invalidity. If any provision of this Agreement is held
------------------
to be invalid by a court of competent jurisdiction, then the remaining
provisions shall remain, nevertheless, in full force and effect. The parties
agree to renegotiate in good faith any term held invalid and to be bound by the
mutually agreed substitute provision in order to give the most approximate
effect intended by the parties.
16.7 No Implied Licenses. Except as expressly provided herein, no
-------------------
party hereto grants to any other party hereto any rights or licenses under such
party's patent rights, trade secrets or other intellectual property rights.
16.8 Language. This Agreement is in the English language, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications and notices to be made or given pursuant to
this Agreement shall be in the English language.
16.9 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
16.10 Entire Agreement. This Agreement, including the Exhibits
----------------
attached hereto, constitutes the entire agreement of the parties with respect to
the subject matter hereof, and supersedes all prior or contemporaneous
understandings or agreements, whether written or oral, between Somnus and
Distributor with respect to such subject matter. No amendment or modification
hereof shall be valid or binding upon the parties unless made in writing and
signed by the duly authorized representatives of both parties.
-17-
<PAGE>
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
Agreement on behalf of Somnus and Distributor as applicable effective as of the
Effective Date.
Somnus Medical Technologies, Inc. Carl Zeis Canada
("Somnus") ("Distributor")
By: /s/ Stuart D. Edwards By: /s/ R. Wehkamp
------------------------------ --------------------------------
Print Name: Stuart D. Edwards Print Name: R. Wehkamp
--------------------- ------------------------
Title: President and CEO Title: Sales Manager
-------------------------- -----------------------------
Date: Date: NOV. 20 1998
---------------------------- -----------------------------
-18-
<PAGE>
Exhibit A
---------
HOUSE ACCOUNTS
None
-19-
<PAGE>
Exhibit B
---------
PRODUCTS
Model 1010
Reusable Cable - 2 (RC-2)
Model 1100
Reusable Cable - 1 (RC- 1)
Model S2
Associated Accessories
-20-
<PAGE>
Exhibit C
---------
TERRITORY
Canada
-21-
<PAGE>
Exhibit D
---------
TRANSFER AND LIST PRICES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PRODUCT TRANSFER PRICE LIST PRICE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Model 1010 (min. quantity of 5 [*] [*]
boxes per order)
- ------------------------------------------------------------------------------------------------------------
Reusable Cable - 2 (RC-2) [*] [*]
- ------------------------------------------------------------------------------------------------------------
Model 1110 (min. quantity of 5 [*] [*]
boxes per order)
- ------------------------------------------------------------------------------------------------------------
Reusable Cable - 1 (RC-1) [*] [*]
- ------------------------------------------------------------------------------------------------------------
Model S2 [*] [*]
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
-22-
<PAGE>
Exhibit E
---------
INITIAL STOCKING ORDER
- -------------------------------------------------------------------------------
Year 1 [*] System Sales per Quarter; [*] System Sales for the Year
- -------------------------------------------------------------------------------
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
-23-
<PAGE>
Exhibit F
---------
MINIMUM PERFORMANCE REQUIREMENTS
- -------------------------------------------------------------------------------
Year 1 [*] System Sales per Quarter; [*] System Sales for the Year
- -------------------------------------------------------------------------------
Year 2 To Be Determined
- -------------------------------------------------------------------------------
Year 3 To Be Determined
- -------------------------------------------------------------------------------
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
-24-
<PAGE>
Exhibit G
---------
MARKS
Somnus and the Somnus Medical Technologies, Inc. logo are trademarks of Somnus
Medical Technologies, Inc.
Somnoplasty is a servicemark of Somnus Medical Technologies, Inc.
"Sound sleep without the sound" is a trademark of Somnus Medical Technologies,
Inc.
-25-
<PAGE>
EXHIBIT 10.17
SEVERANCE AGREEMENT
-------------------
It is agreed as follows between Somnus Medical Technologies, Inc.
("Company") and Eric N. Doelling ("Doelling") as of October 21, 1998:
1. Notwithstanding any terms to the contrary in any prior agreements
between the Company and Doelling, the following terms shall govern Doelling's
right to salary, benefits or other compensation in the event of the termination
of his employment with the Company, whether the termination is voluntary or
involuntary, for cause or without cause. Other existing terms of the parties'
employment relationship shall remain in effect.
2. Doelling's salary shall continue for one year from the date of
termination, subject to applicable withholdings.
3. Doelling's stock options shall be fully vested as of the date of
termination.
4. Doelling shall for one year after termination be reimbursed whatever
amounts he may be required to pay to continue his insurance coverage under
COBRA.
5. Doelling shall be entitled to keep the Company computer and related
equipment which is at his home.
COMPANY
By: /s/ Stuart D. Edwards /s/ Eric N. Doelling
Stuart Edwards ERIC N. DOELLING
President/CEO 10/21/98
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-43325) pertaining to the Amended and Restated 1996 Stock Plan, the
1997 Employee Stock Purchase Plan and the 1997 Director Option Plan of Somnus
Medical Technologies, Inc., of our report dated February 2, 1999, with respect
to the consolidated financial statements of Somnus Medical Technologies, Inc.,
included in the Annual Report (Form 10-K) for the year ended December 31, 1998.
Our audits also included the financial statement schedule of Somnus Medical
Technologies, Inc. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Palo Alto, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-01-1998
<CASH> 32,280
<SECURITIES> 0
<RECEIVABLES> 1,991
<ALLOWANCES> 662
<INVENTORY> 806
<CURRENT-ASSETS> 34,826
<PP&E> 3,046
<DEPRECIATION> 1,445
<TOTAL-ASSETS> 36,512
<CURRENT-LIABILITIES> 7,084
<BONDS> 0
0
0
<COMMON> 65,060
<OTHER-SE> (35,632)
<TOTAL-LIABILITY-AND-EQUITY> 36,512
<SALES> 7,356
<TOTAL-REVENUES> 7,356
<CGS> 5,565
<TOTAL-COSTS> 28,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (19,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,328)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
