<PAGE>
SCHEDULE 14A (RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14A-11(c) or Rule 14A-12
SOMNUS MEDICAL TECHNOLOGIES, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14A-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 11, 2000
----------------
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of SOMNUS
MEDICAL TECHNOLOGIES, INC., a Delaware corporation (the "Company"), will be
held on Thursday, May 11, 2000 at 10:00 a.m. local time, at 285 North Wolfe
Road, Sunnyvale, California 94086 for the following purposes (as more fully
described in the Proxy Statement accompanying this Notice):
1. To elect two (2) Class III directors to serve for terms of three years
expiring upon the 2003 Annual Meeting of Stockholders or until their
successors are elected. To elect one (1) Class I director to serve for a
term of one year expiring upon the 2001 Annual Meeting of Stockholders or
until their successors are elected.
2. To approve an amendment to the Company's 1997 Director Stock Option
Plan (the "Director Plan") to increase each director's initial grant from
20,000 to 30,000 shares, and to increase the annual director grant from
5,000 to 7,500 shares.
3. To ratify the appointment of Ernst & Young LLP as independent auditors
of the Company for the year ending December 31, 2000.
4. To transact such other business as may properly come before the
meeting or any postponement or adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 30, 2000
are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed Proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any stockholder attending
the meeting may vote in person even if he or she has returned a Proxy.
FOR THE BOARD OF DIRECTORS
John G. Schulte
President, Chief Executive Officer,
and Director
Sunnyvale, California
April 12, 2000
YOUR VOTE IS IMPORTANT
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED
TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE AND
RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
----------------
PROXY STATEMENT FOR THE 2000
ANNUAL MEETING OF STOCKHOLDERS
MAY 11, 2000
----------------
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed Proxy is solicited on behalf of the Board of Directors of
Somnus Medical Technologies, Inc. (the "Company" or "Somnus"), for use at the
Annual Meeting of Stockholders to be held Thursday, May 11, 2000 at 10:00 a.m.
local time, or at any postponement or adjournment thereof (the "Annual
Meeting"), for the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Stockholders. The Annual Meeting will be held at the
Company's principal executive offices at 285 North Wolfe Road, Sunnyvale, CA
94086. The Company's telephone number at that location is (408) 773-9121.
These proxy solicitation materials and the Annual Report to Stockholders
for the year ended December 31, 1999, including financial statements, were
first mailed on or about April 12, 2000 to all stockholders entitled to vote
at the meeting.
Record Date and Principal Share Ownership
Stockholders of record at the close of business on March 30, 2000 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. At
the Record Date, 14,464,105 shares of the Company's Common Stock were issued
and outstanding and held of record by approximately 127 stockholders. The
closing price of the Company's Common Stock on the Record Date as reported by
The National Association of Securities Dealers, Inc. Automated Quotation
National Market was $4.531 per share.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to American Securities
Transfer and Trust, Inc., 12039 W. Alameda Parkway, Suite Z-2, Lakewood, CO
80228 (Attention: Inspector of Elections) a written notice of revocation or a
duly executed proxy bearing a later date or by attending the meeting and
voting in person.
Voting and Solicitation
Each stockholder is entitled to one vote for each share held as of the
Record Date. Stockholders will not be entitled to cumulate their votes in the
election of directors.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation material to
such beneficial owners. Proxies may also be solicited by certain of the
Company's directors, officers, and regular employees, without additional
compensation, personally or by telephone or facsimile.
Quorum; Abstentions; Broker Non-votes
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections (the "Inspector") appointed for the meeting and
will determine whether or not a quorum is present.
<PAGE>
The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the record date. Shares that are voted "FOR,"
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.
While there is not definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, the Company believes that
abstentions should be counted for purposes of determining both (i) the
presence or absence of a quorum for the transaction of business and (ii) the
total number of Votes Cast with respect to a proposal (other than the election
of directors). In the absence of controlling precedent to the contrary, the
Company intends to treat abstentions in this manner. Accordingly, abstentions
will have the same effect as a vote against the proposal.
In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence or absence of a quorum for the transaction of
business, broker non-votes should not be counted for purposes of determining
the number of Votes Cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, the Company intends to treat
broker non-votes in this manner. Thus, a broker non-vote will not affect the
outcome of the voting on a proposal.
Any proxy which is returned using the form of proxy enclosed and which is
not marked as to a particular item will be voted for the election of the two
Class III directors and the one Class I director, for the amendments of the
Director Plan, for the confirmation of the appointment of the designated
independent auditors, and as the proxy holders deem advisable on other matters
that may come before the meeting, as the case may be, with respect to the
items not marked.
Deadline for Receipt of Stockholder Proposals
Proposals of stockholders that are intended to be presented by such
stockholders at the Company's 2001 Annual Meeting must be received by the
Company no later than November 30, 2000 in order that such proposals may be
considered for possible inclusion in the proxy statement and form of proxy
relating to that meeting.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 30, 2000, by (i) each person or entity who is known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each of the executive
officers named in the Summary Compensation Table, and (iv) all directors and
executive officers of the Company as a group. Except as otherwise noted, the
stockholders named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to applicable community property laws.
<TABLE>
<CAPTION>
Shares Approximate
Beneficially Percent
Name and Address of Beneficial Owner Owned Owned(1)
- ------------------------------------ ------------ -----------
<S> <C> <C>
Medtronic Asset Management, Inc..................... 1,190,286 8.2%
Attn: Michael Ellwein
7000 Central Avenue NE
Minneapolis, MN 55432-3576
Stuart D. Edwards(2)................................ 1,003,900 6.9%
Genesis Medical, Inc.
524 Weddell Drive, Ste 4
Sunnyvale, CA 94089
The Travelers Insurance Group, Inc.................. 1,000,000 6.9%
Attn: Don Scudder
One Tower Square
Hartford, CT 06183
Larry N. Feinberg................................... 917,300 6.3%
c/o Oracle Investment Management, Inc.
712 Fifth Avenue
45th Floor
New York, NY 10019
AWM Investment Company(3)........................... 858,700 5.9%
153 East 53rd Street
New York, NY 10022
HBP Associates LP................................... 778,667 5.4%
Attn: Howard P. Berkowitz
888 Seventh Avenue
New York, NY 10106
David B. Musket(4).................................. 407,638 2.8%
John G. Schulte(5).................................. 188,083 1.3%
Gary R. Bang(6)..................................... 153,717 1.1%
Robert D. McCulloch(7).............................. 115,818 *
Robert D. Campbell(8)............................... 75,047 *
John C. Meyer(9).................................... 45,408 *
Woodrow A. Myers, Jr., M.D.(10)..................... 30,438 *
Edward H. Luttich(12)............................... 15,000 *
Abhi Acharya(11).................................... 11,875 *
Steven J. Ojala(12)................................. 10,000 *
Mark Logan(13)...................................... 3,125 *
All directors and executive officers as a group (14
persons)........................................... 2,060,049 14.2%
</TABLE>
3
<PAGE>
- --------
* Less than 1%
(1) Applicable percentage ownership is based on 14,464,105 shares of Common
Stock as of March 30, 2000, together with applicable options or warrants
for such stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission.
(2) Includes options to purchase up to 200,000 shares.
(3) Consists of 644,600 shares held by Special Situations Fund III, and MGP
Advisors Limited Partnership, and 214,100 shares held by Special
Situations Fund Cayman Fund, L.P. and AWM Investment Company, Inc.
(4) Includes options to purchase up to 10,938 shares and warrants to purchase
5,000 shares exercisable within 60 days after March 30, 2000.
(5) Includes options to purchase up to 180,583 shares exercisable within 60
days after March 30, 2000.
(6) Includes options to purchase up to 46,667 shares exercisable within 60
days after March 30, 2000.
(7) Includes options to purchase up to 101,750 shares exercisable within 60
days after March 30, 2000.
(8) Includes options to purchase up to 67,916 shares exercisable within 60
days after March 30, 2000.
(9) Includes options to purchase up to 35,408 shares exercisable within 60
days after March 30, 2000.
(10) Includes options to purchase up to 28,438 shares exercisable within 60
days after March 30, 2000.
(11) Includes options to purchase up to 6,875 shares exercisable within 60
days after March 30, 2000.
(12) Includes no options to purchase shares exercisable within 60 days after
March 30, 2000.
(13) Includes options to purchase up to 3,125 shares exercisable within 60
days after March 30, 2000.
Compliance with Section 16(a) Filing Requirements
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and beneficial
owners of more than 10% of the Company's Common Stock to file reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission (the "SEC"). Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such reports received by it, or
written representations from reporting persons, the Company believes that
during the fiscal year ended December 31, 1999 (the "Last Fiscal Year"), Ron
Byron, an officer of the Company, Debra Young, a former employee, and Robert
Campbell, an officer of the Company, each failed to timely file one Form 4.
Further, Mark Logan, a director of the Company failed to timely file one Form
3. Finally, Abhi Acharya, David B. Musket and Woodrow A. Meyers, directors of
the Company, each failed to timely file one Form 5.
4
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Director and Nominees for Director
Pursuant to the Company's Restated Certificate of Incorporation, the
Company's Board of Directors currently consists of seven persons, divided into
three classes serving staggered terms of three years. Currently, there are two
directors in Class I, three directors in Class II and two directors in Class
III. Two Class III directors are to be elected at the Annual Meeting. In
addition one Class I director will be elected at the Annual Meeting. The Class
I and Class II directors will be elected at the Company's 2001 and 2002 Annual
Meetings of Stockholders, respectively. Each of the Class III directors
elected at the Annual Meeting will hold office until the 2003 Annual Meeting
of Stockholders or until his successor has been duly elected and qualified.
The Class I director elected at the Annual Meeting will hold office until the
2001 Annual Meeting or until his successor has been duly elected and
qualified.
In the event that any of such persons becomes unavailable or declines to
serve as a director at the time of the Annual Meeting, the proxy holders will
vote the proxies in their discretion for any nominee who is designated by the
current Board of Directors to fill the vacancy. It is not expected that any of
the nominees will be unavailable to serve.
The names of the two Class III nominees and one Class I nominee for
election to the Board of Directors at the Annual Meeting, their ages of the
Record Date, and certain information about them are set forth below. The names
of the current Class I and Class II directors with unexpired terms, their ages
as of the Record Date, and certain information about them are also stated
below.
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
- ---- --- -------------------- --------
<S> <C> <C> <C>
Nominees for Class III
Directors
Stuart D. Edwards(1)....... 54 President, Chief Executive 1996
Officer and Chairman of the Board
of Genesis Medical, Inc.
Woodrow A. Myers, Jr., 46 Director, Healthcare Management, Ford 1997
M.D.(1)................... Motor Company
Nominee for Class I
Director
Mark B. Logan(1)........... 61 Chairman and Chief Executive 1999
Officer of VISX, Inc.
Continuing Class I Director
David B. Musket(2)......... 41 President, Musket Research 1996
Associates, Inc.
Continuing Class II
Directors
Gary R. Bang(2)............ 53 Independent Consultant 1999
John G. Schulte............ 51 Chief Executive Officer and President 1999
Abhi Acharya............... 59 Independent Consultant 1999
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
There are no family relationships among any of the directors or executive
officers of the Company.
5
<PAGE>
Directors to be Elected at the Annual Meeting
Stuart D. Edwards founded the Company and served as Chairman of the Board,
Chief Executive Officer and President of the Company from its founding in
January 1996 through December 1998. Mr. Edwards currently serves as a member
of the Board of Directors, as well as the Company's Chief Technical Officer.
Since November 1999, Mr. Edwards has been principally employed as President,
Chief Executive Officer and Chairman of the Board of Genesis Medical, Inc., a
private company which develops minimally invasive medical devices for the
treatment of female urinary incontinence and other genito-urinary conditions.
From January 1999 to October 1999 Mr. Edwards was principally employed as the
Chief Executive Officer and President of Conway-Stuart Medical, Inc. a private
company which develops minimally invasive medical devices for the treatment of
esophageal reflux. From July 1992 to May 1995, Mr. Edwards served as
President, Chief Executive Officer, and Chairman of the Board of VidaMed,
Inc., a public medical device company co-founded by Mr. Edwards, which
develops minimally-invasive surgical systems. He continues to serve as a board
member of such company. Mr. Edwards holds a Certificate in Mechanical
Engineering from the Union of Educational Institutions in England.
Mark B. Logan has served as a Director of the Company since December 1999.
Since 1994 Mr. Logan has served as Chairman of the Board and Chief Executive
Officer of VISX, Inc., a medical device company. From January 1992 to October
1994, he was Chairman of the Board and Chief Executive Officer of INSMED
Pharmaceuticals, Inc. Previously, Mr. Logan held senior management positions
at Bausch and Lomb, Inc., Becton, Dickinson & Co., and American Home Products,
Inc. He received a B.A. from Hiram College and a P.M.D. from Harvard Business
School. He currently serves on the Board of Directors of Abgenix, Inc. and
Vivus, Inc. Mr. Logan replaces David Douglas, a General Partner at Delphi
Ventures, who stepped down from the board.
Woodrow A. Myers, Jr., M.D. has served as a Director of the Company since
August 1997. Since November 1995, Dr. Myers has served as the Director,
Healthcare Management, of Ford Motor Company. From August 1991 to October
1995, Dr. Myers served as Senior Vice President and Corporate Medical Director
of the Associated Group. From January 1990 to July 1991 he served as the
Commissioner of Health of New York City and as an Assistant Professor of
Medicine at Cornell Medical College. Dr. Myers holds a B.S. in Biological
Science from Stanford University, an M.D. from Harvard Medical School and an
M.B.A. from Stanford University.
Directors Whose Terms Extend Beyond the Annual Meeting
Abhi Acharya has served as a Director of the Company since his appointment
in March 1999. Dr. Acharya has over 25 years of experience in the medical
device field and is currently an independent consultant. In 1998, he served as
the Senior Vice President of Regulatory Affairs, Quality and Clinical Research
for EndoTex Interventional Systems. From 1994 to 1997, he was Vice President
of Regulatory Affairs, Quality Assurance and Clinical Research at Target
Therapeutics, Inc. From 1993 to 1994, he served as the Senior Technical
Advisor for Biometric Research Institute, Inc. From 1979 to 1993, Dr. Acharya
held various positions, including Director of the Division of Cardiovascular,
Respiratory and Neurological Devices, Chief of Surgical Devices Branch and
Chief of the Contact Lens Branch and Engineering and Physical Science Branch
for the Office of Device Evaluation, Center for Devices and Radiological
Health, Food and Drug Administration. Dr. Acharya holds a B. Tech in
Metallurgical Engineering from the Indian Institute of Technology, and an M.S.
and a Ph.D in Biomedical Engineering from Northwestern University.
Gary R. Bang has served as Chairman of the Board of Directors since his
appointment in January 1999. Mr. Bang has over 25 years of experience in the
healthcare field. From 1993 to 1997, he was President, CEO and Director of
Target Therapeutics, Inc. Before joining Target, Mr. Bang worked for Baxter
International for 19 years. He held various positions including President of
the Pharmaseal Surgical Division, Vice President, Sales and Marketing of
Baxter U.K., and President and Vice President of several medical products
divisions. Mr. Bang serves on the board of Spectranetics Corp., a public
cardiovascular laser company. He holds a B.A. in Economics from Northwestern
University and an M.B.A. in Finance and Accounting from the University of
Chicago.
6
<PAGE>
David B. Musket has served as a Director of the Company since November 1996
as a designated representative of INVESCO Trust Company, an investor in the
Company. Since August 1991, he has been President of Musket Research
Associates, Inc. (MRA), an investment banking firm specializing in healthcare,
and of DBM Corporate Consulting Group. Since June 1996, he has also been a
Managing Member of ProMed Management, LLC, a money management company focusing
on both public and private healthcare companies.
John G. Schulte has served as President, Chief Executive Officer and
Director of the Company since January 1999. From 1997 through 1998, Mr.
Schulte was President, Surgical Products Division of Genzyme Corporation. From
1996 to 1997, he was Senior Vice President and General Manager at 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 disgnostics 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.
Vote Required
The two nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted for them shall be
elected as Class III directors, and the one nominee receiving the highest
number of affirmative votes of the shares present or represented and entitled
to be voted shall be elected as Class I director. Votes withheld from any
director are counted for purposes of determining the presence or absence of a
quorum for the transaction of business, but have no other legal effect under
Delaware law.
Board Meetings, Committees and Directors Compensation
The Board of Directors of the Company held a total of six meetings during
the fiscal year ended December 31, 1999.
The Board of Directors has an Audit Committee and Compensation Committee.
It does not have a nominating committee or committee performing the functions
of a nominating committee. From time to time, the Board has created various ad
hoc committees for special purposes. No such committee is currently
functioning.
The Audit Committee reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent accountants. This Committee, which currently consists of directors
Gary Bang and David Musket, held five meetings during 1999.
The Compensation Committee reviews and makes recommendations to the Board
concerning salaries and incentive compensation for executive officers and
certain employees of the Company. This Committee, which consists of directors
Mark Logan, Stuart Edwards and Woodrow Myers held twelve meetings during 1999.
Compensation of Directors
Directors of the Company who are not otherwise compensated by the Company
receive $2,000 for each meeting they attend in person, or $1,000 for each
meeting they attend by telephone, and directors may be reimbursed for
reasonable expenses in connection with attendance at Board and committee
meetings. Directors also receive option grants for their participation as
Board members pursuant to the 1997 Director Stock Option Plan (the "Director
Plan") is described in detail under Proposal No. 2.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
NOMINEES SET FORTH HEREIN.
7
<PAGE>
CERTAIN TRANSACTIONS
In November 1998, the Company and Stuart Edwards agreed to the termination
of his employment agreement, pursuant to which Mr. Edwards was granted (1) two
years of severance payments equal to his annual salary, (2) a $100,000
severance adder, (3) full vesting on his outstanding option and (4) an
additional option immediately exercisable on January 1, 1999 for 100,000
shares of Common Stock at the fair market value on the date of grant. As of
December 31, 1999, Mr. Edwards was indebted to the Company for short-term
loans totaling, in the aggregate, $28,926, which amount is being repaid by Mr.
Edwards over a remaining term of approximately 11 months.
In connection with the Company's Series B Preferred Stock financing, MRA
and the Company entered into an agreement whereby for each 1% of the shares
actually sold in the Company's initial public offering that were purchased by
investors or parties directly affiliated with investors identified by MRA in
the Series B Preferred Stock financing, MRA would be granted options or
warrants to purchase 1,000 shares of Common Stock at a price equivalent to the
initial public offering price. On January 13, 1998, 5,000 of such options or
warrants were issued, which have a five year term and are entitled to
antidilution and piggyback registration rights
On December 28, 1998, the Company entered into a consulting agreement with
Gary Bang, the Company's Chairman of the Board of Directors, whereby Mr. Bang
has agreed to provide the Company with approximately 50 days of consulting per
year in exchange for a monthly consulting fee of $8,333.33. Additionally,
pursuant to such consulting agreement, Mr. Bang received 80,000 fully vested
shares of the Company's Common Stock at the fair market value on the date of
grant.
On August 25, 1998, the Company's Board of Directors approved an amendment
to reprice options outstanding under the Stock Plan with exercise prices over
$7.50 per share. Holders of such options were offered the choice of retaining
their existing options without amendment or accepting the amendment of their
stock options. The exercise price of the amended options is $3.375 per share,
which equals the fair market value of the Company's Common Stock on September
18, 1998. The principal features (including the number of shares, vesting and
expiration date) of the repriced options were not affected. However, all
repriced options are subject to a blackout period, pursuant to which such
options may not be exercised until after September 18, 1999.
On December 8, 1999 the Board of Directors authorized the acceleration of
vesting of options to each officer of the Company. Pursuant to this
arrangement, each officer of the Company may immediately vest a portion of
their options on a change in control, and any remaining options if, within a
year of the change in control, the officer is either terminated,
constructively terminated or the Company headquarters moves more than 30 miles
from its current location.
The Company has employment agreements with certain of its officers. See
"Employment Agreements."
8
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth information as of December 31, 1999
regarding executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John G. Schulte......... 51 Chairman of the Board, Chief Executive Officer and President
Robert D. McCulloch..... 38 Vice President Finance, Chief Financial Officer and Chief
Information Officer
Ron D. Byron............ 42 Vice President and General Manager, Somnus Europe
Robert D. Campbell...... 45 Vice President, Sales and Marketing
Edward H. Luttich....... 44 Vice President, Research and Development
John C. Meyer........... 55 Vice President, Human Resources
Steven J. Ojala......... 53 Vice President, Clinical, Quality and Regulatory Affairs
Brad L. Steadman........ 43 Vice President, Manufacturing
</TABLE>
John G. Schulte, biographical information, infra., at Proposal No. 1.
Robert D. McCulloch joined Somnus in October 1997 as Corporate Controller
and was promoted to Vice President of Finance and CFO in August 1998 and
appointed CIO in July 1999. From 1996 to 1997, Mr. McCulloch was Director of
Accounting and Finance at Target Therapeutics, Inc. where he played an
integral role in the growth of the company's revenues to more than $100
million, and was a key member of the team that effected the $1.1 billion
acquisition of Target by Boston Scientific Corp. From 1991 to 1995, he served
as General Accounting Manager/Business Process Manager at Anthem Electronics,
Inc., and also spent more than eight years in public accounting with
PricewaterhouseCoopers LLP. Mr. McCulloch is a Chartered Accountant, a
Certified Public Accountant and a member of the Institute of Cost and
Management Accountants. He holds a Bachelor of Commerce degree from Rhodes
University in South Africa.
Ron D. Byron, formerly European Business Manager of Medtronic, Inc.'s Upper
Airway Venture, has served as Vice President and General Manager for Somnus
Europe since July 1998. Mr. Byron has 12 years of sales/marketing experience
in the pharmaceutical and medical device industry and served as European
Business Manager of Medtronic, Inc.'s Upper Airway Venture from April 1998 to
July 1998. Prior to that, Mr. Byron was International Marketing Manager for
St. Jude Medical from July 1995 to March 1998. While at St. Jude, Mr. Byron
covered several international territories including Europe, the Middle East
and South Africa. From 1990 to 1995, Mr. Byron held several sales and
marketing positions at American Cyanamid, Inc. (Lederle Pharmaceutical
Division). Mr. Byron holds a B.Sc. from the Academy of Sport Science &
Physical Education in Arnhem, The Netherlands and an MBA from the Glasgow
University Business School in Scotland.
Robert D. Campbell has served as Vice President of Sales and Marketing for
the Company since October 1999. From July 1998 to September 1999, Mr. Campbell
served as Vice President of Sales for the Company. From August 1997 to June
1998, Mr. Campbell was Western Regional Sales Manager, Director of Sales and
VP of North American Sales for the Company. From July 1995 to August 1997, Mr.
Campbell was a sales representative with Karl Storz Endoscopy Inc. From June
1994 to July 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.
Edward H. Luttich has served as Vice President of Research and Development
for the Company since November 1999. Mr. Luttich comes to Somnus after eight
years at Medtronic PS Medical, a manufacturer of
9
<PAGE>
implantable medical devices for neurosurgery. Mr. Luttich held a series of
technical and operations management positions with Medtronic PS Medical. He
served as Director of Operations from December 1998 to November 1999, Director
of Research, Development and Engineering from August 1996 to December 1998,
and as Director of Engineering from September 1991 to August 1996. Prior to
its acquisition by Medtronic, he was instrumental in the development and
evolution of PS Medical's technical and operations organizations. Under his
leadership, the organization developed and brought to market revolutionary
processes to surface treat silicone products, state of the art implanted
application systems for spinal opiates and market leading valve systems for
treatment of hydrocephalus. He has a B.S. in Mechanical Engineering from the
University of Pennsylvania with advanced course work at Wharton and Pepperdine
Universities.
John C. Meyer has served as Vice President of Human Resources for the
Company since January 1999. He has a broad track record covering 25 years at
the executive level of Human Resources. Prior to joining Somnus, he was Vice
President of Human Resources at Vivus, Inc. a urology company, from February
to December 1998. He also served as Vice President of Human Resources at
Target Therapeutics, an interventional neuroradiology company which was
acquired in 1997 by Boston Scientific, from January 1996 to September 1997.
Prior to that, he served as Vice President of HR at Chipcom, Inc. from 1991 to
1995. Chipcom designs, manufactures, markets and services intelligent
switching systems including a broad range of hub, internetworking and network
management products. Mr. Meyer has a B.S. in Business from Colorado State
University.
Steven J. Ojala has served as Vice President of Clinical, Quality and
Regulatory Affairs for the Company since October 1999. Dr. Ojala brings 25
years experience in the medical device, pharmaceutical and biological product
industries to Somnus. Most recently, he served as Vice President of
Regulatory, Clinical and Quality for IMPRA, a leading manufacturer of
implantable vascular grafts, from October 1998 to September 1999. Prior to
this assignment, from February 1997 to February 1998, Dr. Ojala was Corporate
Vice President and Chief Technology Officer at R.P. Scherer, a drug delivery
company, where he managed worldwide operations for Research and Development,
Corporate Engineering, Regulatory, Quality and Information Technology. He
previously spent May 1994 to January 1997 in Copenhagen, Denmark as Senior
Vice President of Quality and Regulatory operations at Novo-Nordisk, a $3
billion diversified pharmaceutical, biotechnology and industrial enzyme
company. Dr. Ojala received his undergraduate degree from the University of
California, Berkeley, an MBA from Golden Gate University in San Francisco, and
his Ph.D. from West Virginia University.
Brad L. Steadman has served as Vice President of Manufacturing for the
Company since September 1999. Mr. Steadman has 20 years experience in the
medical industry, and was most recently Director of Operations in the plastics
division at Boston Scientific-Target from January 1997 to September 1999,
where he was responsible for manufacturing, production control, manufacturing
engineering and quality control. Also at Boston Scientific-Target, he served
as Director of Extrusion from April 1996 to January 1997. Prior to Target, he
served as Vice President of Operations for Autogenics, a heart valve startup,
from December 1995 to April 1996 and as General Manager with Quintex
Corporation from January to August 1995. He has a B.S. from the University of
Arizona in Nuclear Engineering and a certificate in Biomedical Engineering
from the University of California at Irvine.
Employment Agreements
John G. Schulte. The Company has entered into an agreement relating to the
employment of John Schulte whereby the Company has agreed to provide Mr.
Schulte with severance benefits during the first two years of employment in
the event of termination without cause consisting of 12 months continued
salary, insurance benefits, bonus and option vesting. The agreement also
provides that, upon an acquisition, merger or sale of a majority of the
Company's assets, Mr. Schulte will receive one year continued salary,
insurance benefits and bonus, and all of his outstanding stock options will
fully and immediately vest.
Robert D. McCulloch. The Company has entered into an agreement relating to
the employment of Robert D. McCulloch whereby the Company has agreed to
provide Mr. McCulloch with severance benefits during the first two years of
employment in the event of termination without cause consisting of 12 months
continued salary, insurance benefits, bonus and option vesting. The agreement
also provides that upon an
10
<PAGE>
acquisition, merger or sale of a majority of the Company's assets, Mr.
McCulloch will receive six months continued salary, insurance benefits and
bonus, and all his outstanding stock options will fully and immediately vest.
Robert D. Campbell. The Company has entered into an agreement relating to
employment of Robert D. Campbell whereby the Company has agreed to provide Mr.
Campbell with severance benefits during the first year of employment in the
event of termination without cause consisting of 6 months continued salary,
insurance benefits, bonus and option vesting.
John C. Meyer. The Company has entered into an agreement relating to the
employment of John C. Meyer whereby the Company has agreed to provide Mr.
Meyer with severance benefits in the event of termination without cause
consisting of 6 months continued salary, insurance benefits, and bonus. This
agreement also provides that, upon an acquisition that results in the
elimination of his position or transfer to a location outside the Bay Area,
Mr. Meyer will receive 6 months continued salary, insurance benefits, and
bonus.
Executive Officer Compensation
Summary Compensation Table. The following table sets forth information for
the years ended December 31, 1999, 1998 and 1997 regarding the compensation of
the Company's Chief Executive Officer and each of the Company's three other
most highly compensated executive officers whose total annual salary and bonus
for such fiscal years were in excess of $100,000 (the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options Compensation
--------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John G. Schulte..................... 1999 250,000 57,700 510,000(1) 99,594(2)
Chief Executive Officer and 84,660(3)
President
Robert D. McCulloch................. 1999 161,308(4) 33,322 20,000(5)
Vice President, Finance, 1998 128,069 8,410 132,000(6)
Chief Financial Officer and 1997 23,004 10,000 60,000(7)
Chief Information Officer
Robert D. Campbell.................. 1999 150,000(8) 30,293 20,000(9) 7,200(10)
Vice President, Sales and 1998 111,731(11) 1,327 85,000(12) 77,195(13)
Marketing 25,000(14)
1997 29,135 -- 15,000(15) 19,576(16)
John C. Meyer....................... 1999 150,769(17) 32,312 16,600(18)
Vice President, Human Resources 100,000(19)
</TABLE>
- --------
(1) On January 4, 1999, Mr. Schulte received an option to purchase 510,000
shares of the Company's Common Stock.
(2) Consists of a $6,000 automobile allowance, $26,617 in moving expenses,
and $66,977 in temporary housing reimbursement.
(3) On November 11, 1999, Mr. Schulte received an option to purchase 84,660
shares of the Company's Common Stock.
(4) During 1999, Mr. McCullochs' annual salary was $150,000 until February,
when his annual salary increased to $157,500. In July Mr. McCullochs'
annual salary increased to $165,000.
(5) On November 11, 1999, Mr. McCulloch received an option to purchase 20,000
shares of the Company's Common Stock.
(6) On August 20, 1998, Mr. McCulloch received an option to purchase 132,000
shares of the Company's Common Stock.
11
<PAGE>
(7) In September 1997, Mr. McCulloch received an option to purchase 60,000
shares of the Company's Common Stock.
(8) During 1999, Mr. Campbell's annual salary was $130,000 until January,
when his annual salary increased to $150,000.
(9) On November 11, 1999, Mr. Campbell received an option to purchase 20,000
shares of the Company's Common Stock.
(10) Consists of automobile allowance.
(11) During 1998, Mr. Campbell's annual salary was $75,000 until February,
then $100,000 until June, when his annual salary was increased to
$130,000.
(12) In August 1998, Mr. Campbell received an option to purchase 85,000 shares
of the Company's Common Stock.
(13) Consists of $6,923 in automobile allowance and $70,270 in commissions.
(14) In March 1998, Mr. Campbell received an option to purchase 25,000 shares
of the Company's Common Stock, which was repriced from $9.25 to $3.375 in
August 1998.
(15) In August 1997, Mr. Campbell received an option to purchase 15,000 shares
of the Company's Common Stock.
(16) Consists of commissions.
(17) Mr. Meyer joined the Company in January 1999. His annual salary was
$160,000.
(18) On November 11, 1999, Mr. Meyer received an option to purchase 16,600
shares of the Company's Common Stock.
(19) On February 26, 1999, Mr. Meyer received an option to purchase 100,000
shares of the Company's Common Stock.
Option Grants in Last Fiscal Year. The following table sets forth each
grant of stock options made during the fiscal year ended December 31, 1999 to
each of the Named Executive Officers:
Option Grants in Fiscal 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential
Realizable Value
at Assumed Annual
% of Total Rates of Stock
Number of Options Price
Securities Granted to Appreciation for
Underlying Employees Option Term(4)
Options in Fiscal Exercise Expiration -----------------
Name Granted(1) Year(2) Price ($/Sh)(3) Date 5% 10%
- ---- ---------- ---------- --------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
John G. Schulte......... 510,000 25.3 2.625 01/04/09 841,933 2,133,623
84,660 4.2 1.469 11/11/09 78,202 198,180
Robert D. McCulloch..... 20,000 1.0 1.469 11/11/09 18,474 46,818
Robert D. Campbell...... 20,000 1.0 1.469 11/11/09 18,474 46,818
John C. Meyer........... 100,000 5.0 2.875 02/26/09 180,807 458,201
16,600 0.8 1.469 11/11/09 15,334 38,859
</TABLE>
- --------
(1) Options were granted under the Stock Plan and generally vest over four
years from the date of grant.
(2) Based on an aggregate of options to purchase 2,014,935 shares of the
Company's Common Stock granted to employees and directors of the Company,
including the Named Executive Officers for the year ended December 31,
1999.
(3) The exercise price per share of each option was, unless repriced, equal to
the closing price of the Common Stock at close of market on the date of
grant.
(4) The potential realization value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Common Stock of the Company on the date of
the grant appreciates at the annual rate shown (compounded annually) from
the date of grant until the expiration of the ten year option term. These
numbers are calculated based on the requirements promulgated by the SEC
and do not reflect the Company's estimate of future stock growth.
12
<PAGE>
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. The
following table sets forth the information with respect to stock option
exercises during the year ended December 31, 1999, by the Named Executive
Officers, and the number and value of securities underlying unexercised
options held by the Named Executive Officers at December 31, 1999.
Aggregate Option Exercises in Fiscal 1999 and
Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options At In-the-Money Options at
December 31, 1999 (#) December 31, 1999 ($)(1)
Shares Acquired Value ------------------------- -------------------------
Name Upon Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John G. Schulte......... -- -- 1,764 592,896 2,039 95,844
Robert D. McCulloch..... -- -- 80,917 131,083 482 22,642
Robert D. Campbell...... -- -- 52,813 92,187 482 22,642
John C. Meyer........... -- -- 346 116,254 400 18,793
</TABLE>
- --------
(1) The fair market value of Somnus Medical Technologies, Inc.'s Common Stock
at the close of business on December 31, 1999, was $2.625 per share.
Board Compensation Committee Report on Executive Compensation
The following is provided to stockholders by the members of the
Compensation Committee of the Board of Directors:
The Compensation Committee of the Board of Directors (the "Committee"),
comprising three outside directors, is responsible for the administration of
the Company's compensation programs. These programs include base salary for
executive officers and both annual and long-term incentive compensation
programs. The Company's compensation programs are designed to provide a
competitive level of total compensation and include incentive and equity
ownership opportunities linked to the Company's performance and stockholder
return.
Compensation Philosophy. The Company's overall executive compensation
philosophy is based on a series of guiding principles derived from the
Company's values, business strategy, and management requirements. These
principles are summarized as follows:
. Provide competitive levels of total compensation which will enable the
Company to attract and retain the best possible executive talent;
. Motivate executives to achieve optimum performance for the Company;
. Align the financial interest of executives and stockholders through
equity-based plans;
. Provide a total compensation program that recognizes individual
contributions as well as overall business results.
Compensation Program. The Committee is responsible for reviewing and
recommending to the Board the compensation and benefits of all officers of the
Company and establishing and reviewing general policies relating to
compensation and benefits of employees of the Company. The Committee is also
responsible for the administration of the Stock Plan. There are two major
components to the Company's executive compensation: base salary and potential
cash bonus, as well as potential long-term compensation in the form of stock
options. The Committee considers the total current and potential long-term
compensation of each executive officer in establishing each element of
compensation.
1. Base Salary. In setting compensation levels for executive officers, the
Committee reviews competitive information relating to compensation levels for
comparable positions at medical product, biotechnology and high technology
companies. In addition, the Committee may, from time to time, hire
compensation and benefit
13
<PAGE>
consultants to assist in developing and reviewing overall salary strategies.
Individual executive officer base compensation may vary based on time in
position, assessment of individual performance, salary relative to internal
and external equity and critical nature of the position relative to the
success of the Company.
2. Long-Term Incentives. The Company's 1996 Stock Plan provides for the
issuance of stock options to officers and employees of the Company to purchase
shares of the Company's Common Stock at an exercise price equal to the fair
market value of such stock on the date of grant. Stock options are granted to
the Company's executive officers and other employees both as a reward for past
individual and corporate performance and as an incentive for future
performance. The Committee believes that stock-based performance compensation
arrangements are essential in aligning the interests of management and the
stockholders in enhancing the value of the Company's equity.
1999 Compensation for the Chief Executive Officer
In determining Mr. Schulte's salary for 1999, the Committee considered
competitive compensation data for chairmen and chief executive officers of
similar companies within the medical device and biotechnology industry, taking
into account Mr. Schulte's experience and knowledge. The Committee determined
that it was appropriate for Mr. Schulte's annual salary to be $250,000
commencing in January, 1999. On January 4, 1999 Mr. Schulte received options
to purchase 510,000 shares. In addition, on November 11, 1999, Mr. Schulte
received options to purchase 84,660 shares.
Section 162(m) of the Internal Revenue Code Limitations on Executive
Compensation
In 1993, Section 162(m) was added to the United States Internal Revenue
Code of 1986, as amended, (the "Code"). Section 162(m) may limit the Company's
ability to deduct for United States federal income tax purposes compensation
in excess of $1,000,000 paid to the Company's Chief Executive Officer and its
four other highest paid executive officers in any one fiscal year. No
executive officer of the Company received any such compensation in excess of
this limit during fiscal 1997. Grants under the Stock Plan will not be subject
to the deduction limitation if the stockholders approve the Stock Plan,
including the option grant limitations described below.
Section 162(m) of the Code places limits on the deductibility for United
States federal income tax purposes of compensation paid to certain executive
officers of the Company. In order to preserve the Company's ability to deduct
the compensation income associated with options granted to such person, the
Stock Plan provides that no employee may be granted, in any fiscal year of the
Company, options to purchase more than 450,000 shares of Common Stock. In
addition, the Stock Plan provides that in connection with an employee's
initial employment, the employee may be granted an additional 450,000 shares
of Common Stock.
The foregoing Committee Report shall not be "soliciting material" or to be
"filed" with the SEC, nor shall such information be incorporated by reference
into any future filing under this Securities Act of 1933, as amended, or the
Exchange Act, except to the extent the Company specifically incorporates it by
reference into such filing.
Respectfully submitted,
Mark B. Logan
Stuart D. Edwards
Woodrow A. Myers, Jr., M.D.
14
<PAGE>
Stock Performance Graph
The following graph compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total return of the Nasdaq National
Market, U.S. index ("Nasdaq U.S. Index") and the Hambrecht & Quist Healthcare,
Excluding Biotechnology index ("H&Q Healthcare Index") for the period
beginning on November 6, 1997, the Company's first day of trading after its
initial public offering, and ending on December 31, 1999.
[LOGO OF PERFORMANCE CHART]
<TABLE>
<CAPTION>
Cumulative Total Return
---------------------------------------------
11/6/97 11/97 12/97 1/98 2/98 3/98 4/98
<S> <C> <C> <C> <C> <C> <C> <C>
SOMNUS MEDICAL TECHNOLOGIES, INC. 100 110 121 93 86 113 114
NASDAQ STOCK MARKET (U.S.) 100 101 99 102 112 116 118
HAMBRECHT & QUIST HEALTHCARE-EXCLUDING BIOTECHNOLOGY 100 102 105 105 115 120 123
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return
-------------------------------------------------------
5/98 6/98 7/98 8/98 9/98 10/98 11/98 12/98 1/99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SOMNUS MEDICAL TECHNOLOGIES, INC. 95 78 62 36 30 30 28 29 25
NASDAQ STOCK MARKET (U.S.) 111 119 117 94 108 112 123 139 159
HAMBRECHT & QUIST HEALTHCARE-EXCLUDING BIOTECHNOLOGY 118 122 120 99 108 113 124 128 122
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------------------------------------
2/99 3/99 4/99 5/99 6/99 7/99 8/99 9/99 10/99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SOMNUS MEDICAL TECHNOLOGIES, INC. 27 25 28 24 31 27 23 24 21
NASDAQ STOCK MARKET (U.S.) 145 156 160 156 170 168 175 174 187
HAMBRECHT & QUIST HEALTHCARE-EXCLUDING BIOTECHNOLOGY 119 122 118 121 125 122 120 108 106
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Total Return
-------------
11/99 12/99
<S> <C> <C>
SOMNUS MEDICAL TECHNOLOGIES, INC. 18 25
NASDAQ STOCK MARKET (U.S.) 207 252
HAMBRECHT & QUIST HEALTHCARE-EXCLUDING BIOTECHNOLOGY 112 112
</TABLE>
- --------
* $100 INVESTED ON 11/6/97 IN STOCK OR ON 10/31/97 IN INDEX--INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
* The graph assumes that $100 was invested on November 6, 1997 in the
Company's Common Stock, the Nasdaq U.S. Index and the H&Q Healthcare Index,
and that all dividends were reinvested. No dividends have been declared or
paid on the Company's common Stock. Stock performance shown in the above
chart for the Common Stock is historical and should not be considered
indicative of future price performance. This graph was prepared by Research
Data Group, Inc.
15
<PAGE>
PROPOSAL TWO
AMENDMENT OF 1997 DIRECTOR OPTION PLAN
At the Annual Meeting, the stockholders are being asked to approve an
amendment of the Company's 1997 Director Option Plan (the "Director Plan") to
increase the option shares of Common Stock that each Outside Director (as
defined below) shall be granted automatically upon joining the Board from
20,000 shares to 30,000 shares, and to increase the annual option grant issued
to each Outside Director from 5,000 shares to 7,500 shares. The adoption of
the Director Plan was approved by the Board of Directors and the stockholders
in September 1997. The current proposed amendment of the Director Plan was
approved by the Board of Directors in December 1999. As of the Record Date,
options to purchase an aggregate of 106,667 shares of the Company's Common
Stock were outstanding, with a weighted average exercise price of $2.483 per
share, and 328,333 shares were available for future grant. No shares have been
purchased pursuant to exercise of stock options under the Director Plan.
The Director Plan provides for the grant of nonqualified stock options to
non-employee directors of the Company ("Outside Directors") pursuant to an
automatic, non-discretionary grant mechanism. The Company believes that the
grant of options to the Outside Directors has enabled the Company to attract
and retain directors with the talent that it continues to require.
The essential terms of the Director Plan are summarized as follows:
Purpose
The purposes of the Director Plan are to attract and retain the best
available Outside Directors, to provide additional incentive to the Outside
Directors to serve as directors and to encourage their continued service on
the Board of Directors.
Automatic, Non-Discretionary Grants and Eligibility
The Director Plan provides that each future Outside Director is
automatically granted an option to purchase up to 20,000 shares (30,000
shares, if this Proposal is adopted) of Common Stock of the Company on the
date upon which such person becomes an Outside Director (the "Initial
Option"). Each Outside Director is automatically granted an option purchase up
to 5,000 shares (7,500 shares, if this Proposal is adopted) of Common Stock
(the "Subsequent Option") each year on the date of the Company's annual
meeting of stockholders (if, on such date, he or she has served as a director
for at least the preceding six months), so long as he or she remains an
Outside Director.
Terms of Options
Each option is evidenced by a stock option agreement between the Company
and the optionee to whom such option is granted and is subject to the
following additional terms and conditions:
(1) Exercise of the Option: The options granted under the Director Plan may
be exercised after the shares subject to the option become vested. The
Director Plan provides for vesting of one forty-eighth ( 1/48) of the shares
subject to any Initial Option and any Subsequent Option at the end of each
month. An option is exercised by giving written notice of exercise to the
Company, specifying the number of shares of Common Stock to be purchased and
tendering payment to the Company of the purchase price. Payment for shares
issued upon exercise of an option may consist of cash, check, delivery of
already-owned shares of the Company's Common Stock (subject to certain
conditions), or any combination of the foregoing methods of payment. Payment
may also be made by a cashless exercise program implemented by the Company in
connection with the Director Plan.
Options may be exercised at any time on or following the date the options
are first exercisable. An Option may not be exercised for a fraction of a
share.
16
<PAGE>
(2) Option Price: The option price of nonqualified stock options granted
under the Director Plan is equal to 100% of the fair market value of the
Company's Common Stock on the date the option is granted. For purposes of the
Director Plan, fair market value is defined as the closing price per share of
the Company's Common Stock on the date of grant as reported on The Nasdaq
National Market.
(3) Termination of Service as a Director: The Director Plan provides that
if the optionee's status as an Outside Director of the Company is terminated
for any reason, other than death or total and permanent disability, options
may be exercised within three months after such termination and may be
exercised only to the extent the options were exercisable on the date of
termination.
(4) Death: If an optionee should die while he or she is an Outside Director
of the Company, options may be exercised at any time within twelve months
after the date of death but only to the extent that such options were
exercisable on the date of death and in no event later than the expiration of
the term of such option.
(5) Disability: If an optionee's status as an Outside Director is
terminated due to a disability, such options may be exercised at any time
within twelve months from the date of such termination, but only to the extent
that such options were exercisable on the date of termination of the
individual's status as an Outside Director and in no event later than the
expiration of the term of such option.
(6) Termination of Options: Options granted under the Director Plan expire
ten years from the date of grant. No option may be exercised by any person
after such expiration.
(7) Nontransferability of Options: An option is nontransferable by the
optionee, other than by will or the laws of descent and distribution, and is
exercisable only by the optionee during his or her lifetime or, in the event
of death, by a person who acquires the right to exercise the option by bequest
or inheritance or by reason of the death of the optionee.
Adjustment Upon Changes in Capitalization
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization which results in an increase or decrease in the
number of outstanding shares of Common Stock without receipt of consideration
by the Company, an appropriate adjustment will be made in the option price and
in the number of shares subject to each option. In the event of the proposed
dissolution or liquidation of the Company, all outstanding options, which have
not been previously exercised, automatically terminate immediately prior to
the consummation of such action. In the event of a merger of the Company with
or into another corporation or sale of substantially all of the assets of the
Company, all outstanding options will be assumed or an equivalent option
substituted by the successor corporation. If an option is assumed or
substituted by the successor corporation, such option will continue to be
exercisable pursuant to its own terms for so long as the optionee serves as a
director of the Company or of the successor corporation. Following such
assumption or substitution, if the optionee's status as a director of the
Company or of the successor corporation is terminated other than upon a
voluntary resignation by the optionee, his or her option will immediately
become fully exercisable. If the options are not assumed or substituted by the
successor corporation, such options will immediately become fully exercisable
but terminate 30 days from the date notice is given to the optionee of the
fully vested status of his or her option.
Amendment and Termination
With the exception of the administration of the Director Plan, including
the number, frequency and price of grants and the eligibility and vesting of
options, the Board of Directors may amend the Directors Plan at any time or
from time to time or may terminate it without approval of the stockholders,
provided, however, that stockholder approval is required for any amendment
which increases the number of shares which may be issued under the Director
Plan or for any amendment that would be required to enable the Director Plan
to comply with Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
17
<PAGE>
However, no action by the Board of Directors or stockholders may alter or
impair any option previously granted under the Director Plan without the
consent of the optionee. In any event, the Director Plan will terminate in
September 2007.
Tax Information
Options granted under the Director Plan are nonqualified options. An
optionee will not recognize any taxable income at the time he or she is
granted a nonqualified option. However, upon its exercise, the optionee will
recognize ordinary income generally measured as the excess of the then fair
market value of the shares purchased over the purchase price. Any taxable
income recognized in connection with an option exercise by an optionee who is
also an employee of the Company will be subject to tax withholding by the
Company. Upon resale of such shares by the optionee, any difference between
the sales price and the optionee's purchase price, to the extent not
recognized as taxable income as described above, will be treated as long-term
or short-term capital gain or loss, depending on the holding period.
Generally, the Company will be entitled to a tax deduction in the same amount
as the ordinary income recognized by the optionee with respect to shares
acquired upon exercise of a nonqualified option.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Director Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
Participation in the Plan
The grant of options under the Director Plan to Outside Directors is
automatic and non-discretionary. During fiscal 1999, all current Outside
Directors as a group received options to purchase 75,000 shares pursuant to
the Director Plan. No other employee or director of the Company received any
shares pursuant to the Director Plan.
Vote Required
The affirmative vote of a majority of the shares of the Company's Common
Stock present and voting at the Annual Meeting will be required to approve the
amendment of the Director Plan.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
APPROVAL OF THE AMENDMENT OF THE DIRECTOR PLAN.
18
<PAGE>
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit the consolidated financial statements of the Company for
the fiscal year ending December 31, 2000, and recommends that stockholders
vote "FOR" ratification of such appointment. In the event of a negative vote
on such ratification, the Board of Directors will reconsider its selection.
Ernst & Young LLP has audited the Company's financial statements annually
since the Company's inception in 1996. Representatives of Ernst & Young LLP
are expected to be present at the meeting with the opportunity to make a
statement if they desire to do so and are expected to be available to respond
to appropriate questions. If stockholders fail to ratify the selection, the
Audit Committee and the Board will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Audit Committee and the Board in
their discretion may direct the appointment of different independent auditors
at any time during the year.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 2000.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the accompanying form of proxy to vote the shares they
represent as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Sunnyvale, California
April 12, 2000
19
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SOMNUS MEDICAL TECHNOLOGIES, INC.
2000 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Somnus Medical Technologies, Inc., a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement each dated April 12, 2000 and hereby appoints
John. G. Schulte and Robert D. McCulloch or either of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned to represent the undersigned at the 2000 Annual Meeting
of Stockholders of Somnus Medical Technologies, Inc. to be held on May 11, 2000
at 10:00 a.m., local time, at the Company's principal executive offices located
at 285 North Wolfe Road, Sunnyvale, California 94086 and at any postponement or
adjournment thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below:
<TABLE>
<CAPTION>
<S> <C>
1. Election of Directors
[_] FOR [_] WITHHOLD
NOMINEES CLASS III: STUARD T. EDWARDS WOODROW A. MYERS, JR., M.D. CLASS I: MARK B. LOGAN
THE STOCKHOLDER MAY WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE BY STRIKING OUT ABOVE.
2. To approve an amendment to the Company's 1997 Director Option Plan (the
"Director Plan") to increase the option shares of Common Stock that each
Outside Director shall be granted automatically upon joining the Board from
20,000 shares to 30,000 shares, and to increase the annual option grant
issued to each Outside Director from 5,000 shares to 7,500 shares.
[_] FOR [_] WITHHOLD [_] ABSTAIN
3. Proposal to ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31, 2000.
[_] FOR [_] WITHHOLD
SEE REVERSE SIDE
</TABLE>
- --------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED AS FOLLOWS: (1) FOR THE ELECTION OF TWO NOMINATED
CLASS III DIRECTORS AND ONE CLASS I; (2) FOR APPROVAL OF THE AMENDMENT TO THE
COMPANY'S 1997 DIRECTOR PLAN; (3) FOR THE RATIFICATION OF THE APPOINTMENT OF
ERNST & YOUNG LLP AS INDEPENDENT AUDITORS, AND AS THE PROXY HOLDERS DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. IF THE STOCK IS REGISTERED
IN THE NAMES OF TWO OR MORE PERSONS, EACH SHOULD SIGN. EXECUTORS,
ADMINISTRATORS, TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT SHOULD ADD THEIR
TITLES. IF SIGNER IS A CORPORATION, PLEASE GIVE FULL CORPORATE NAME AND HAVE A
DULY AUTHORIZED OFFICER SIGN, STATING TITLE. IF SIGNER IS A PARTNERSHIP, PLEASE
SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
PLEASE SIGN, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
DATE: ______________________, 2000
__________________________________
__________________________________
SIGNATURE(S)
__________________________________
SIGNATURE(S)
NOTE: This Proxy should be marked, signed by the stockholder(s) exactly as his
or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.
