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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, 1999 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)
Delaware 77-0423465
(State or other jurisdiction
(I.R.S. Employer Identification Number)
of incorporation or organization)
285 N. Wolfe Road 94086
Sunnyvale, California (Zip Code)
(address of principal executive offices)
Registrant's telephone number, including area code: (408) 773-9121
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
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,
2000, as reported on the Nasdaq National Market, was approximately
$81,267,000.
The number of shares of Common Stock outstanding as of March 10, 2000:
14,447,438 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
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PART I.................................................................... 1
ITEM 1. BUSINESS.......................................................... 1
ITEM 2. PROPERTIES........................................................ 20
ITEM 3. LEGAL PROCEEDINGS................................................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 20
PART II................................................................... 21
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 21
ITEM 6. SELECTED FINANCIAL DATA........................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 27
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 42
PART III.................................................................. 43
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 43
ITEM 11. EXECUTIVE COMPENSATION........................................... 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 45
PART IV................................................................... 45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-
K................................................................ 45
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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
temperature controlled radiofrequency ("TCRF") technology for the treatment of
upper airway disorders. The Somnus Somnoplasty(R) 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 syndrome ("OSAS"), enlarged turbinates and habitual
snoring. Our Somnoplasty System shrinks tissue in the upper airway by
utilizing automated TCRF 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.
Our clinically proven, patented, temperature controlled, radiofrequency
technology ensures predictable and consistent tissue volume reduction without
cutting or bleeding, reducing pain and post procedure complications. We have
received Food and Drug Administration ("FDA") and European clearance for the
use of the Somnoplasty System in the treatment of OSAS, Upper Airway
Resistance Syndrome ("UARS"), chronic turbinate hypertrophy and habitual
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 and a manufacturers representative group to
market our products in the United States. Our intention is to market the
Somnoplasty System primarily to:
. ear, nose and throat physicians,
. oral maxillofacial surgeons,
. pulmonologists,
. sleep medicine specialists,
. allergists 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, 1999, we have an
installed base of 568 control units in the United States. We 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 Procedure.
We have a European Headquarters in The Netherlands primarily to manage
relationships with our 9 distributors throughout Europe. In addition we have 9
distributors in Latin America, Africa, Asia and the Pacific Rim.
On October 20, 1999 we announced our exclusive distribution agreement with
MC Medical, a subsidiary of Mitsubishi Corporation, to distribute the
Somnoplasty technology throughout Japan. We have applied for clearance to sell
our products in Japan through the "Shonin" process. We received clearance of
the S2 generator for tissue reduction in the head and neck area, for the
treatment of habitual snoring and OSAS. We are awaiting approval for the
disposable handpieces.
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At December 31, 1999, our commercial products included one control unit
model and three disposable devices designed to treat a variety of upper airway
disorders. Additional devices are under development. As of December 31, 1999,
in the United States, we had 29 issued patents, and an additional 22 pending
patent applications. We also had 3 issued foreign patents and 19 pending
foreign patent applications.
Business Strategy
Our strategy is to establish the Somnoplasty System, which utilizes our
proprietary temperature controlled radiofrequency technology, as the standard
of care for the management and 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,
. reduced morbidity,
. tissue shrinkage without cutting,
. 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 soft
palate/uvula, 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 OSAS/UARS. We intend to seek 510(k) clearance
of the Somnoplasty System for other new indications, some of which are
associated with OSAS. Clinical trials have recently begun for use of the
Somnoplasty System in the treatment of hypertrophic ("enlarged") tonsils.
In 2000, we plan to file for FDA clearance and, if such clearance is
obtained, to launch a tonsil handpiece to address the market for treatment of
enlarged tonsils, currently estimated at more than half a million annually.
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.
In the United States, our direct sales force of 10 representatives and one
sales representative group is supported by three clinical specialists whose
role is to support the physicians in the use of the system for increased sales
and patient satisfaction. In Europe our 9 distributors are managed from our
European
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headquarters in The Netherlands. Our sales in the rest of the world are
coordinated by the Director of International Sales, hired in 1999 and based in
Sunnyvale.
We may add additional sales personnel, representative groups, and
distributors as necessary to further penetrate markets in the United States
and around the world.
We have acquired and may acquire or grant licensed complementary technologies
and products and may continue to pursue this strategy in the future.
We 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 S2 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 Somnoplasty System.
Upper Airway Disorders
The upper airway comprises the passages in the nose, the back of the mouth,
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 OSAS/UARS, 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 Syndrome (OSAS)
OSAS 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 OSAS typically
experience ten or more such cycles per hour and experience two or more
clinical symptoms of OSAS, 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 OSAS 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,
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such as OSAS, insomnia and narcolepsy. They estimate that 20 million of these
people are afflicted with OSAS, 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 OSAS are diagnosed.
Chronic Turbinate Hypertrophy
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 OSAS.
Habitual 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, OSAS.
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 OSAS 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 OSAS
The most common treatment for OSAS 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 OSAS, its use has a
number of disadvantages, including:
. facial skin irritation,
. abdominal bloating,
. mask leaks,
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. sore eyes and
. headaches.
Additionally, CPAP is not a cure for OSAS 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 OSAS, 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
OSAS 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. If the surgical procedures
are not effective, it is sometimes difficult to successfully return to CPAP,
leaving the patient with few alternatives for further treating the condition.
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. According to several large population surveys, approximately 20% of
the population, or more than 50 million Americans, suffer from some type of
chronic rhinitis.
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. Further, surgical
resection of turbinates may impact functionality of the turbinates for
temperature control and hydration.
Treatment of Habitual Snoring
There are both nonsurgical and surgical methods for treating habitual
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
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Surgical treatment for habitual 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. 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 habitual
snoring. Snoring sufferers most often seek treatment for quality of life
rather than medical reasons.
The Somnus Solution: Somnoplasty
Our proprietary Somnoplasty System is designed to use temperature
controlled radiofrequency energy to provide a minimally-invasive, curative and
relatively painless treatment of upper airway disorders. The Somnoplasty
System includes an automated temperature controlled radiofrequency control
unit with continuous feedback for 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 TCRF 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 reabsorbed in approximately four to
eight weeks, reducing excess tissue volume.
Somnus believes that the primary advantages of the Somnoplasty System
include:
Our clinically proven, patented temperature controlled radiofrequency
technology ensures predictable and consistent tissue volume reduction without
cutting or bleeding, reducing pain and post procedure complications.
Minimal Discomfort and Reduced Recovery Time. The use of TCRF 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 OSAS 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 side effects
of standard and laser-assisted surgical operations.
Rapid Procedure Time. The Somnoplasty System, including patient preparation
and administration of local anesthesia, takes 15-45 minutes, for base of
tongue, while enlarged turbinates, soft palate/uvula procedures typically take
five to ten minutes. 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 minimally invasive compared to many minor surgical procedures
performed by dentists in their offices.
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We believe the other 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, and soft
palate/uvula. These devices deliver temperature controlled 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 soft palate/uvula
and turbinate devices are commercially available in Europe.
Somnoplasty Product Line
Disposable Devices
SP 1010. The SP 1010 is a single needle deployable electrode device for the
delivery of temperature 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 TCRF 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. The SP 1100 has a disposable
needle device with a reusable handle and cable assembly. It delivers the TCRF
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 TCRF
energy to the tongue for patients suffering from OSA. The SP 1200 has a
disposable needle device with a reusable handle and cable assembly. The SP
1200 delivers the TCRF energy through a coagulating needle electrode which is
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.
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 TCRF tissue volume reduction through the use
of continuous feedback on temperature. 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.
S2 Control Unit. The S2 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
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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 OSAS or Upper Airway Resistance Syndrome ("UARS").
The 510(k) clearance was based on the results of an 18-patient, single-center
clinical trial completed in June 1998. The data from this trial indicated that
patients may require two to nine 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.
In 1999, we had five new articles published in peer-reviewed journals, for
a total of nine published to date, giving us a broad clinical foundation. The
most recent was in the November issue of The Laryngoscope, written by Dr.
Timothy L. Smith, outlining a new study about the long-term effectiveness of
Somnoplasty to treat chronic nasal obstruction. Patients in the study showed a
significant decrease in the degree and frequency of nasal obstruction for one
year following Somnoplasty treatment.
Following the indication 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 OSAS. 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 OSAS. In addition, the S2 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. We
have submitted documentation to the Pharmaceutical Safety Bureau in Japan, and
anticipate a "Shonin" or product approval in 2000.
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 radiofrequency 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
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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 Somnoplasty System.
In fiscal 1999, 1998, and 1997 research and development expenses were
$5,773,000, $8,220,000 and $6,033,000 respectively. As of December 31, 1999,
our research and development staff consisted of 16 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 and a manufacturers
representative group to target primarily:
. ear, nose and throat physicians,
. oral maxillofacial surgeons,
. pulmonologists,
. sleep medicine specialists,
. allergists and
. other physicians who treat upper airway disorders.
As of December 31, 1999, the sales organization in the United States
consisted of 24 employees, including 3 clinical specialists. We intend to
expand our sales effort during 2000 through the addition of sales
representatives, clinical specialists and customer service representatives, as
appropriate.
During the fourth quarter of fiscal 1999, we hired a Director of
International Sales and Marketing to manage distributors in countries other
than the United States and Europe. We refer to this as the rest of the world
(ROW). We currently have 9 distributors distributing Somnus product in each of
Europe and ROW.
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
diagnosing and treating 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.
We have a European Headquarters in The Netherlands primarily to manage
relationships with 9 distributors throughout Europe. In addition we have 9
distributors in Latin American, Africa, Asia and the Pacific Rim.
On October 20, 1999 we announced our exclusive distribution agreement with
MC Medical, a subsidiary of Mitsubishi Corporation to distribute the
Somnoplasty technology throughout Japan. We have applied for
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clearance to sell our products in Japan through the "Shonin" process. We
received clearance of the S2 generator for tissue reduction in the head and
neck area, for the treatment of habitual snoring and OSAS. We are awaiting
approval for the disposable handpieces.
Our marketing and education efforts have been focused on early adopters
with emphasis on leading surgeons and sleep clinics. At present we have
systems in over half of the 108 ENT residency-training programs throughout the
United States. As we have approached saturation of the "early adopter" market
we have moved the focus of 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. We leased additional space in early 2000, to expand the area
available for manufacturing. The manufacturing process consists primarily of
assembly of internally manufactured, purchased components and subassemblies.
Disposable products are processed 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.
The S2 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.
During 1998 and 1999 we operated from a 20,000 square feet facility, of
which approximately 6,300 square feet was dedicated to manufacturing,
warehousing and distribution. In January 2000 we leased an additional building
containing 20,000 square feet, of which we will use approximately 12,500
square feet for administrative personnel and plan to sublease the remainder
for one to two years. We will allocate an additional 3,000 to 5,000 square
feet of the current facility to manufacturing personnel.
Our direct labor force includes one shift five days per week assembling
control units and 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.
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Dependence upon Patents and Proprietary Technology; Risk of Infringement
In the United States, at December 31, 1999, we had 29 issued patents, 2
allowed patents and an additional 22 pending patent applications. We also had
3 issued foreign patents and 19 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.
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
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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.
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 physician
requirements. In the treatment of habitual 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 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. Other companies offer products which
use radiofrequency for the treatment of upper airway disorders. There can be
no assurance of our ability to differentiate our products with temperature
control feature from these products. This could adversely affect our future
business, financial condition and results of operations. 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 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
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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 OSAS.
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) 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.
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We intend to seek 510(k) clearance of the Somnoplasty System for new
indications, some of which are associated with the management and treatment of
upper airway disorders with OSAS. 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
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
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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.
Japan
We have applied for clearance to sell our products in Japan through the
"Shonin" process. We received clearance of the S2 generator for tissue
reduction in the head and neck area, for the treatment of habitual snoring and
OSAS. We are awaiting approval for the disposable handpieces. While we
anticipate clearance of disposable handpieces this year, there can be no
assurance this will occur.
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 Payers") to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Certain Third-Party Payers 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
Payers may be independent of the practice's cost incurred for the specific
case and the specific devices used. Medicare and other Third-Party Payers are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products. The Company has recently been notified
that the Health Care Financing Administration (HCFA) believes that existing
coding is appropriate for Medicare reimbursement for the use of the
Somnoplasty procedure in treating OSAS/UARS.
In the United States, we do not anticipate that the Somnoplasty System will
be subject to reimbursement for the treatment of habitual snoring.
Traditionally, sufferers of snoring have paid for surgical and non-surgical
treatment and devices directly. However, the current treatment of OSAS 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 payers.
We believe that the Somnoplasty System is reimbursed, currently less than
50 percent of the time, for the treatment of base of the tongue for OSAS under
existing reimbursement codes, based on physician endorsement and the
demonstration of improved quality of life for specific patient groups. We are
working to raise the reimbursement level. 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
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of life or that reimbursement will ever be available for our products. Our
clinical sites do not reimburse us for the Somnoplasty System control units or
disposable devices.
Because our devices have been relatively recently launched for the
treatment of OSAS/UARS (base of tongue) 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 Payers 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 habitual
snoring will be a reimbursable expense. We believe that various levels of
reimbursement will be available in international markets for treatment of
OSAS/UARS (base of tongue) 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
Payers will not otherwise adversely affect the demand for our existing
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, 1999, we employed 108 individuals full time. Of our
total work force, 47 employees are engaged in manufacturing, 16 employees are
engaged in research and development activities, 30 employees are engaged in
sales and marketing activities and 15 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.
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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, 1999, we
have had total revenues of approximately $21.6 million and incurred cumulative
losses of approximately $48.3 million. We expect to significantly increase
spending over the next several years with respect to sales and marketing,
manufacturing and to a lesser extent, ongoing research and development efforts
and clinical trials, and expect 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 OSAS/UARS, chronic turbinate hypertrophy and habitual
snoring. Market acceptance will depend, in large part, upon the effectiveness
of the Somnoplasty System over time.* There can be no assurance that the
procedure will provide a permanent, curative treatment for patients.
Independent factors, such as aging and weight gain, may, over time, lead to
the enlargement of tissue in areas previously treated by our procedure.* Such
regrowth of tissue could require further treatments, making the procedure a
potentially less attractive alternative to existing surgical and non-surgical
procedures, which could have a material adverse effect upon our business,
financial condition and results of operations.
Several factors will impact our ability to achieve market acceptance.
TCRF tissue volume reduction in the upper airway is a new and novel
development. Market acceptance of this procedure for the treatment of OSAS,
enlarged turbinates and habitual snoring could be adversely affected by
numerous factors, including:
. the lack of availability of third-party reimbursement,
. cost of the procedure,
. clinical acceptance,
. differentiation of our temperature control feature,
. 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 habitual snoring.* Market acceptance of the Somnoplasty System for the
treatment of OSAS and chronic turbinate hypertrophy will depend, in large
part, upon the availability of third-party reimbursement for each of those
indications, which is not assured.*
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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.
Differentiation. We believe our temperature controlled radiofrequency
technology provides more predictable and consistent tissue volume reduction
than competing radiofrequency products. There can be no assurance that we will
be able to successfully differentiate our technology from competing products.
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
OSAS than snoring which can require from one to nine treatments.* 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
habitual snoring, turbinate reduction, OSAS/UARS, and other potential
indications will also depend in part upon physician recommendations as well as
other factors, including the effectiveness and reliability of the procedure as
compared to existing surgical and non-surgical procedures.* There can be no
assurance that the Somnoplasty System will be accepted by the patient
community or that market demand for such system will be sufficient to allow us
to achieve profitable operations. In addition, publicity arising from any
adverse outcome or other problem occurring in the treatment of a Somnoplasty
patient for any reason, particularly during this early phase of the
commercialization of the Somnoplasty System, could materially adversely affect
patient demand for the procedure. Failure of the Somnoplasty System, for
whatever reason, to achieve significant patient acceptance would have a
material adverse effect on our business, financial condition and results of
operations.
We have limited direct sales and marketing experience.
We have only limited experience selling and marketing the Somnoplasty
System for the treatment of OSAS, chronic turbinate hypertrophy and habitual
snoring. We are directing our sales effort in the United States on private
practices, clinics, hospitals and sleep clinics through a direct sales force
and a manufacturers representative group. 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 may
require 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
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<PAGE>
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.*
In the United States, our direct sales force of 10 representatives and one
sales representative group is supported by three clinical specialists whose
role is to support the physicians in the use of the system for increased sales
and patient satisfaction. In Europe our 9 distributors are managed from the
European headquarters in The Netherlands. Our sales in the rest of the world
are coordinated by the Director of International Sales, hired in 1999 and
based in Sunnyvale.
We may add additional sales personnel, representative groups, and
distributors as necessary to further penetrate markets in the United States
and around the world.
The success of our future strategic or distributor relationships, will
depend on the other parties' ability to perform the role contemplated by us.*
We may have limited or no control over the resources that any particular
strategic party or distributor devotes to our relationship with us. There can
be no assurance that we will be successful in locating or finalizing
agreements with further qualified parties with whom to enter into additional
strategic or distributor relationships or that any such relationships can be
maintained or will ultimately prove beneficial to us. In the event we are not
successful in developing such additional relationships, or if such
relationships do not prove to be successful, our business, financial condition
and results of operations would be materially adversely affected.
International sales of the Somnoplasty System are subject to numerous risks.
Distribution, pricing and marketing structures, as well as regulatory
requirements, vary significantly from country to country. Additionally, such
sales can be adversely affected by:
. limitations or disruptions caused by the imposition of government
controls,
. difficulty in obtaining export licenses,
. political instability,
. trade restrictions,
. changes in foreign tax laws or tariffs or other trade regulations,
. difficulties coordinating communications among and managing international
operations,
. the risk that distributors will fail to effectively promote our products,
. the risk of financial instability of distributors,
. fluctuations in overseas economic conditions and international currency
exchange rates,
. increase 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.
The S2 control unit is manufactured entirely by Somnus. There can be no
assurance that we will not experience design or production issues as Somnus
manufactures these units. In addition, certain parts in our
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<PAGE>
control unit may be discontinued by their manufacturers. We may have to have
such parts specifically manufactured or redesign the unit to use other
available parts. 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.
We are dependent on single-source suppliers for components.
We purchase certain key components of our products from single-source
suppliers. There can be no assurance that the components obtained from the
single-source suppliers will continue to be available in adequate quantities
or, if required, that we will be able to locate alternative sources of such
components on a timely and cost-effective basis. To date, we have not
experienced significant adverse effects resulting from any shortage of
components. However, there can be no assurance that the single-source
suppliers will meet our future requirements for timely delivery of components
of sufficient quality and in sufficient quantity.* The components may take
several months to procure, and a significant increase of orders could lead to
significant delays and control unit or device shortages. Such delays or
shortages, particularly as we scale up our manufacturing activities in support
of sales and distributor orders, would have a material adverse effect on our
business, financial condition and results of operations.
We are dependent upon key personnel.
Our future success depends in significant part upon the continued service
of certain key scientific, technical and management personnel and our
continuing ability to attract and retain highly qualified scientific,
technical and managerial personnel.* Competition for such personnel is
intense, and there can be no assurance that we can retain our key scientific,
technical and managerial personnel or that we can attract, assimilate or
retain other highly qualified scientific, technical and managerial personnel
in the future. We have taken steps to retain our key employees, including the
granting of stock options that vest over time. The loss of key personnel,
especially if without advanced notice, or the inability to hire or retain
qualified personnel could have a material adverse effect upon our business,
financial condition and results of operations.
Due to the factors noted above, our future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings from 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 lease an additional 20,000 square foot light industrial
facility in Sunnyvale, California under a lease that terminates in 2002, with
an option to extend to 2005. We intend to sub-lease about 7,500 square feet of
this additional facility for one to two years. We believe that our facilities
are adequate to meet our current requirements. In addition, we lease an
approximately 2,500 square foot sales office facility in Windhaven, 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been quoted on the Nasdaq National Market under the
symbol SOMN since our initial public offering on November 5, 1997. Prior to
such time, there was no public market for the Common Stock. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the Common Stock as reported on the NASDAQ National Market:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- -------- --------
<S> <C> <C>
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
1999: First Quarter........................................ $ 3 7/8 $2 1/4
1999: Second Quarter....................................... $ 3 1/4 $2 1/8
1999: Third Quarter........................................ $ 3 5/16 $2 1/8
1999: Fourth Quarter....................................... $ 2 3/4 $1 7/16
</TABLE>
As of March 10, 2000, the number of common stockholders of record was 130.
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, 1999, the approximate amount of net proceeds used from the
Offering were $11.1 million for research and development, clinical trials and
regulatory matters, $9.0 million to manufacture product and further develop
manufacturing expertise and capabilities, $21.8 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 $1.9
million for the acquisition of fixed assets.
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
described in the Offering prospectus.
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ITEM 6. SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Product revenues................................ $ 11,665 $ 7,356 $ 2,574
Cost of sales................................... 6,468 5,565 3,110
-------- -------- --------
Gross Margin.................................... 5,197 1,791 (536)
Operating expenses:
Research and development....................... 5,733 8,220 6,033
Selling, marketing, general and
administrative................................ 14,053 14,953 6,741
-------- -------- --------
Total operating expenses..................... 19,786 23,173 12,774
-------- -------- --------
Loss from operations............................ (14,589) (21,382) (13,310)
Interest and other income....................... 1,439 2,059 735
Interest expense................................ -- (5) (182)
-------- -------- --------
Net loss........................................ $(13,150) $(19,328) $(12,757)
======== ======== ========
Net loss per share, basic and diluted........... $ (0.92) $ (1.41) $ (3.02)
======== ======== ========
Shares used in computing net loss per share,
basic and diluted.............................. 14,242 13,717 4,224
======== ======== ========
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $ 14,888 $ 32,280 $ 45,145
Short-term investments.......................... 4,972 -- --
Working capital................................. 15,138 27,742 43,736
Total assets.................................... 24,798 36,512 48,227
Accumulated deficit............................. (48,332) (35,182) (15,854)
Total stockholders' equity...................... 16,825 29,428 45,620
</TABLE>
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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 temperature controlled radiofrequency technology for
the treatment of upper airway disorders. Our Somnoplasty 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 syndrome, OSAS, chronic turbinate hypertrophy and
habitual snoring.
Our operations in 1996 and 1997 consisted largely of research and
development, product engineering, seeking clearance of our products from the
Food & Drug Administration (FDA), 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, beginning in June 1997. One
month later, after receiving 510(k) clearance from the FDA for the use of the
Somnoplasty System to treat habitual snoring, we began direct sales of the
Somnoplasty System in the United States. We received FDA clearance to treat
chronic turbinate hypertrophy in December 1997 and OSAS in November 1998.
During the third quarter of fiscal 1998 we established a European headquarters
in The Netherlands.
During 1999, we continued to build our direct sales force in the United
States. Presently, the sales force consists of a Vice President of Sales and
Marketing, two domestic regional sales managers, ten domestic sales
representatives, one independent representative group and three clinical
specialists. During 1998, we hired a Vice President and General Manager of
European Sales and Marketing to manage distributors in European countries.
During the fourth quarter of 1999, we hired a Director of International Sales
to manage our 9 distributors in countries other than the United States and
Europe. We anticipate significant short-term expenditures in the development
of our direct and indirect sales infrastructure.*
Product shipments of control units and disposable devices are made directly
from our facility in Sunnyvale, California to domestic customers and
international distributors. As the Company's sales have grown, the dollar
volume of products has shifted from a mix of about 68 percent control units
and 32 percent disposables during 1998 to a mix of about 38 percent control
units and 62 percent disposables during the fourth quarter of 1999.
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.* 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.
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<PAGE>
As of December 31, 1999, we have incurred cumulative losses from inception
of approximately $48,332,000. 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, as well as due to costs
associated with the implementation of the appropriate infrastructure to
support and grow the business operations.* 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 our ability to market our products in the United States
and internationally. Accordingly, interim period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indicators of likely future performance or annual operating results.
Our business and financial results could be materially adversely affected
in the event that we are unable to market the Somnoplasty System effectively,
anticipate customer demand accurately or effectively manage new product
launches, pricing and cost containment pressures in health care. Our
operations and financial results could also be significantly affected by
international factors, including oversight by numerous regulatory agencies,
changes in foreign currency exchange rates and foreign economic and political
conditions.
Results of Operations
Net revenues
Our revenues for 1999 and 1998 were derived primarily from sales of our
Somnoplasty System, consisting of the control units and disposable devices, to
private practices, hospitals, clinics and sleep clinics. Net revenues
increased in 1999 to $11,665,000 from $7,356,000 in 1998 and $2,574,000 in
1997. The year over year increase was $4,309,000 or 59 percent from 1998 to
1999 and $4,782,000 or 186 percent from 1997 to 1998. These increases were due
to both the increased sale of control units, boosted by the introduction of
the new S2 control unit during the third quarter of 1998 and increased
disposable handpiece shipments driven off the higher installed base and an
increased use of disposable devices per control unit. During 1999, about 88
percent of net revenues were attributable to sales to customers in the United
States and about 12 percent from Europe and the rest of the world. This
compares with about 93 percent domestic sales in 1998, with Europe and the
rest of the world about 7 percent.
Traditionally, the sale of control units has been the major part of our
total revenues. In 1998 about 68 percent of our domestic revenue came from the
sale of control units, with disposable handpieces representing about 32
percent. In 1999, only 46 percent of our domestic revenue represented sales of
control units, with disposable handpieces representing 54 percent of revenue.
In the fourth quarter of 1999, handpieces represented about 62 percent of
total sales compared to the fourth quarter of 1998 where disposables
represented 42 percent of revenue. We expect disposable devices to increase as
a percentage of total revenue, year over year, as we implement sales programs
that reduce the price of control units.*
Cost of sales and gross profit
Cost of sales consists of raw materials, subassemblies and completed
electronics, quality assurance and warranty costs. Our gross profit increased
to $5,197,000 in 1999, or 45 percent gross margin, from $1,791,000
representing a 24 percent gross margin in 1998. During 1997, our initial year
of product sales, we sustained a negative gross profit of ($536,000), due to
manufacturing start up costs. During 1999 and 1998 increased volume and cost
reduction efforts contributed to better efficiency in our manufacturing
process. Cost of sales included a one-time charge of approximately $200,000
relating to certain manufacturing process issues which were experienced in the
fourth quarter of 1998. We believe that cost of sales will increase in
absolute dollars but may fluctuate as a percentage of revenues depending on
volume and product mix.*
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<PAGE>
Research and development expenses
Research and development expenses for 1999 were $5,733,000, compared to
$8,220,000 for the prior year, a decrease of $2,487,000 or 30 percent.
Research and development expenses are comprised of salaries, prototype
development costs, costs associated with intellectual property, and clinical
trial and regulatory approval expenses. The decrease in 1999 expenses was
primarily due to a shifting of focus over a wide range of activities. We
reduced clinical trial expenses by $659,000, reduced prototype and engineering
expenses by $408,000, intellectual property and patent expenses by $556,000
and lowered personnel costs in the research and development category by
$578,000. These lower expenses resulted principally from our previously
receiving FDA approval for three indications and the introduction of our S2
control unit in 1998, thus reducing our 1999 activity in research and
development.
From 1997 to 1998 our research and development expenses increased from
$6,033,000 to $8,220,000. This increase of $2,187,000 or 36 percent was
primarily due to increased salaries and employee related expenses of
$2,533,000 in 1998 versus $1,794,000 in 1997, increased consulting fees of
$1,145,000 compared to $400,000, and increased patent legal expenses of
$835,000 versus $369,000 in the prior year period.
Selling, marketing, general and administrative
Selling, marketing, general and administrative ("SG&A") expenses for 1999
were $14,053,000 compared to $14,953,000 for 1998 a decrease of approximately,
$900,000 or 6 percent. SG&A expenses consist of sales salaries, sales and
marketing expenses, executive salaries, professional fees (including
consulting, accounting, legal and risk management), facilities overhead,
accounting and human resources and general office administration expenses.
The decrease in SG&A from 1998 to 1999 results from a decrease in one-time
charges incurred in 1998 of approximately $1,600,000 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, offset by increased
advertising expenses of about $357,000 and increased investment in the
European sales effort of about $268,000. Selling, general and administrative
("SG&A") expenses for 1997 were $6,741,000 compared to $14,953,000 for 1998,
an increase of approximately $8,212,000 or 122 percent, including
approximately $1,600,000 in one-time charges in 1998. The other increases in
SG&A costs are primarily due to increased salaries and employee related
expenses of $5,213,000 due to increased headcount, higher levels of commission
on higher sales volumes, and the opening of the European headquarters.
Interest and other income
Interest and other income for 1999 was $1,439,000, compared to $2,059,000
for 1998 and $735,000 for 1997. The increase from 1997 to 1998 is attributable
to interest income earned by Somnus on an increased outstanding balance of
cash, cash equivalents and short-term investments, invested from the proceeds
of the IPO. In 1999 interest income decreased as invested cash balances
decreased. Interest expense was $0 for 1999, compared to $5,000 in 1998 and
$182,000 in 1997. The decrease was due to the repayment of borrowings under
the equipment lease line of credit.
Net loss
The net loss was $13,150,000 for 1999, $19,328,000 for 1998, and
$12,757,000 for 1997. We expect that our operating losses will continue for at
least the next couple of years, as we continue to invest substantial resources
in product development, manufacturing, sales, marketing and infrastructure
development.
Income Taxes
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $40,100,000 and $21,800,000, respectively. We
also had federal and California research and development tax
25
<PAGE>
credit carryforwards of approximately $700,000 and $700,000, respectively. The
federal net operating loss and credit carryforwards will expire at various
dates beginning in the year 2011 through 2019, if not utilized. The state of
California net operating losses will expire at various dates beginning in 2001
through 2004, if not utilized.
The deferred tax asset on the balance sheet has been fully offset by a
valuation allowances.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Liquidity and Capital Resources
Since inception through December 31, 1999, Somnus has financed its
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 $43,800,000 from our IPO,
net of costs of $4,500,000.
Cash and cash equivalents and short-term investments at December 31, 1999
were $19,860,000 compared to $32,280,000 at December 31, 1998.
Net cash used in operating activities was approximately $11,695,000 for the
year ended December 31, 1999, compared to $12,438,000 for 1998 and $9,521,000
in 1997. 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 other changes in operating assets and liabilities. Net cash
used in investing activities for capital expenditures was approximately
$776,000 for 1999, compared to $752,000 for 1998 and $1,957,000 for 1997.
Net cash provided by financing activities was approximately $51,000 for the
year ended December 31, 1999, compared to $325,000 for 1998 and $47,795,000 in
1997. This was due to the exercise of stock options of approximately $340,000
in 1999 and $325,000 in 1998. The net cash provided by financing activities
for the twelve months ended December 31, 1997 primarily included the issuance
of preferred stock, borrowings under a lease line of credit and proceeds from
our IPO. During 1999, the Company repurchased $289,000 of its common stock.
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, 1999 is $189,000. We amortized
deferred compensation expenses of approximately $261,000 in the twelve months
ended December 31, 1999 compared to $2,811,000 and $1,252,000 for the
respective 1998 and 1997 periods. 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, 1999, our principal sources of liquidity consisted of
$19,860,000 in cash and cash equivalents and short term investments. There
were no other material unused sources of liquid assets at December 31, 1999.
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<PAGE>
We currently anticipate that our capital expenditure requirements will be
approximately $1.2 million for the next twelve months.* These requirements
relate primarily to the acquisition of additional leasehold improvements,
manufacturing equipment, computer hardware and software 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. During 1999 the Company
purchased 100,000 shares for a total of $289,000 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
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
or to scale back and eliminate certain sales and marketing initiatives. 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
about 4 months and a maximum maturity of 6 months. Due to the nature of short
term investments we have concluded that we do not have a material market risk
exposure.
27
<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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the Index at Item 14
(A) 2. These financial statements and schedule 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 auditing standards generally
accepted in the United Sates. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects, the information set forth therein.
/s/ Ernst & Young LLP
Palo Alto, California
February 4, 2000
28
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 14,888 $ 32,280
Short-term investments................................... 4,972 --
Accounts receivable, net of allowances of $724 and $662
at December 31, 1999 and 1998, respectively............. 1,906 1,329
Inventories.............................................. 1,181 806
Other current assets..................................... 164 411
-------- --------
Total current assets....................................... 23,111 34,826
Property and equipment..................................... 1,603 1,601
Other assets............................................... 84 85
-------- --------
$ 24,798 $ 36,512
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable......................................... $ 1,623 $ 1,521
Accrued liabilities...................................... 1,442 1,562
Accrued compensation..................................... 2,167 1,858
Accrued warranty......................................... 907 612
Accrued clinical costs................................... 547 675
Deferred revenue......................................... 1,287 856
-------- --------
Total current liabilities.................................. 7,973 7,084
Commitments
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, par value
$0.001 per share, no shares were outstanding at December
31, 1999 and 1998....................................... -- --
Common stock, 50,000,000 shares authorized, par value
$0.001 per share, shares issued and outstanding:
14,402,198 and 13,989,490 shares at December 31, 1999, and
1998 respectively......................................... 14 14
Additional paid-in capital................................. 65,332 65,046
Deferred stock compensation................................ (189) (450)
Accumulated deficit and accumulated comprehensive loss..... (48,332) (35,182)
-------- --------
Total stockholders' equity............................. 16,825 29,428
-------- --------
$24,798 $ 36,512
======== ========
</TABLE>
See accompanying notes.
29
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Product revenues................................ $ 11,665 $ 7,356 $ 2,574
Cost of sales................................... 6,468 5,565 3,110
-------- -------- --------
Gross Margin.................................... 5,197 1,791 (536)
Operating expenses:
Research and development....................... 5,733 8,220 6,033
Selling, marketing, general and
administrative................................ 14,053 14,953 6,741
-------- -------- --------
Total operating expenses........................ 19,786 23,173 12,774
-------- -------- --------
Loss from operations............................ (14,589) (21,382) (13,310)
Interest and other income....................... 1,439 2,059 735
Interest expense................................ -- (5) (182)
-------- -------- --------
Net loss........................................ $(13,150) $(19,328) $(12,757)
======== ======== ========
Net loss per share, basic and diluted........... $ (0.92) $ (1.41) $ (3.02)
======== ======== ========
Shares used in computing net loss per share,
basic and diluted.............................. 14,242 13,717 4,224
======== ======== ========
</TABLE>
See accompanying notes.
30
<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>
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)
------ ----- ------ --- ------- ----- ------ -------- --------
Balances at December 31,
1998................... -- -- 13,989 14 65,046 -- (450) (35,182) 29,428
Issuance of common stock
upon exercise of stock
options for cash....... -- -- 409 -- 116 -- -- -- 116
Amortization of deferred
compensation........... -- -- -- -- -- -- 261 -- 261
Acceleration of unvested
options................ -- -- -- -- 235 -- -- -- 235
Repurchase of common
stock.................. -- -- (100) -- (289) -- -- -- (289)
Issuance of shares under
Employee Stock Purchase
Plan................... -- -- 88 -- 189 -- -- -- 189
Issuance of shares under
the Patent Incentive
Program................ -- -- 16 -- 35 -- -- -- 35
Net loss and
comprehensive loss..... -- -- -- -- -- -- -- (13,150) (13,150)
------ ----- ------ --- ------- ----- ------ -------- --------
Balances at December 31,
1999................... -- $ -- 14,402 $14 $65,332 $ -- $ (189) $(48,332) $ 16,825
------ ----- ------ --- ------- ----- ------ -------- --------
</TABLE>
See accompanying notes.
31
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows used in operating activities
Net loss......................................... $(13,150) $(19,328) $(12,757)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation and
acceleration of unvested options.............. 496 2,811 1,252
Depreciation................................... 774 716 800
Net book value of property, plant and equipment
retirements................................... -- 257 476
Changes in operating assets and liabilities:
Other current assets........................... 247 (111) (242)
Accounts receivable............................ (577) (667) (662)
Inventories.................................... (375) (570) (236)
Other noncurrent assets........................ 1 (23) (58)
Accounts payable, accrued liabilities and
accrued warranty.............................. 277 2,041 1,022
Accrued compensation........................... 309 1,349 440
Accrued clinical costs......................... (128) 406 269
Deferred revenue............................... 431 681 175
-------- -------- --------
Net cash used in operating activities............ (11,695) (12,438) (9,521)
Cash flows used in investing activities
Purchase of short-term investments............... (4,972) -- --
Capital expenditures............................. (776) (752) (1,957)
-------- -------- --------
Net cash used in investing activities............ (5,748) (752) (1,957)
Cash flows provided by financing activities
Net proceeds from issuance of convertible
preferred stock................................. -- -- 4,940
Net proceeds from issuance of common stock....... 340 325 43,829
Repayment of shareholder loan.................... -- -- 3
Proceeds from borrowings under lease line of
credit.......................................... -- -- 1,956
Repayment of lease line of credit................ -- -- (2,933)
Repurchase of common stock....................... (289) -- --
-------- -------- --------
Net cash provided by financing activities........ 51 325 47,795
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (17,392) (12,865) 36,317
Cash and cash equivalents at beginning of
period.......................................... 32,280 45,145 8,828
-------- -------- --------
Cash and cash equivalents at end of period....... $ 14,888 $ 32,280 $ 45,145
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest........................... $ -- $ 5 $ 182
Supplemental schedule of non-cash investing and
financing activities
Property and equipment acquired under lease line
of credit....................................... $ -- $ -- $ 1,957
Deferred compensation related to grant of stock
options, net.................................... $ -- $ (60) $ 4,049
</TABLE>
See accompanying notes.
32
<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
management and treatment of upper airway disorders. Our Somnoplasty System is
intended to offer minimally-invasive, curative treatment alternatives for
disorders of the upper airway, including habitual snoring, obstructive sleep
apnea syndrome, and chronic turbinate hypertrophy. 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 habitual snoring and chronic turbinate
hypertrophy. In November 1998, we received an additional 510(k) FDA clearance
to treat Obstructive Sleep Apnea Syndrome ("OSAS").
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 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 recognized upon shipment to the final customer.
Allowances for product returns are provided 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 1999
or 1998.
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
33
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 net loss per share has 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 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 accounting
principles generally accepted in the United States 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 at standard cost
which approximates first-in, first-out (fifo) cost, or 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
34
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Cash Equivalents and Short-term Investments
Somnus classifies investments as cash equivalents if the maturity of an
investment is three months or less from the purchase date. Short-term
investments principally consist of time deposits and temporary money-market
instruments. Cash equivalents and short-term investments are stated at cost,
which approximates market value.
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. In 1999, Somnus wrote off $105,000 as expenses related to one
customer. All other losses were immaterial. There were no material losses on
individual customer receivables in 1998.
Advertising Expenses
We expense the costs of advertising as incurred. For the years ended
December 31, 1999, 1998 and 1997 advertising expenses were $865,000, $129,000,
and $890,000, respectively.
Comprehensive Loss
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
We have organized the business in one operating segment which includes
activities relating to development, manufacturing and marketing of medical
devices that utilize proprietary temperature controlled radiofrequency
technology for the management and treatment of upper airway disorders.
Substantially all of our assets are in the United States and through December
31, 1999 we have derived our revenue primarily from our operations in the
United States.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning June 15, 2000. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
35
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Financial Instruments
The following is a table of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Money market funds...................................... $ 4,694 $ 9,958
Certificates of deposit................................. 2,988 9,996
Commercial paper........................................ 11,910 11,947
-------- --------
19,592 31,901
Amounts classified as cash equivalents.................. $(14,620) $(31,901)
-------- --------
Short-term investments.................................. $ 4,972 $ --
======== ========
</TABLE>
Available for sale securities are recorded at amortized cost, which
approximates market value.
3. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Machinery and equipment................................... $ 1,239 $ 1,257
Computer equipment........................................ 1,140 862
Furniture and fixtures.................................... 762 610
Purchased software........................................ 404 317
------- -------
3,545 3,046
Less accumulated depreciation and amortization............ $(1,942) $(1,445)
------- -------
Property and equipment, net............................... $ 1,603 $ 1,601
======= =======
</TABLE>
4. Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
December
31,
-----------
1999 1998
------ ----
<S> <C> <C>
Raw materials.................................................... $ 406 $399
Work-in-process.................................................. 214 111
Finished goods................................................... 561 296
------ ----
$1,181 $806
====== ====
</TABLE>
36
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Commitments
We lease two facilities in Sunnyvale, California and one facility in the
Netherlands under operating lease agreements which expire on March 31, 2002,
February 28, 2000 and 2000, respectively.
Future payments under non-cancelable operating lease arrangements at
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Years ending December 31 (in thousands):
2000................................................................. $ 822
2001................................................................. 836
2002................................................................. 210
------
Total minimum payments............................................. $1,868
======
</TABLE>
Rent expense for the years ended December 31, 1999, 1998, and 1997 was
approximately $499,000, $417,000 and $353,000, respectively.
6. Related Party Transactions
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.
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 1998, we recorded a $50,000 one-time royalty fee. In June 1998 we
introduced our new generation S2 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 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 totaling $70,000 were received in 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. During 1999, sales
37
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of kits to this related party of $445,000 were included in total revenues. 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. No royalty payments have been received under the license agreement.
In addition, the Company's Chairman of the Board received a consulting fee of
$100,000.
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, 1998 and
1999, 340,000 and 6,000 shares, respectively, were subject to these repurchase
rights held by Somnus. No shares have been repurchased by Somnus as of
December 31, 1999.
Somnus has reserved approximately 4,517,000 shares of common stock for
future issuance under all stock option plans and stock purchase plans at
December 31, 1999.
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. During 1998, no
shares had been repurchased by Somnus. During 1999, we repurchased 100,000
shares.
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
38
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
grant, as determined by the board of directors. Nonstatutory options granted
under the plan are at prices not less than 85% of the fair value on the date
of the grant. 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. As of
December 31, 1999, a total of 4,081,898 shares of common stock have been
reserved for issuance under the Plan.
1997 Director Option Plan
In August 1997, our Board of Directors (the "Board") adopted the 1997
Director Option Plan ("Director Option Plan"). A total of 435,000 shares of
common stock have been reserved for issuance under the Director Option Plan
which provides for the grant of nonstatutory options to non-employee directors
of the Company.
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
enrollment 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
Shares Number Exercise Price
Available of Shares Per Share
--------- --------- ----------------
<S> <C> <C> <C>
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
Additional shares authorized for
issuance................................ 937 --
Options granted.......................... (2,015) 2,015 $2.37
Options exercised........................ -- (410) $0.26
Options canceled......................... 796 (796) $2.69
------ ----- -----
Balance at December 31, 1999.............. 1,096 3,421 $2.80
====== ===== =====
</TABLE>
39
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 and 1998, options to purchase 1,088,000 and 915,000
shares, respectively, were exercisable.
The following table summarizes information about options outstanding at
December 31, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Weighted Average Exercisable Options
-------------------------- Remaining --------------------------
Range of Number Weighted Average Contractual Life Number Weighted Average
Exercise of Shares Exercise Price (in years) of Shares Exercise Price
-------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.10-1.47 580 $0.87 8.39 239 $0.20
1.91-3.38 2,360 2.74 8.34 591 3.11
3.50-7.50 464 5.28 8.20 248 5.72
9.25-10.00 14 9.89 8.36 7 9.90
10.75-
10.75 3 10.75 8.03 3 10.75
---------- ----- ----- ---- ----- -----
$0.10-
10.75 3,421 $2.80 8.33 1,088 $3.12
========== ===== ===== ==== ===== =====
</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.
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 of options granted in 1999, 1998 and 1997 were estimated at
the date of grant using the minimum value method, assuming no dividends, an
expected life of four years, volatility of 112% for 1999, 70% for 1998, and a
nominal volatility for 1997, and a risk free interest rate of 6.0% for 1999,
5.2% for 1998, and 5.3% for 1997.
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.
40
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Year Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss........................ $ (15,065) $ (21,818) $ (12,868)
Pro forma basic and diluted net loss per
share.................................... $ (1.06) $ (1.60) $ (3.05)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, 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, 1999 and 1998 were 62,500.
Stock Compensation
We recorded deferred compensation of approximately $4,049,000 during the
year ended December 31, 1997. This amount 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 year 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 1999 or 1997. Deferred compensation expense was $261,000,
$2,811,000, and $1,252,000 respectively, during 1999, 1998, and 1997.
At December 31, 1999, Somnus has a total of $189,000 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 can
elect to contribute to the 401(k) Plan, beginning on the first of the month
following the start of their employment. Participants may contribute up to 15%
of salary on a pretax basis subject to certain limitations. We have the option
to provide matching contributions but have not done so to date.
9. Income Taxes
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $40,100,000 and $21,800,000, respectively.
The Company also had $700,000 of federal and $700,000 of California research
and development tax credit carryforwards. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2011
through 2019, if not utilized. The state of California net operating losses
will expire at various dates beginning in 2001 through 2004, if not utilized.
41
<PAGE>
SOMNUS MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Utilization of the Company's 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 the Company's deferred
tax assets and liabilities for federal and state income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred Tax Assets:.....................................
Net operating loss carry forwards....................... $ 14,900 $ 10,200
Research and other credits.............................. 1,100 700
Capitalized research expenses........................... 1,200 900
Other................................................... 1,200 800
-------- --------
Total Deferred Tax Assets................................ $ 18,400 $ 12,600
Valuation Allowance...................................... (18,400) (12,600)
-------- --------
Net Deferred Taxes....................................... $ -- $ --
======== ========
</TABLE>
Because of the Company's lack of earnings history , the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $5,800,000 and $6,800,000 during the years ended December 31,
1999 and December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
42
<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 2000 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...... 51 Chairman of the Board, Chief Executive Officer and
President
Robert D. McCulloch.. 38 Vice President Finance, Chief Financial Officer and
Chief Information Officer (Principal Financial and
Accounting Officer)
Ron 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 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.
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.
43
<PAGE>
Robert D. Campbell has served as Vice President of Sales and Marketing for
the Company since January 1999. From July 1998 to December 1998, 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 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 start up
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.
44
<PAGE>
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.
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, 1999 and 1998.
Consolidated Statements of Operations, for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statement of Stockholders' Equity, for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows, for the years ended December 31,
1999, 1998 and 1997 .
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 8K
during the three months ended December 31, 1999.
45
<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) Employment Letter Agreement dated May 8, 1996 between the
Registrant and Eric N. Doelling, and amendment thereto dated August
26, 1996.
10.7(1) 1997 Employee Stock Purchase Plan.
10.8(1) 1997 Director Option Plan.
10.9 Employment Letter Agreement dated July 15, 1998 between the
Registrant and Robert D. McCulloch.
10.10 Employment Letter Agreement dated October 20, 1998 between the
Registrant and John G. Schulte.
10.11 Amended Employment Letter Agreement dated November 2, 1998 between
the Registrant and Stuart D. Edwards.
10.12*(2) Patent License Agreement dated January 30, 1998 between the
Registrant and Medtronic, Inc.
10.13 Further Amendment to Employment Letter Agreement dated October 21,
1998 between the Registrant and Eric N. Doelling.
10.14(3) Consulting agreement dated December 28, 1998 between the Registrant
and Gary R. Bang.
10.15 Employment Letter Agreement dated January 28, 1999 between the
Registrant and John C. Meyer.
10.16*(4) Development and Supply Agreement
10.17 Employment Letter Agreement dated September 7, 1999 between the
Registrant and Brad L. Steadman.
10.18 Employment Letter Agreement dated September 27, 1999 between the
Registrant and Steven J. Ojala.
10.19 Employment Letter Agreement dated September 27, 1999 between the
Registrant and Edward Luttich
10.20 Lease effective December 1, 1999 between the Registrant and
American Advantech Corporation.
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 47).
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.
(2) Filed as an Exhibit to Somnus Form 10K for the year ended December 31,
1998 (File No. 000-23275) and incorporated herein by reference.
(3) Filed as an Exhibit to Somnus Form 10Q for the quarterly period ended
March 31, 1999 (File No. 000-23275) and incorporated herein by reference.
(4) Filed as an Exhibit to Somnus Form 10Q for the quarterly period ended June
30, 1999 (File No. 000-23275) and incorporated herein by reference.
46
<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.
By: /s/ John G. Schulte
--------------------------------
President and Chief Executive
Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ President, Chief Executive March 29, 2000
____________________________________ Officer and Director
(John G. Schulte)
/s/ VP Finance, Chief Financial March 29, 2000
____________________________________ Officer and Chief
(Robert D. McCulloch) Information Officer
(Principal Financial and
Accounting Officer)
/s/ Chairman of the Board of March 29, 2000
____________________________________ Directors
(Gary R. Bang)
/s/ Director March 29, 2000
____________________________________
(Abhi Acharya)
/s/ Director March 29, 2000
____________________________________
(Mark B. Logan)
/s/ Chief Technical Officer and March 29, 2000
____________________________________ Director
(Stuart D. Edwards)
/s/ Director March 29, 2000
____________________________________
(David B. Musket)
/s/ Director March 29, 2000
____________________________________
(Woodrow A. Myers, Jr.)
</TABLE>
47
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged
Beginning to Balance at
Year Costs End of Year
---------- ------- -----------
<S> <C> <C> <C>
Allowance for Doubtful Accounts Year ended
December 31, 1999............................. $661 $ 63 $724
Year ended December 31, 1998................... $ 70 $591 $661
Year ended December 31, 1997................... $-- $ 70 $ 70
Inventory Reserve Year ended December 31,
1999.......................................... $797 $ 33 $830
Year ended December 31, 1998................... $599 $198 $797
Year ended December 31, 1997................... $-- $599 $599
Return Reserves Year ended December 31, 1999... $391 $109 $500
Year ended December 31, 1998................... $-- $391 $391
Year ended December 31, 1997................... $-- $-- $--
</TABLE>
48
<PAGE>
Exhibit 10.9
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 10.10
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
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<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
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<PAGE>
EXHIBIT 10.11
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
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<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
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<PAGE>
EXHIBIT 10.13
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 10.15
January 28, 1999
John C. Meyer
621 Laurel Glen Terrace
Fremont, Ca 94539
510-353-1981
Dear John,
On behalf of Somnus Medical Technologies, Inc. (the "Company"), I am pleased to
offer you the position of Vice President, Human Resources, reporting to me,
President and Chief Executive 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 $6153.85. This equates to a
monthly salary of $13,333.33. Your salary will be payable (26
pay periods annually) 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. In addition, you will participate in
the current executive bonus program (see attached).
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.
4. Subject to grant by the Board of Directors, upon joining the
Company as an employee, you will receive an option to purchase
100,000 shares of Common Stock at the Company's current fair
market value on the date of grant. Twelve forty-eighths of the
shares shall vest twelve full calendar months following the
date of grant and one forty-eighth (1/48) of such shares shall
vest at the end of each full calendar month thereafter until
all such shares are exercisable, based
<PAGE>
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 six (6) 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 six (6) months provided you elect Cobra coverage.
10. In the event that you are terminated without cause, the
"Company" will extend to you a six (6) 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 six (6) months provided you elect Cobra coverage.
<PAGE>
Acceptance of this offer may be acknowledged by signing below and returning this
document to me. This offer expires January 31, 1999, 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,
John G. Schulte
President & CEO
JGS/
Signature ______________________
John C. Meyer
Date: ______________________
Start Date: ______________________
<PAGE>
Exhibit 10.17
September 7, 1999
Mr. Brad L. Steadman
37755 Brayton Street
Fremont, CA 95536
Dear Brad,
On behalf of Somnus Medical Technologies, Inc. (the "Company") I am pleased to
offer you the position of Vice President, Manufacturing, reporting to John
Schulte. Your first day of employment to be September 27, 1999. 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 be a regular
full-time employee entitled to PTO (paid time off), paid
holidays and benefits, pursuant to Somnus' policies and
procedures.
2. Your bi-weekly salary will be $6538.47. This equates to an
annual salary of $170,000. Your salary will be payable in
accordance with the Company's standard payroll policies
(subject to normal required withholding). You will
participate in the company's annual employee bonus program
(prorated for 1999). Under this program, which is based on
the company attaining certain annual financial goals, you
will be eligible to receive a 35% bonus at 100% of plan
achievement. The bonus may increase up to 52.5% at 115% of
plan achievement. A copy of the plan is enclosed. You will
receive a sign-on bonus of $30,000. This bonus will be paid
at the end of your first month's employment and is subject
to required federal and state withholding taxes. Should you
voluntarily leave the employment of the company within the
first year of employment this bonus is repayable within
thirty days of your termination.
3. Somnus has major medical, vision and dental insurance, as well
as life insurance for all regular full-time employees. You
will be entitled to accrue three weeks PTO (paid time off) per
year, which may be taken or accrued pursuant to our PTO policy
(your PTO will be prorated for 1999). The details of these
programs will be available upon your first day orientation
with Human Resources. 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. Subject to approval by the Board of Directors, you will
receive an option to purchase 100,000 shares of Common Stock
at the fair market value priced at the closing price on the
date the Board approves the grant. Twenty-five percent (25%)
of the option vests after you have completed one year of
employment. The remaining options vest at the rate of
one-forty-eighth (1/48th) per 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).
<PAGE>
September 7, 1999
Offer Letter
Page 2 of 2
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 Somnus,
or use in any way during your employment at Somnus, any
confidential information, trade secrets, or proprietary
materials or processes of any former employer, company or
individual for whom you have performed services. You further
confirm that by accepting this offer you will not breach any
contract or agreement to which you are a party.
6. All employment at Somnus is at-will as provided by California
law. This means that either party may terminate the employment
relationship at any time with or without notice or cause.
7. In compliance with the Federal Immigration Reform and Control
Act, you must present to Somnus Medical Technologies, Inc. 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.
8. In the event the company is acquired within twenty-four months
of your start date and such acquisition leads to the
elimination or transfer of your position to a location outside
of the Bay area, or you are terminated without cause, Somnus
will extend to you a six month severance package consisting of
your base salary plus the reimbursement of Cobra premiums for
six months provided you elect Cobra coverage.
Acceptance of this offer may be acknowledged by signing below and returning this
document to me. I've enclosed a second copy for your files.
Again, let me indicate how pleased we all are to extend this offer, and how much
we look forward to working with you.
Sincerely,
John Meyer
Vice President, Human Resources
Acceptance:
Signature _________________________ Date: ______________________
<PAGE>
Exhibit 10.18
September 27, 1999
Mr. Steven J. Ojala
P.O. Box 70
Park City, Utah 84060
Dear Steve,
On behalf of Somnus Medical Technologies, Inc. (the "Company") I am pleased to
offer you the position of Vice President, Clinical, Regulatory and Quality
Affairs, reporting to John Schulte, President and CEO. 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 be a regular
full-time employee entitled to PTO (paid time off), paid
holidays and benefits, pursuant to Somnus' policies and
procedures.
2. Your bi-weekly salary will be $7115.38. This equates to an
annual salary of $185,000.00. Your salary will be payable in
accordance with the Company's standard payroll policies
(subject to normal required withholding). You will
participate in the company's annual employee bonus program.
Since you will begin employment after this year's program
eligibility cut-off date (9/30/99) you will begin
participation in the company's 2000 program at the first of
the new year. Under this program, which is based on the
company attaining certain annual financial goals, you will
be eligible to receive a 35% bonus at 100% of plan
achievement. The bonus may increase up to 52.5% based on
exceeding plan goals. A copy of the 1999 plan is enclosed to
provide you with an overview of how this year's plan will be
administered.
3. You will receive a monthly housing allowance to offset your
housing related expenses in California. This allowance will be
paid to you during the first thirty-six months of your
employment and will be as follows:
Months 1 - 12 $1500 per month
Months 13 - 24 $1000 per month
Months 25 - 36 $ 750 per month
This housing allowance will be included in your paycheck and
will be subject to state and federal tax deductions.
<PAGE>
September 22, 1999
Offer Letter
Page 2 of 3
4. Somnus has major medical, vision and dental insurance, as well
as life insurance for all regular full-time employees. You
will be entitled to accrue three weeks PTO (paid time off) per
year, which may be taken or accrued pursuant to our PTO policy
(your PTO will be prorated for 1999). The details of these
programs will be available upon your first day orientation
with Human Resources. 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.
5. Subject to approval by the Board of Directors, you will
receive an option to purchase 100,000 shares of Common Stock
at the fair market value priced at the closing price on the
date the Board approves the grant. Twenty-five percent (25%)
of the option vests after you have completed one year of
employment. The remaining options vest at the rate of
one-forty-eighth (1/48th) per 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).
6. You will be required to sign a confidentiality and assignment
of proprietary inventions contract. Further, by accepting this
offer, you agree that you will not bring with you to Somnus,
or use in any way during your employment at Somnus, any
confidential information, trade secrets, or proprietary
materials or processes of any former employer, company or
individual for whom you have performed services. You further
confirm that by accepting this offer you will not breach any
contract or agreement to which you are a party.
7. All employment at Somnus is at-will as provided by California
law. This means that either party may terminate the employment
relationship at any time with or without notice or cause.
8. In compliance with the Federal Immigration Reform and Control
Act, you must present to Somnus Medical Technologies, Inc. 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.
<PAGE>
September 22, 1999
Offer Letter
Page 3 of 3
9. In the event the company is acquired within twenty-four months
of your start date and such acquisition leads to the
elimination or transfer of your position to a location outside
of the Bay area, or you are terminated without cause, Somnus
will extend to you a six month severance package consisting of
your base salary plus the reimbursement of Cobra premiums for
six months provided you elect Cobra coverage.
Acceptance of this offer may be acknowledged by signing below and returning this
document to me. I've enclosed a second copy for your files. This offer will
remain in effect until 5pm, September 29,1999.
Again, let me indicate how pleased we all are to extend this offer, and how much
we look forward to working with you.
Sincerely,
John Meyer
Vice President, Human Resources
Acceptance:
Signature _________________________ Date: ______________________
<PAGE>
Exhibit 10.19
September 25, 1999
Mr. Edward Luttich
6000 La Goleta Road
Goleta, CA 93117
Dear Ed,
On behalf of Somnus Medical Technologies, Inc. (the "Company") I am pleased to
offer you the position of Vice President, Research and Development, reporting to
John Schulte, President and CEO. In this position you will be an officer of the
company. 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 be a regular
full-time employee entitled to PTO (paid time off), paid
holidays and benefits, pursuant to Somnus' policies and
procedures.
2. Your bi-weekly salary will be $6153.85. This equates to an
annual salary of $160,000.00. Your salary will be payable in
accordance with the Company's standard payroll policies
(subject to normal required withholding). You will participate
in the company's annual employee bonus program. Under this
program, which is based on the company attaining certain
annual financial goals, you will be eligible to receive a 35%
bonus at 100% of plan achievement. Since you will begin
employment after the 1999 program's eligibility cut-off date
(9/30/99) you will begin participation in the company's 2000
program at the first of the year. A copy of the 1999 plan is
enclosed to provide you with an overview of this year's plan.
3. You will receive a relocation assistance payment of $30,000 to
offset the expenses associated with the sale and purchase of
permanent housing. This payment will be recoverable ratably if
you voluntarily terminate within twelve months of your hire
date.
4. We will provide two house-hunting trips to the Sunnyvale area.
We will provide up to four weeks temporary living assistance
while you are obtaining permanent housing. The company will
pay for the movement of your household goods.
<PAGE>
September 25, 1999
Offer Letter
Page 2 of 3
5. You will receive a monthly housing allowance to offset your
housing related expenses. This allowance will be paid to you
during the first twenty-four months of your employment. Months
1-12 will be $750 and months 13 - 24 will be $500. This
housing allowance will be included in your paycheck and will
be subject to state and federal tax deductions.
6. Somnus has major medical, vision and dental insurance, as well
as life insurance for all regular full-time employees. You
will be entitled to accrue three weeks PTO (paid time off) per
year, which may be taken or accrued pursuant to our PTO policy
(your PTO will be prorated for 1999). The details of these
programs will be available upon your first day orientation
with Human Resources. 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.
7. Subject to approval by the Compensation Committee of the Board
of Directors, you will receive an option to purchase 100,000
shares of Common Stock at the fair market value priced at the
closing price on the date the Committee approves the grant.
The options are approved at the first Compensation Committee
meeting following your start date. Twenty-five percent (25%)
of the option vests after you have completed one year of
employment. The remaining options vest at the rate of
one-forty-eighth (1/48th) per 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).
8. You will be required to sign a confidentiality and assignment
of proprietary inventions contract. Further, by accepting this
offer, you agree that you will not bring with you to Somnus,
or use in any way during your employment at Somnus, any
confidential information, trade secrets, or proprietary
materials or processes of any former employer, company or
individual for whom you have performed services. You further
confirm that by accepting this offer you will not breach any
contract or agreement to which you are a party.
9. All employment at Somnus is at-will as provided by California
law. This means that either party may terminate the employment
relationship at any time with or without notice or cause.
<PAGE>
September 25, 1999
Offer Letter
Page 3 of 3
10. In compliance with the Federal Immigration Reform and Control
Act, you must present to Somnus Medical Technologies, Inc. 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.
11. In the event the company is acquired within twenty-four months
of your start date and such acquisition leads to the
elimination or transfer of your position to a location outside
of the Bay area, or you are terminated without cause, Somnus
will extend to you a six month severance package consisting of
your base salary plus the reimbursement of Cobra premiums for
six months provided you elect Cobra coverage.
Acceptance of this offer may be acknowledged by signing below and returning this
document to me. I've enclosed a second copy for your files. This offer will
remain in effect until 5pm, October 29,1999.
Again, let me indicate how pleased we all are to extend this offer, and how much
we look forward to working with you.
Sincerely,
John Meyer
Vice President, Human Resources
Acceptance:
Signature _________________________ Date: ______________________
<PAGE>
Exhibit 10.20
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only
November 19, 1999, is made by and between American Advantech Corporation, a
- ----------------- ---------------------------------
California corporation ("Lessor")
- ---------------------------------------------------------------------------
and Somnus Medical Technologies, Inc., a Delaware corporation ("Lessee"),
---------------------------------------------------------------------
(collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and
commonly known as 750 East Arques Avenue, City of Sunnyvale
-------------------------------------------------------------
located in the County of Santa Clara, State of California
------------ -------------------
and generally described as (describe briefly the nature of the property and, if
applicable, the "Project", if the property is located within a Project) A
-------
free-standing office/light industrial building containing approximately 20,000
- -------------------------------------------------------------------------------
square feet, together with a paved parking lot and landscaped grounds.
- -------------------------------------------------------------------------------
("Premises"). (See also Paragraph 2)
- -------------------------------------------------------------------------------
1.3 Term: Two years and one months ("Original Term")
----------------- -----
commencing March 1, 2000 ("Commencement Date") and ending February 28, 2002
------------- -----------------
("Expiration Date"). (See also Paragraph 3)
1.4 Early Possession: See Addendum A ("Early Possession Date").
-----------------------
(See also Paragraphs 3.2 and 3.3)
1.5 Base Rent: $ See Addendum A per month ("Base Rent"), payable on
---------------------
the first day of each month commencing March 1, 2000
----------------- ----------------------------
(See also Paragraph 4)
[x] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $ 36,266.00
-------------------------------------
as Base Rent for the period January 25 through February 28, 2000
---------------------------------------------------
1.7 Security Deposit: $ 33,000.00 ("Security Deposit").
-----------
(See also Paragraph 5)
1.8 Agreed Use: General Office, training, storage, manufacturing and
---------------------------------------------------------
production of medical devices and other legally permitted uses.
- -------------------------------------------------------------------------------
(See also Paragraph 6)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See also Paragraph 8)
1.10 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
[x] Cushman & Wakefield represents Lessor exclusively ("Lessor's Broker");
--------------------- ("Lessor's Broker");
[x] Staubach Company represents Lessee exclusively ("Lessee's Broker"); or
--------------------- ("Lessee's Broker"); or
[ ] represents both Lessor and Lessee ("Dual Agency").
---------------------
(b) Payment to Brokers: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of 5.5% of the
----
total Base Rent for the brokerage services rendered by said Broker).
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (See also Paragraph 37)
-----------------------------------------------------------------
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 64 and Exhibits 1,
------ ------ -----
all of which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean and
free of debris on the Commencement Date or the Early Possession Date, whichever
first occurs ("Start Date"), and, so long as the required service contracts
described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30)
days following the Start Date, warrants that the existing electrical, plumbing,
fire sprinkler, lighting, heating, ventilating and air conditioning systems
("HVAC"), loading doors, if any, and all other such elements in the Premises,
other than those constructed by Lessee, shall be in good operating condition on
said date and that the structural elements of the roof, bearing walls and
foundation of any buildings on the Premises (the "Building") shall be free of
material defects. If a non-compliance with said warranty exists as of the Start
Date, Lessor shall, as Lessors sole obligation with respect to such matter,
except as otherwise provided in this Lease, promptly after receipt of written
notice from Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If, after the Start Date,
Lessee does not give Lessor written notice of any non-compliance with this
warranty within: (i) one year as to the surface of the roof and the structural
portions of the roof, foundations and bearing walls, (ii) six (6) months as to
the HVAC systems, (iii) thirty (30) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("Applicable Requirements") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of a non-
compliance with this warranty within six (6) months following the Start Date,
correction of that non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in Paragraph
6.2 (e) below) so as to require during the term of this Lease the construction
of an addition to or an alteration of the Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical modification of the
Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of
such work as follows:
PAGE 1 Initials /s/
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1997 - American Industrial real Estate Association
<PAGE>
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds three (3) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to three (3)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1(c); provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor,
in writing, within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure. If Lessor does not elect to
terminate, and fails to tender its share of any such Capital Expenditure, Lessee
may advance such funds and deduct same, with interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee elects not to finance
Lessor's share, or if the balance of the Rent due and payable for the remainder
of this Lease is not sufficient to fully reimburse Lessee on an offset basis,
Lessee shall have the right to terminate this Lease upon thirty (30) days
written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agent, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 Delay In Possession. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. Rent.
4.1 Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessors reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change of control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgement, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.
PAGE 2 Initials /s/ (illegible)
---------------
<PAGE>
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to neighboring properties. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, or waste whose presence,
use, manufacture, disposal, transportation, or release, either by itself or in
combination with other materials expected to be on the Premises, is either: (i)
potentially injurious to the public health, safety or welfare, the environment
or the Premises, (ii) regulated or monitored by any governmental authority, or
(iii) a basis for potential liability of Lessor to any governmental agency or
third party under any applicable statute or common law theory. Hazardous
Substances shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, and/or crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises which constitutes
a Reportable Use of Hazardous Substances without the express prior written
consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "Reportable Use" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under, or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of the
Premises or neighboring properties, that was caused or materially contributed to
by Lessee, or pertaining to or involving any Hazardous Substance brought onto
the Premises during the term of this Lease, by or for Lessee, or any third
party.
(d) Lessee Indemnification. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's obligations shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease, No termination,
cancellation or release agreement entered into by Lessor and Lessee shall
release Lessee from its obligations under this Lease with respect to Hazardous
Substances, unless specifically so agreed by Lessor in writing at the time of
such agreement.
(e) Lessor Indemnification. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(f) Investigations and Remediations. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.
(g) Lessor Termination Option. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessors expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent of $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds
or assurance thereof within the time provided, this Lease shall terminate as of
the date specified in Lessor's notice of termination.
6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, at the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a material violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.
PAGE 3 Initials /s/
----------
<PAGE>
7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in the maintenance of the
following equipment and improvements ("Basic Elements"), if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels,
(iii) fire extinguishing systems, including fire alarm and/or smoke detection,
(iv) landscaping and irrigation systems, (v) roof covering and drains, (vi)
driveways and parking lots, (vii) clarifiers, (viii) basic utility and feed to
the perimeter of the Building, and (ix) any other equipment, if reasonably
required by Lessor.
(c) Replacement. Subject to Lessee's indemnification of Lessor as set
forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereafter in effect to
the extent it is inconsistent with the terms of this Lease.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during this Lease as extended does not exceed $50,000 in the aggregate
or $10,000 in any one year.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) Indemnification. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein, Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.
(b) Removal. By delivery to Lessee of written notice from Lessor not
earlier than ninety (90) and not later than thirty (30) days prior to the end of
the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom clean and free of debris, and in good operating
order, condition and state of repair, ordinary wear and tear excepted. "Ordinary
wear and tear" shall not include any damage or deterioration that would have
been prevented by good maintenance practice. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee
Owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or groundwater
contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and
shall be removed by Lessee. The failure by Lessee to timely vacate the Premises
pursuant to this Paragraph 7.4(c) without the express written consent of Lessor
shall constitute a holdover under the provisions of Paragraph 26 below.
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8. Insurance; Indemnity.
8.1 Payment For Insurance. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an
invoice.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises
Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) Carried by Lessor. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. If the coverage is available and commercially appropriate, such policy
or policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b) Rental Value. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indeminity for such coverage shall be extended beyond the
date of the completion of repairs of replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to refelct the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger building,
or of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the premiums for the property insurance
of such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages against the other, for loss of or damage to its
property arising out of or incident to the perils required to be insured against
herein. The effect of such releases and waivers is not limited by the amount of
insurance carried or required, or by any deductibles applicable hereto. The
Parties agree to have their respective property damage insurance carriers waive
any right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury of damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which can reasonably be repaired in six (6) months or less from
the date of the damage or destruction.
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Lessor shall notify Lessee in writing within thirty (30) days from the date of
the damage or destruction as to whether or not the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect, if such funds or assurance are not received, Lessor shall then elect by
written notice to Lessee within ten (10) days thereafter shall either: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or (ii) have this Lease terminate thirty (30) days thereafter. Lessee
shall not be entitled to reimbursement of any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor, Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, and is not an insured loss, Lessor
shall have the right to recover Lessor's damages from Lessee, except as provided
in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of this Lease there is damage for which the cost to repair exceeds one (1)
month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired. All
other obligations of Lessee hereunder shall be performed by Lessee, and Lessor
shall have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.
(b) Remedies. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such notice
and such repair or restoration is not commenced within thirty (30) days
thereafter, this Lease shall terminate as of the date specified in said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "Commence" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 Termination - Advance Payments. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Definition of "Real Property Taxes. "As used herein, the term "Real
Property Taxes" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated
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with reference to the Building address and where the proceeds so generated are
to be applied by the city, county or other local taxing authority of a
jurisdiction within which the Premises are located. The term "Real Property
Taxes" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring during the term of this
Lease, including but not limited to, a change in the ownership of the Premises.
10.2
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In the event Lessee incurs a late charge on any
Rent payment, Lessor may, at Lessor's option, estimate the current Real Property
Taxes, and require that such taxes be paid in advance to Lessor by Lessee,
either: (i) in a lump sum amount equal to the installment due, al least twenty
(20) days prior to the applicable delinquency date, or (ii) monthly in advance
with the payment of the Base Rent. If Lessor elects to require payment monthly
in advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of taxes divided by the number of months remaining before
the month in which said installment becomes delinquent. When the actual amount
of the applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
applicable taxes. If the amount collected by Lessor is insufficient to pay such
Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All money paid to
Lessor under this Paragraph may be intermingled with other money of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may at the option of Lessor, be treated
as an additional Security Deposit.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) a change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of twenty-five percent
(25%) or more of the voting control of Lessee shall constitute a change in
control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may either: (i) terminate this Lease, or (ii) upon thirty (30) days written
notice, increase the monthly Base Rent to one hundred ten percent (110%) of the
Base Rent then in effect. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of
any obligations hereunder; or (iii) alter the primary liability of Lessee for
the payment of Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations from
any person other than Lessee pending approval or disapproval of an assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of Rent or performance shall constitute a waiver of estoppel of
Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a fee of $1,000 as
consideration for Lessor's considering and processing said request. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice
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from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease; provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a sublease
shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. a "Default" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "Breach" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder, whether to Lessor, when due, to
provide reasonable evidence of insurance or surety bond, or to fulfill any
obligation under this Lease which endangers or threatens life or property, where
such failure continues for a period of three (3) business days following written
notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) a Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 11 U.S.C. (S) 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph 13.1 (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.
13.2 Remedies. If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If more than two (2)
checks given to Lessor by Lessee shall not be honored by the bank upon which it
is drawn, Lessor, at its option, may require all future payments to be made by
Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or
without further notice or demand, and without limiting Lessor in the exercise of
any right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessors right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet or assign, subject
only to reasonable limitations. Acts of maintenance, efforts to relet, and/or
the appointment of a receiver to protect the Lessor's interests, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability
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under any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are hereinafter referrred to as "Inducement
Provisions," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor uner such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to seven percent (7%) of each such overdue
amount. The Parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to scheduled payments (such as Base
Rent) or within thirty (30) days following the date on which it was due for non-
scheduled payment, shall bear interest from the date when due, as to scheduled
payments, or the thirty-first (31st) day after it was due as to non-scheduled
payments. The interest ("Interest") charged shall be equal to the prime rate
reported in the Wall Street Journal as published closest prior to the date when
due plus four percent (4%), but shall not exceed the maximum rate allowed by
law. Interest is payable in addition to the potential late charge provided for
in Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform any obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(b) Performance by Lessee on Behalf of Lessor. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
Premises, or more than twenty-five percent (25%) of the land area portion of the
Premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation. Lessee
shall be entitled to any compensation for value of leasehold, Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. Brokers' Fee.
15.1 Additional Commission. In addition to the payments owed pursuant to
Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is located,
(c) if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease, or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then, Lessor shall pay
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.2 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker.
15.3 Representations and Indemnities of Broker Relationships. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, and/or attorneys' fees reasonably incurred with respect thereto.
16. Estoppel Certificates.
(a) Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's Rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
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(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including, but not limited to,
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease, in the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, and the
transferee's or assignee's written assumption, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined. Notwithstanding
the above, and subject to the provisions of Paragraph 20 below, the original
Lessor under this Lease, and all subsequent holders of the Lessor's interest in
this Lease shall remain liable and responsible with regard to the potential
duties and liabilities of Lessor pertaining to Hazardous Substances as outlined
in Paragraph 6 above.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of the individual partners of Lessor or its or their individual
partners, directors, officers or shareholders, and Lessee shall not seek
recourse against the individual partners of Lessor, or its or their individual
partners, directors, officers or shareholders, or any of their personal assets
for such satisfaction.
21. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Brokers have no responsibility with respect thereto respect to any default or
breach hereof by either Party. The liability (including court costs and
Attorneys' fees), of any Broker with respect to negotiation, execution, delivery
or performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. PostaI Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. a copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given three (3) days after the same
is addressed as required herein and three (3) days with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantee next
day delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the Postal Service or courier. Notices transmitted by facsimile
transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof, Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of monies or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions; Construction of Agreement. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
Parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the Parties, but rather
according to its fair meaning as a whole, as if both Parties had prepared it.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new
PAGE 10 Initials /s/
----------
<PAGE>
owner shall not: (i) be liable for any act or omission of any prior lessor or
with respect to events occurring prior to acquisition of ownership; (ii) be
subject to any offsets or defenses which Lessee might have against any prior
lessor, or (iii) be bound by prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"Prevailing Party" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "For Sale" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "For Lease" signs. Lessee may at any time place on or
about the Premises any ordinary "For Sublease" sign.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with all Applicable Requirements.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including, but not limited to, architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including, but not limited to,
consents to an assignment, a subletting or the presence or use of a Hazardous
Substance, shall be paid by Lessee upon receipt of an invoice and supporting
documentation therefor. Lessor's consent to any act, assignment or subletting
shall not constitute an acknowledgment that no Default or Breach by Lessee of
this Lease exists, nor shall such consent be deemed a waiver of any then
existing Default or Breach, except as may be otherwise specifically stated in
writing by Lessor at the time of such consent. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given. In the event that either Party disagrees with any determination made by
the other hereunder and reasonably requests the reasons for such determination,
the determining party shall furnish its reasons in writing and in reasonable
detail within ten (10) business days following such request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 Default. It shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) a Estoppel Certificate, or (d)
written confirmation that the guaranty is still in effect.
38. Quiet Possession. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 Multiple Options. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Defaults are cured, or (iii) if Lessee commits a
Breach of this Lease.
40. Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including
PAGE 11 Initials
----------
<PAGE>
the care and cleanliness of the grounds and including the parking, loading and
unloading of vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44. Authority. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. Multiple Parties. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] is [X] is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
- -------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
- ---------
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
- -------
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES ARE LOCATED.
- -------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: ADVANTECH Executed at: Sunnyvale, CA
---------------------- ---------------------------
on: 1-3-2000 on: Nov 19, 1999
------------------------------- ------------------------------------
By LESSOR: By LESSEE:
American Advantech Corporation Somnus Medical Technologies
------------------------------- ----------------------------
285 N. Wolfe Road
----------------------------
Sunnyvale, CA 94086
----------------------------
By: /s/ Thomas Chen By: /s/ John G. Shulte
------------------------------ ------------------------------------
Name Printed: Thomas Chen Name Printed: John G. Shulte
-------------------- --------------------------
Title: General Manager Title: President and CEO
--------------------------- ---------------------------------
By: /s/ Lucia Wang By: /s/ Casey McGlynn
------------------------------ ------------------------------------
Name Printed: Lucia Wang Name Printed: Casey McGlynn
-------------------- --------------------------
Title: Secretary Title: Secretary
--------------------------- ---------------------------------
Address: 750 E Arques Ave Address: 650 Page Mill Rd., WSGR
------------------------- -------------------------------
Sunnyvale, CA 94086 Palo Alto, CA 94304
------------------------- -------------------------------
Telephone: (408) 245-6678 Telephone: ( )
----------------------- -----------------------------
Facsimile: (408) 245-5678 Facsimile: ( )
----------------------- -----------------------------
Federal ID No. 68-0144624 Federal ID No. 27-0423465
------------------- -------------------------
NOTE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-
8777. Fax No. (213) 687-8616
12
<PAGE>
ADDENDUM TO LEASE
This Addendum is attached to, and forms a part of, the Standard
Industrial/Commercial Single-Tenant Lease (the "Lease") made by and between
American Advantech Corporation, a California corporation, as Lessor, and Somnus
Medical Technologies, Inc., a Delaware corporation, as Lessee, and dated as of
November 19, 1999.
--
50. The Base Rent under paragraph 1.5 shall be the sum of $32,000.00 per month
for the period from the Commencement Date until January 31, 2001 and the
sum of $33,000.00 per month from February 1, 2001 through the Expiration
Date. During each twelve-month period (commencing March 1, 2002 and each
anniversary of that date) within the Extended Term of this Lease (as
defined below), the Base Rent shall be the fair rental value of the
Premises for such twelve-month period, as determined either by (a)
agreement between Lessor or Lessee in writing or (b) by appraisal done by a
commercial real-estate broker having at least five (5) years experience in
leasing properties comparable to the Premises within the City of Sunnyvale
and/or the City of Santa Clara, California. Lessor and Lessee shall, in
good faith, attempt to agree on the selection of the appraiser at least 60
days before the beginning of the twelve-month period in question. Should
they fail to agree by that date, then either Lessor or Lessee may apply to
the South Bay Association of Commercial/Industrial Brokers for appointment
of the appraiser. The appraiser's determination shall be final and binding
on Lessor and Lessee. In no event shall the Base Rent for any twelve-month
period during the Original Term or Extended Term be decreased from the Base
Rent in effect for the preceding twelve-month period, notwithstanding the
fair rental value determined by appraisal.
51. Lessee shall have the right to extend the Original Term for a period of
three (3) years (the "Extended Term") by giving written notice of Lessee's
election to Lessor not sooner than nine (9) and not later than six (6)
months before the expiration of the Original Term, provided Lessee is not
in default under the Lease on the date of such notice or at the expiration
of the Original Term.
52. Paragraph 2.2 of the Lease is modified by adding the following sentence at
the end thereof: "Notwithstanding
<PAGE>
any other provision of this paragraph to the contrary, Lessee shall have no
obligation to correct any defect in the structural portions of the roof,
foundations and bearing walls, if such defect existed on the Early
Possession Date."
53. Paragraph 2.3(b) of the Lease is modified by adding the following sentence
at the end thereof: "Notwithstanding any other provision of this paragraph
and paragraph 7.1(c) to the contrary, for the purpose of allocating the
cost of any such Capital Expenditure which consists of the remediation of
any Hazardous Substance, the remediation shall be deemed to possess a
depreciable useful life of ten (10) years."
54. Paragraph 2.4 of the Lease is modified by adding the following sentence at
the end thereof: ". . . and (c) Lessee's acknowledgment in this paragraph
is made in reliance upon the warranties given by Lessor in paragraph 2.2
above."
55. Paragraph 6.2(d) of the Lease is modified by adding the following sentence
at the end thereof: "Lessee's indemnity shall not apply to any Hazardous
Substance that existed on the Premises before the Early Occupancy Date."
56. Paragraph 6.2(g) of the Lease is modified by adding the following sentence
at the end thereof: "If Lessor's investigation or remediation prevents
Lessee from occupying any portion of the building on the Premises, then
Base Rent shall be abated, during the period of time that Lessee is
prevented from occupying that portion, in proportion to the percentage of
the interior space of the entire building that Lessee is prevented from
occupying."
57. Paragraph 7.2 of the Lease is modified by adding the following sentence at
the end thereof: "Notwithstanding any other provision of this paragraph and
paragraph 7.1(a) above to the contrary, Lessor's obligation to repair and
maintain the Premises shall extend to the structural portions of the
foundation, roof, and walls of the building, unless Lessee's Alterations or
activities create the need for such repair or maintenance. Lessee shall pay
for only that portion of the cost of such structural item replaced which is
allocable to the remaining Original Term of this Lease (including any
Extended Term) as compared with the depreciable, useful life of the item."
14
<PAGE>
58. Paragraph 8.4(b) of the Lease is deleted.
59. Paragraph 9.2 of the Lease is modified by adding the following sentence
immediately preceding the second to last sentence thereof: "Lessor's
failure to deliver such written notice within such ten (10) day period
shall be conclusively deemed to constitute Lessor's election to terminate
the Lease."
60. Paragraph 9.3 of the Lease is modified by adding the following sentence
immediately after the second sentence thereof: "Basic Rent shall be abated
during the period of time between the date on which the Partial Damage
occurred and the date of termination of the Lease in proportion to the
percentage of the interior space of the building that Lessee is prevented
from occupying because of the Partial Damage."
61. Paragraph 9.6(b) of the Lease is modified by adding the following sentence
at the end thereof: "Lessor shall use due diligence in commencing such
repair or restoration."
62. Paragraph 10.1 of the Lease is modified by adding the following sentence at
the end thereof: "In the case of an assessment against the Premises whose
proceeds pay a bonded indebtedness of the assessing agency, only that
portion of the assessment corresponding to annual installment on the bond
amortized over the maximum term of the bond, together with interest at the
rate of ten percent (10%) per annum on the unamortized portion of principal
of the bond, shall be included in Real Property Taxes for any such tax
year."
63. Paragraph 12.1(b) of the Lease is deleted and the following substituted in
its place: "12.1(b) The acquisition of all of the outstanding shares of
Lessee by a single person or entity, whether or not followed by a merger of
Lessee with another corporation."
64. Paragraphs 1.4 and 3.2 of the Lease concerning Early Possession is modified
by adding the following: "Commencing on December 1, 1999 Lessee shall have
the right to occupy approximately 4,100 square feet of the building on the
Premises comprising the area marked on Exhibit 1, attached hereto and
incorporated herein by this reference (the "Occupied Area"). The period of
Early Occupancy shall end on the Commencement Date. During the period of
Early Occupancy Lessee shall pay rent to Lessor at the rate of $9,225.00
per month; and such rent shall be pro-rated for any period of Early
Occupancy which is a fraction of one month.
<PAGE>
Notwithstanding any provision of the Lease to the contrary, during the
period of Early Occupancy Lessor shall provide all utilities, shall be
obligated for all maintenance and repair, shall provide its customary
security service, and shall allow Lessee full and unrestricted access the
Occupied Area. Lessee shall maintain its own insurance coverage for damage
to its personal property and for workmen's compensation and for public
liability in amounts that would otherwise be required under the Lease. The
following provisions of the Lease shall not take effect during the period
of Early Occupancy: Paragraphs 1.5, 10, 11. Effective January 15, 2000,
Lessee shall have the right to occupy the entire Premises under all terms
and conditions of the Lease; provided that Lessee shall not be obligated
to pay Basic Rent until the Commencement Date (January 25, 2000)."
LESSEE
Somnus Medical Technologies, Inc.,
A Delaware corporation
/s/ John G. Shulte Dated: Nov 19 , 1999
- ------------------------- ----------
By: John G. Shulte,
----------------------
Its President
/s/Casey McGlynn Dated: Nov 19 , 1999
- ------------------------ ----------
By: Casey McGlynn
---------------------
Its Secretary
LESSOR
American Advantech Corporation,
A California corporation
By: /s/ (illegible) Dated: 1-3-2000
-------------------- ----------,
Its President
/s/ Lucia Wang Dated: Dec 22 , 1999
- ------------------------ -----------
By: Lucia Wang
---------------------
Its Secretary
16
<PAGE>
EXHIBIT 1
[BUILDING FLOORPLAN APPEARS HERE]
"OCCUPIED AREA" OUTLINED IN RED
-------------------------------
17
<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. 333-87787) 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 4, 2000, with respect
to the consolidated financial statements and schedule of Somnus Medical
Technologies, Inc., included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Palo Alto, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,888
<SECURITIES> 4,972
<RECEIVABLES> 2,630
<ALLOWANCES> 724
<INVENTORY> 1,181
<CURRENT-ASSETS> 23,111
<PP&E> 3,545
<DEPRECIATION> 1,942
<TOTAL-ASSETS> 24,798
<CURRENT-LIABILITIES> 7,973
<BONDS> 0
0
0
<COMMON> 65,346
<OTHER-SE> (48,521)
<TOTAL-LIABILITY-AND-EQUITY> 24,798
<SALES> 11,665
<TOTAL-REVENUES> 11,665
<CGS> 6,468
<TOTAL-COSTS> 6,468
<OTHER-EXPENSES> 19,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,150)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,150)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,150)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
