-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ut6Lc7HGrI3f3jld6GSr3dpZbkZ71LgH22itenlNoR2fU39zO/JJ8Q4BODWOwUe3 L5jYE2+wcNfX/LiG7ewv+A== 0001012870-97-002292.txt : 19971118 0001012870-97-002292.hdr.sgml : 19971118 ACCESSION NUMBER: 0001012870-97-002292 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19971117 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYMPHONIX DEVICES INC CENTRAL INDEX KEY: 0000930481 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770376250 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-40339 FILM NUMBER: 97722426 BUSINESS ADDRESS: STREET 1: 3047 ORCHARD PKWY CITY: SAN JOSE STATE: CA ZIP: 95134-2024 BUSINESS PHONE: 4082320710 MAIL ADDRESS: STREET 1: 3047 ORCHARD PKWY CITY: SAN JOSE STATE: CA ZIP: 95134-2024 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- SYMPHONIX DEVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------- CALIFORNIA (BEFORE REINCORPORATION) DELAWARE (AFTER REINCORPORATION) 3998 77-0376250 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
SYMPHONIX DEVICES, INC. 3047 ORCHARD PARKWAY SAN JOSE, CA 95134 (408) 232-0710 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------- HARRY S. ROBBINS CHIEF EXECUTIVE OFFICER SYMPHONIX DEVICES, INC. 3047 ORCHARD PARKWAY SAN JOSE, CA 95134 (408) 232-0710 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------- Copies to: J. CASEY MCGLYNN ALAN C. MENDELSON JOHN T. SHERIDAN PATRICK A. POHLEN ISSAC J. VAUGHN COOLEY GODWARD LLP DAVID J. SAUL FIVE PALO ALTO SQUARE WILSON SONSINI GOODRICH & ROSATI 3000 EL CAMINO REAL PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94306-2155 650 PAGE MILL ROAD (650) 843-5000 PALO ALTO, CA 94304 (650) 493-9300
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------- If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ------------------- CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED(1) REGISTERED PER SHARE OFFERING PRICE FEE(2) - --------------------------------------------------------------------------------------------- Common Stock $0.001 par value per share....... 2,645,000 $13.00 $34,385,000 $10,420 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
(1) Includes 345,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS + +OF ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) November 17, 1997 2,300,000 Shares [LOGO OF SYMPHONIX] COMMON STOCK -------------- All of the 2,300,000 shares of Common Stock, $0.001 par value per share (the "Common Stock"), offered hereby are being sold by Symphonix Devices, Inc. ("Symphonix" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "SMPX." -------------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================ Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - -------------------------------------------------------------------------------- Per Share................................... $ $ $ Total(3).................................... $ $ $ ================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the offering payable by the Company estimated to be $800,000. (3) The Company has granted the Underwriters an option, exercisable within 30 days after the date hereof, to purchase an aggregate of up to 345,000 additional shares at the Price to Public less Underwriting Discounts and Commissions to cover over-allotments, if any. If all such additional shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." -------------- The Common Stock is offered by the several Underwriters named herein when, as and if received and accepted by them, subject to their right to reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of certificates for the shares will be made at the offices of Cowen & Company, New York, New York on or about , 1998. -------------- COWEN & COMPANY UBS SECURITIES , 1998 The Company's family of products under development, vibrant soundbridges, are designed to work in the middle ear. [Illustration of Vibrant soundbridge in place and illustration of Floating Mass Transducer in middle ear] The Floating Mass Transducer (FMT) is attached to one ossicle. The patented FMT, Symphonix's core technology, mimics and amplifies the movement of the ear's vibratory structure. The Company's implantable hearing devices have not been approved for marketing by the United States Food and Drug Administration or any international regulatory authorities. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". Vibrant and Symphonix are registered trademarks and Floating Mass Transducer, FMT, Vibrating Ossicular Prosthesis, VORP and Audio Processor are trademarks of Symphonix Devices, Inc. 2 The external audio processor is magnetically held in place behind the ear and covered by the user's hair. [PHOTOGRAPH OF MAN WITH AUDIO PROCESSOR IN PLACE] The Vibrant TI, a totally implantable soundbridge with no external components, is in the early stages of development. The product is designed to incorporate the Company's proprietary microphone technology. [PHOTOGRAPH OF VIBRANT TI MODEL] [Symphonix Logo Appears Here] [PHOTOGRAPH OF THE VIBRANT P, WITH PROGRAMMING UNIT] The Vibrant P, a second generation programmable soundbridge (pictured above), is currently being implanted in clinical trials in Europe. The Vibrant D, a third generation programmable digital soundbridge, is under development. Hearing Management The first generation Vibrant soundbridge is currently being implanted in clinical trials in the United States and Europe. [PHOTOGRAPH OF VIBRANT SOUNDBRIDGE] The Company's implantable hearing devices have not been approved for marketing by the United States Food and Drug Adminis- tration or any international regulatory authorities. Vibrant and Symphonix are registered trademarks and Floating Mass Transducer, FMT, Vibrating Ossicular Prosthesis, VORP and Audio Processor are trademarks of Symphonix Devices, Inc. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as set forth in the Financial Statements or as otherwise indicated herein, information in this Prospectus gives effect to (i) the reincorporation of the Company from California to Delaware to be effected prior to the completion of this offering, (ii) the one-for-1.376 reverse split of the outstanding Common Stock to be effected prior to the completion of this offering and (iii) the conversion of all outstanding shares of Preferred Stock into shares of Common Stock, which will occur automatically upon the closing of this offering, and assumes that the Underwriters' over-allotment option is not exercised. See "Certain Transactions," "Description of Capital Stock" and "Underwriting." This Prospectus contains certain statements of a forward- looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which would cause actual results to differ materially from those indicated by such forward-looking statements. THE COMPANY Symphonix is a leader in the development of proprietary semi-implantable and implantable products, or soundbridges, for the management of moderate to severe hearing impairment. In 1994, mild to severe hearing impairment affected approximately 26 million people in the United States, or 10% of the population, of whom approximately 17 million people were classified as moderately or severely hearing impaired. The Company believes that its family of Vibrant soundbridges, designed to overcome the inherent limitations of traditional hearing devices, represent a novel approach in the management of hearing impairment. The Company's initial product under development, the Vibrant soundbridge, is a semi-implantable device which mechanically drives the three small bones of the middle ear to overcome the user's hearing impairment. The Company's second generation product, the Vibrant P programmable soundbridge, provides a greater degree of customization to address the specific needs of a particular user's hearing loss and expands the types of hearing loss that can be managed by the Company's products. The Vibrant soundbridge is designed for the management of moderate to severe sensorineural hearing impairment. Sensorineural hearing impairment accounts for the vast majority of adults who are hearing impaired and occurs typically as a result of aging or exposure to loud noise over a protracted period of time. The traditional approach to the management of mild to severe sensorineural hearing impairment has been the use of hearing aids, which were first introduced a hundred years ago. Hearing aids are acoustic drive devices that amplify sound to increase the movement of the ear drum, thereby indirectly vibrating the bones of the middle ear in an attempt to overcome the decreased sensitivity of the delicate sensory hair cells of the inner ear. Although there have been continued advancements in hearing aid technology, for optimal performance, all or part of the device must fit tightly in the ear canal which results in significant drawbacks, including distorted sound quality, acoustic feedback, poor localization, social stigma, discomfort and poor reliability. Despite the inherent limitations of hearing aids, in 1995, approximately 1.7 million hearing aids were sold in the United States, representing a retail market of approximately $1.2 billion. The United States market represents approximately 38% of the worldwide hearing aid market. The Company estimates that the worldwide retail market for hearing aids exceeded $3.0 billion in 1995. Rather than indirectly driving the ear's vibratory structure, the Vibrant soundbridge is a direct drive device which incorporates the Company's patented core technology, the Floating Mass Transducer ("FMT"). The FMT is a tiny transducer, smaller than a grain of rice, that is attached directly to the incus bone of the middle ear. The FMT converts sound into mechanical vibrations and enhances the natural movement of the bones of the middle ear, which in turn generate enhanced stimulation of the delicate 3 sensory hair cells of the inner ear. The Company believes that its direct drive soundbridges offer significant benefits, including improved sound quality and speech intelligibility, elimination of acoustic feedback, improved sound localization, minimized social stigma and improved reliability. The Company has three patents issued in the United States and 20 patents pending in both the United States and internationally covering a number of fundamental aspects of the FMT and related technologies. The Company is currently developing a family of Vibrant soundbridges, including the Vibrant D soundbridge, which is designed to permit an even greater degree of customization along with the additional benefit of digital signal processing, and the Vibrant HF soundbridge, which is designed to provide hearing correction to those individuals who have noise-induced hearing loss at high frequencies but relatively normal hearing at lower frequencies. In addition, the Company is in the early stage of developing versions of the Vibrant soundbridge that are totally implantable with no external components. The Company's soundbridges are designed to be implanted in a single ear in a two-hour, outpatient procedure which requires surgical techniques similar to those employed in common middle ear surgical procedures. The Company's strategy is to market its soundbridges initially to those specialists in otology who are currently most active in ear surgery and thereafter, to the general population of Ear, Nose and Throat ("ENT") surgeons. Because the surgical procedure for implanting the Vibrant soundbridge utilizes many of the same techniques employed by surgeons trained and experienced in otological procedures, the Company believes that surgeon training will not be a significant impediment to market acceptance. In September 1996, the Company initiated clinical trials of the Vibrant soundbridge in both the United States and Europe, and in July 1997 the Company initiated clinical trials of the Vibrant P soundbridge in Europe. As of October 31, 1997, 41 patients have been implanted with the Company's soundbridges of whom 37 have had the Audio Processor fitted and the soundbridge's performance evaluated. To date, the Company has received United States Food and Drug Administration ("FDA") approval of an Investigational Device Exemption ("IDE") to commence clinical testing of the Vibrant soundbridge. In the United States, Phase I testing limited to two sites and five patients has been completed. The Company intends to initiate a multi-site Phase II trial with ten additional patients, followed by a multi-site Phase III pivotal trial in approximately 85 patients. On October 3, 1997, the Company submitted a Phase I report and an IDE supplement to the FDA requesting modification and expansion to the next phase of clinical testing. On October 31, 1997, the Company received notification from the FDA that it would require additional audiologic and safety data prior to commencement of the next phase of clinical testing. On November 14, 1997, the Company submitted the additional information. The Company has completed its European clinical trial and is in the process of submitting the technical, preclinical and clinical data that it believes will be necessary, together with the previously obtained certifications, to satisfy the applicable regulatory requirements for commercial sales in the European Union ("EU"). The Company's objectives are to establish its family of Vibrant soundbridges as the standard of care worldwide for the management of moderate to severe hearing impairment and to establish Symphonix as the leader in the hearing management market. Key elements of the Company's strategy include: demonstrating improved quality of life, developing surgeon endorsement of the Company's family of soundbridges, leveraging the Company's patented core technology and protecting and enhancing the Company's proprietary position. The Company was incorporated under the laws of California in May 1994 and will be reincorporated under the laws of Delaware prior to the completion of this offering. The Company's principal executive offices are located at 3047 Orchard Parkway, San Jose, CA 95134. Its telephone number is (408) 232-0710. 4 THE OFFERING Common Stock to be offered by the Company.... 2,300,000 shares Common Stock to be outstanding after the offering(1)................................. 11,696,021 shares(1) Use of proceeds.............................. For research and development, including clinical trials; development of a sales and marketing organization; construction of a clean room and other capital expenditures; working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... SMPX
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM MAY 17, 1994 PERIOD FROM (DATE OF NINE MONTHS MAY 17, 1994 INCEPTION) YEARS ENDED ENDED (DATE OF TO DECEMBER 31, SEPTEMBER 30, INCEPTION) TO DECEMBER 31, ---------------- ---------------- SEPTEMBER 30, 1994 1995 1996 1996 1997 1997 ------------ ------- ------- ------- ------- ------------- STATEMENTS OF OPERATIONS DATA: Costs and expenses: Research and development........... $ 707 $ 3,307 $ 5,399 $ 3,801 $ 4,643 $ 14,056 General and administrative........ 141 625 1,047 830 1,330 3,143 ----- ------- ------- ------- ------- -------- Loss from operations.... (848) (3,932) (6,446) (4,631) (5,973) (17,199) Interest income, net.... 96 280 337 233 348 1,061 ----- ------- ------- ------- ------- -------- Net loss................ $(752) $(3,652) $(6,109) $(4,398) $(5,625) $(16,138) ===== ======= ======= ======= ======= ======== Pro forma net loss per share(2)............... $ (0.71) $ (0.59) ======= ======= Shares used in calculation of pro forma net loss per share(2)............... 8,546 9,533 ======= =======
SEPTEMBER 30, 1997 ----------------------- ACTUAL AS ADJUSTED(3) ------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments....... $11,528 $36,396 Total assets............................................ 12,557 37,425 Capital lease obligations, less current portion......... 406 406 Deficit accumulated during the development stage........ (16,138) (16,138) Total stockholders' equity.............................. 10,655 35,523
- -------- (1) Based upon the number of shares outstanding as of September 30, 1997. Excludes (i) 441,734 shares of Common Stock subject to outstanding options at a weighted average exercise price of $0.65 per share under the Company's 1994 Stock Option Plan and 223,683 shares reserved for future issuance thereunder (the "1994 Option Plan") and (ii) 33,611 shares issuable upon exercise of outstanding warrants to purchase Common Stock at a weighted average exercise price of $2.20 per share. See "Management--Incentive Stock Plans" and "Description of Capital Stock--Warrants." (2) See Note 10 of Notes to Financial Statements for an explanation for the computation of pro forma net loss per share. (3) Adjusted to reflect the sale of 2,300,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share after deducting estimated underwriting discounts and commissions and estimated offering expenses and the receipt of the net proceeds therefrom. See "Use of Proceeds" 5 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. The following principal factors should be carefully considered in evaluating the Company and its business before purchasing the Common Stock offered hereby. EARLY STAGE OF DEVELOPMENT Since the Company's inception in 1994, substantially all of the Company's resources have been dedicated to research and development, and the Company has not generated any revenue from product sales. All of the Company's products are in development and will require additional clinical trials and, in some cases, additional development and preclinical testing prior to the submission of a regulatory application for commercial use. Since the Company's products are currently in development, significant product revenues will not be realized for at least several years, if ever. There can be no assurance that any of the Company's product development efforts will be successfully completed, that clinical trials will commence on time or be completed, that any of the Company's products will be proven to be safe and effective, that regulatory approvals will be obtained at all or labeling claims will be as broad as sought, that the Company's products will be capable of being produced in commercial quantities at reasonable costs or that any products, if introduced, will achieve market acceptance. LIMITED CLINICAL TESTING EXPERIENCE The Company has conducted only limited clinical trials of its Vibrant and Vibrant P soundbridges. The Company has received approval of an IDE to conduct a clinical trial of the Vibrant soundbridge, which has been the subject of limited clinical testing in the United States. The Vibrant and the Vibrant P soundbridges have both been the subject of limited clinical testing in Europe. None of the Company's other soundbridges under development have been tested in human clinical trials. The Company's soundbridges will require additional development, clinical trials and regulatory approval prior to commercialization. The results from preclinical studies and early clinical trials may not be indicative of results obtained in later clinical trials, and there can be no assurance that clinical trials conducted by the Company will demonstrate sufficient safety and efficacy to obtain requisite approvals. The rate of completion of the Company's clinical trials may be delayed by many factors, including slower than anticipated patient enrollment or adverse events occurring during clinical trials. Completion of preclinical and clinical activities may take several years, and the length of time for completion of the required studies is unpredictable. In addition, data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. No assurance can be given that any of the Company's clinical trials will be successfully completed on a timely basis, or at all, that additional clinical trials will be allowed by the FDA or other regulatory authorities or that such clinical trials will commence as planned. The Company is in the process of submitting clinical data on approximately 30 patients to the Company's Notified Body, a certification body authorized to test and certify medical devices for sale in the EU, to demonstrate the safety and performance of the Vibrant and Vibrant P soundbridges. As of October 31, 1997, 36 patients in the European clinical trial have been implanted with the Company's soundbridges, of whom 32 have had the Audio Processor fitted and the soundbridge's performance evaluated. There can be no assurance that such data will be accepted by the Company's Notified Body, or that the Notified Body will not require the Company to obtain additional data from additional clinical trials involving more patients in order to demonstrate the safety and performance 6 of the Vibrant and Vibrant P soundbridges. If the Notified Body requires the Company to submit additional data, the timing of regulatory approval and commercialization of the Company's products in Europe could be delayed. See "Business--Government Regulation." RELIANCE ON FMT TECHNOLOGY The Company has concentrated its efforts primarily on the development, implementation and acceptance of the FMT, the patented core direct drive technology upon which all of the Company's soundbridges are based, and will be dependent upon the successful development of its soundbridges to generate revenues. The Company's soundbridges employ a direct drive approach to the management of hearing impairment, which is a novel development. There can be no assurance that the Company's soundbridges, based on the Company's FMT technology, will prove to be safe and effective, or that if proven safe and effective, can be manufactured at reasonable cost or successfully commercialized. See "Business--Products Under Development." NO ASSURANCE OF PRODUCT APPROVAL; GOVERNMENT REGULATION The research, preclinical and clinical activities, manufacturing, labeling, distribution, sale, marketing, advertising and promotion of the Company's proposed products are subject to extensive and rigorous government regulation in the United States and certain other countries. In the United States and certain other countries, the process of obtaining and maintaining required regulatory clearances or approvals is lengthy, expensive and uncertain. The Company's future success will be significantly dependent upon commercial sales of its products under development. The Company will also not be able to market such products domestically or overseas until it meets the safety and quality regulations of each jurisdiction in which the Company, its agents or distributors seek to sell such products. Noncompliance with applicable FDA requirements can result in administrative sanctions or judicially imposed sanctions such as civil penalties, criminal prosecution, injunctions, product seizure or detention, product recalls, or total or partial suspension of production. In addition, noncompliance may result in the FDA's refusal to approve pending applications for marketing approval or clearance or supplements to approved marketing approvals, or in the withdrawal of marketing approval. Before these products can be commercialized in the United States, the Company must submit, in a premarket approval ("PMA") application, extensive data on preclinical studies and clinical trials, device design, manufacturing, labeling, promotion and advertising, as well as other aspects of the product. In addition, the Company must submit clinical data gathered in trials conducted under an IDE demonstrating to the satisfaction of the FDA that the product is safe and effective and represents an improvement in hearing compared to currently marketed well-functioning acoustic hearing aids, and obtain marketing approval from the FDA. To date, the Company has received FDA approval of an IDE to commence clinical testing of the Vibrant. The testing will be conducted in phases. Phase I has been completed, was limited to two sites and five patients and was intended to test the safety and preliminary evidence of efficacy of the device and the surgical procedure used to implant the device. As of October 1997, the five patients required for the Phase I clinical trial have been implanted with the Vibrant soundbridge, have had the Audio Processor fitted and have completed the follow-up required by the trial protocol. The Company intends to initiate a multi-site Phase II study with ten additional patients, followed by a multi-site Phase III pivotal trial in approximately 85 patients. The Company has filed an IDE supplement to incorporate the Vibrant P into the Phase II and Phase III trials for the Vibrant soundbridge, but there can be no assurance that the FDA will not require a separate IDE for the Vibrant P. If the Company is required to submit a separate IDE, regulatory approval of the Vibrant P would be delayed. On October 3, 1997, the Company submitted a Phase I report and an IDE supplement to the FDA requesting modification and expansion to the next phase of clinical testing. On October 31, 1997, the Company received notification from the FDA that it would require additional audiologic and safety data prior to commencement of the next phase of clinical 7 testing. On November 14, 1997, the Company submitted the additional information. There can be no assurance that any additional approvals to commence Phase II or Phase III clinical trials will be obtained in a timely fashion, or at all, or that the Company's clinical trial effort will progress as expected, not be delayed or that such efforts will lead to the successful development of any product. Any delays in the Company's clinical trials would have a material adverse effect on the Company's business, financial condition and results of operations. Success in preclinical studies or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Further, there can be no assurance that if such testing of products under development is completed, any such devices will be accepted for formal review by the FDA or approved by the FDA for marketing in the United States. Subsequent to the receipt of an FDA approval, the Company will continue to be regulated by the FDA with regard to the reporting of adverse events related to its products, and ongoing Quality System regulation ("QS regulation") compliance (which includes elaborate testing, control, documentation and other quality assurance procedures). The Company's manufacturing facility must be registered with the FDA and the California Food and Drug Branch and will be subject to periodic inspections by the FDA and by the California Food and Drug Branch. The timing and requirements of obtaining approval for sale in foreign countries may differ from that required for FDA approval. In addition, there may be foreign regulatory barriers other than pre-market approval. The EU consists of 15 countries encompassing most of the major countries in Europe. The EU has adopted numerous directives and standards regulating the design, manufacture, clinical trial, labeling, and adverse event reporting for medical devices. The principal directives prescribing the laws and regulations pertaining to medical devices in the EU are the Medical Devices Directive, 93/42/EEC ("MDD") and the Active Implantable Medical Devices Directive, 90/385/EEC ("AIMDD"). In the EU, the Company's soundbridges will be regulated as active implantables and therefore be governed by the AIMDD. Certain other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the EU with respect to medical devices. The Company's facilities have been inspected by the Notified Body and its quality system has been certified by the Notified Body as being in compliance with the required standards. The Company is in the process of compiling the technical, preclinical and clinical data that its Notified Body has indicated will be required to satisfy the essential requirements of the AIMDD. To satisfy the essential requirements, the Company must complete a clinical trial conducted under European clinical trial standards (EN 540) to determine the safety and performance of the products. The Company is in the process of submitting clinical data to its Notified Body on approximately 30 patients to demonstrate the safety and performance of the Vibrant and Vibrant P soundbridges. As of October 31, 1997, a total of 36 patients in the European clinical trial have been implanted (19 with the Vibrant and 17 with the Vibrant P soundbridge) of whom 32 have had the Audio Processor fitted and the soundbridge's performance evaluated. There can be no assurance that such data will be accepted by the Company's Notified Body, or that the Notified Body will not require the Company to obtain additional data from additional clinical trials involving more patients in order to demonstrate the safety and performance of the Vibrant soundbridge and the Vibrant P soundbridge. If the Notified Body requires the Company to submit additional data, the timing of regulatory approval and commercialization of the Company's products in Europe could be delayed. Once a manufacturer has satisfactorily completed the regulatory compliance tasks required by the directives and received favorable determinations by the Notified Body, it is eligible to place the CE mark on its products. Manufacturers are subject to ongoing regulation under the AIMDD. The quality system will be subject to periodic audit and recertification, and serious adverse events must 8 be reported to the authorities in the country where the incident takes place. If such incidents occur, the manufacturer may have to take remedial action, including withdrawal of the product from the EU market. See "Business--Products Under Development" and "--Government Regulation." NO ASSURANCE OF MARKET ACCEPTANCE The market acceptance of the Company's soundbridges will depend upon their acceptance by the medical community and patients as clinically useful, reliable and cost-effective compared to other devices. Clinical acceptance will depend on numerous factors, including the establishment of the safety and the effectiveness of the soundbridge's ability to drive the ossicles directly and improve hearing over currently available hearing aids. Clinical acceptance will also depend on the receipt of regulatory approvals in the United States and internationally and the Company's ability to adequately train ear surgeons on the techniques for implanting the Company's soundbridges. In addition, there can be no assurance that the Company's soundbridges will be preferable alternatives to existing devices, some of which, such as the acoustic hearing aid, do not require surgery, or that the Company's soundbridges will not be rendered obsolete or noncompetitive by products under development by other companies. Patient acceptance of the Company's soundbridges will depend in part upon physician and surgeon recommendations as well as other factors, including the effectiveness, safety, reliability and invasiveness of the procedure as compared to established approaches. Even if the Company's soundbridges are adopted by the medical community, a significant market may not develop for the Company's products unless acceptable reimbursement from health care payors is available. There can be no assurance that the Company's soundbridges under development will be accepted by the medical community or consumers or that market demand for such products will be sufficient to allow the Company to achieve profitable operations. Failure of the Company's soundbridges, for whatever reason, to achieve significant adoption by the medical community or consumers or failure of the Company's products to achieve any significant market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business-- Government Regulation" and "--Third-Party Reimbursement." LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES To date, the Company is in the development stage, has generated no revenue from product sales and has experienced significant operating losses since inception. As of September 30, 1997, the Company had an accumulated deficit of $16.1 million. The Company expects its operating losses to continue at least through 1999 as it continues to expend substantial funds for clinical trials in support of regulatory approvals, expansion of research and development activities and establishment of commercial-scale manufacturing and sales and marketing capabilities. Any commercialization of the Company's products will require substantial development, clinical, regulatory, manufacturing, sales and marketing and other expenditures. There can be no assurance that the Company's soundbridges will be successfully commercialized or that the Company will achieve significant revenues from either international or domestic sales. In addition, there can be no assurance that the Company will achieve or sustain profitability in the future. The Company's results of operations may fluctuate from quarter to quarter or year to year and will depend upon numerous factors, including action relating to regulatory matters, progress of clinical trials, the timing and scope of research and development efforts, the extent to which the Company's products gain market acceptance or achieve reasonable reimbursement levels, the timing of scale-up of manufacturing capabilities, the timing of expansion of sales and marketing activities and competition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." HIGHLY COMPETITIVE MARKET; RISK OF COMPETING HEARING DEVICES The medical device industry is subject to intense competition in the United States and abroad. The Company believes its products will compete primarily with the traditional approaches to 9 managing hearing impairment, principally hearing aids. Principal manufacturers of acoustic hearing aids include Siemens Hearing Instruments, Inc., Philips Medical Systems North America Co., Starkey Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp., Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no assurance that the Company's soundbridges will be able to successfully compete with established hearing aid products. In addition, there can be no assurance that these potential competitors will not succeed in developing technologies and products in the future that are more effective, less expensive than those being developed by the Company or that do not require surgery. The Company is aware of several university research groups and development-stage companies that have active research or development programs related to direct drive sensorineural hearing devices. In addition, some large medical device companies, some of which are currently marketing implantable medical devices, may develop programs in hearing management. Certain of these companies have substantially greater financial, technical, manufacturing, marketing and other resources than the Company. In addition, there can be no assurance that certain of the Company's competitors will not develop technologies and products that may be more effective in managing hearing impairment than the Company's products or that render the Company's products obsolete. See "Business--Competition." LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK; DEPENDENCE ON KEY SUPPLIERS The Company currently manufactures its products in limited quantities for laboratory testing and for its United States and European clinical trials. The manufacture of the Vibrant soundbridge is a complex operation involving a number of separate processes, components and assemblies. Each device is assembled and individually tested by the Company. The manufacturing process consists primarily of assembly of internally manufactured and purchased components and subassemblies, and certain processes are performed in a clean room environment. After completion of the manufacturing and testing processes, implantable devices are sterilized by a sub-contracted supplier. The Company has no experience manufacturing its products in the volumes or with the yields that will be necessary for the Company to achieve significant commercial sales, and there can be no assurance that the Company can establish high- volume manufacturing capacity or, if established, that the Company will be able to manufacture its products in high volumes with commercially acceptable yields. If the Company receives regulatory approval to commercialize its products, it will need to expend significant capital resources and develop manufacturing expertise to establish large-scale manufacturing capabilities. Before the Company commences large-scale commercial manufacturing activities, it intends to move to a new facility. Furthermore, prior to approval of a PMA, the Company's facilities, procedures and practices will be subject to a pre- approval inspection by the FDA. The Company's inability to successfully manufacture its products in a timely manner or at a reasonable cost could have a material adverse effect on the Company's business, financial condition and results of operations. Raw materials, components and subassemblies for the Company's soundbridges are purchased from various qualified suppliers. A number of components and subassemblies, such as silicone, control electronics and implant packaging are provided by single source suppliers. None of the Company's vendors is contractually obligated to continue to supply the Company nor is the Company contractually obligated to buy from a particular vendor. For certain of these 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. In addition, if the Company wishes to significantly modify its manufacturing processes or change the supplier of a critical component, additional approvals will be required from the FDA before the change can be implemented. Because of the long lead time for some components and subassemblies that are currently available from a single source, a supplier's inability or failure to supply such components or subassemblies in a timely manner or the Company's decision to change its suppliers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business-- Manufacturing." 10 DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY In the United States, the Company holds three issued patents and ten pending patent applications. Additionally, the Company has ten pending foreign patent applications. These patents and patent applications generally cover the invention and application of the FMT as well as the specific application of the FMT and other concepts in the field of hearing impairment. In addition, the Company has licensed, on a royalty-free basis, a United States patent covering the magnetic attachment of an external audio processor to an implanted receiver. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its trade secrets and to operate without infringing or violating the proprietary rights of others. The patent positions and trade secret provisions of medical device companies, including those of the Company, 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 the Company, that any of the Company's 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 the Company. 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, the Company cannot be certain that it was 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 the Company's ability to make, use or sell its products either in the United States or in international markets. Although the Company has conducted searches of patents issued to other companies, research or academic institutions or others, there can be no assurance that such patents do not exist, have not been filed or could not be filed or issued, which contain claims relating to the Company's technology, products or processes. Patents issued and patent applications filed in the United States or internationally relating to medical devices are numerous and there can be no assurance that current and potential competitors and other third parties have not filed or in the future will not file applications for, or have not received or in the future will not receive, patents or obtain additional proprietary rights relating to products or processes used or proposed to be used by the Company. In addition, patent applications in foreign countries 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. There may be pending applications, which if issued with claims in their present form, might provide proprietary rights to third parties relating to products or processes used or proposed to be used by the Company. The Company may be required to obtain licenses to patents or proprietary rights of others. Further, the laws of certain foreign countries do not protect the Company's 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 the Company, may also be necessary to enforce patent or other intellectual property rights of the Company or to determine the scope and validity of other parties' proprietary rights. There can be no assurance that the Company will have the financial resources to defend its patents from infringement or claims of invalidity. The Company also relies upon trade secrets and other 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 the Company's proprietary technology or that the Company can meaningfully protect its rights in such unpatented proprietary technology. The Company's policy is to require each of its employees, consultants, 11 investigators and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. These agreements generally provide that all inventions conceived by the individual during the term of the relationship shall be the exclusive property of the Company 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 for the Company's proprietary information in the event of unauthorized use or disclosure of such information. Recently Public Law 104-208 was signed into law in the United States and limits the enforcement of patents relating to the performance of surgical or medical procedures on a body. This law 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 the Company's ability to enforce any of its proprietary methods or procedures deemed to be surgical or medical procedures. In certain other countries outside the United States, patent coverage relating to the performance of surgical or medical procedures is not available. Therefore, patent coverage in such countries will be limited to the FMT or to narrower aspects of the FMT. The medical device industry in general has been characterized by substantial litigation. Litigation regarding patent and other intellectual property rights, whether with or without merit, could be time-consuming and expensive to respond to and could distract the Company's technical and management personnel. The Company may become involved in litigation to defend against claims of infringement by the Company, to enforce patents issued to the Company or to protect trade secrets of the Company. If any relevant claims of third-party patents are held as infringed and not invalid in any litigation or administrative proceeding, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each such patent, or to redesign its products or processes to avoid infringement. In addition, in the event of any possible infringement, there can be no assurance that the Company would be successful in any attempt to redesign its products or processes to avoid such infringement or in obtaining licenses on terms acceptable to the Company, if at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure by the Company to redesign its products or processes or to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company has not been involved in any litigation to date, in the future, costly and time-consuming litigation brought by the Company may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others. See "Business--Patents and Proprietary Technology." FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING The Company will expend substantial funds in the future for research and development, preclinical and clinical testing, capital expenditures and the manufacturing, marketing and sale of its products. The timing and amount of spending of such capital resources cannot be accurately predicted and will depend upon several factors, including the progress of its research and development efforts and preclinical and clinical activities, competing technological and market developments, the time and costs of obtaining regulatory approvals, the time and costs involved in filing, prosecuting and enforcing patent claims, the progress and cost of commercialization of products currently under development, market acceptance and demand for the Company's products if approved for marketing and other factors not within the Company's control. While the Company believes that the net proceeds of this offering, together with its existing capital resources and projected interest income, will be sufficient to fund its operations for at least the next 18 months, there can be no assurance that the Company will not require additional financing prior to that time. 12 There can be no assurance that such additional financing will be available on a timely basis on terms acceptable to the Company, or at all, or that such financing will not be dilutive to stockholders. If adequate funds are not available, the Company could be required to delay development or commercialization of certain of its products, to license to third parties the rights to commercialize certain products or technologies that the Company would otherwise seek to commercialize for itself, or to reduce the marketing, customer support or other resources devoted to certain of its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds," "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." LACK OF SALES, MARKETING AND DISTRIBUTION EXPERIENCE The Company will have to establish an effective internal sales and marketing organization prior to commercial introduction of its products. The Company is in the process of establishing a sales and marketing organization in Europe. An office has been established in Basel, Switzerland, where the Company's Director of European Sales and Marketing and European Clinical Manager are based. The Company expects to recruit sales personnel to provide direct sales coverage in Germany, France and the United Kingdom by the first quarter of 1998. In other international markets, including Japan, the Company will seek to establish a network of distributors. By the end of the first quarter of 1998, the Company intends to establish distributors in Italy, Spain and the Benelux countries. There can be no assurance that the Company will be able to build a direct sales force or marketing organization in any country, that establishing a direct sales force or marketing organization will be cost-effective or that the Company's sales and marketing efforts will be successful. In addition, the Company has had only limited discussions with potential international distributors and has not yet entered into any agreements with distributors. There can be no assurance that the Company will be able to enter into agreements with qualified distributors on a timely basis on terms acceptable to the Company, or at all, or that such distributors will devote adequate resources to selling the Company's products. Failure to establish a direct sales force domestically and in select international markets, and to enter into successful distribution relationships, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Sales, Marketing and Training." UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT The Company believes that its products will generally be purchased by hospitals and clinics upon the recommendation of a surgeon. In the United States, hospitals, physicians and other health care providers that purchase medical devices generally rely on third-party payors, to reimburse all or part of the cost of the procedure in which the medical device is being used. Such third-party payors have become increasingly sensitive to cost containment in recent years and place a high degree of scrutiny on coverage and payment decisions for new technologies and procedures. Hearing aids, which are the subject of 510(k) clearance and do not involve surgery, are generally not reimbursed, although a modest reimbursement is provided under certain insurance plans. Traditionally, hearing aid users have paid for these devices directly. There can be no assurance that the Company will be able to demonstrate improvement in quality of life or that reimbursement will ever be available for the Company's products. During clinical trials, the Company does not anticipate that there will be any reimbursement for the Vibrant soundbridge implant or procedure. Certain third-party payors are moving toward a managed care system in which they contract to provide comprehensive health care for a fixed cost per person. The fixed cost per person established by these third-party payors may be independent of the hospital's cost incurred for the specific case and the specific devices used. Medicare and other third-party payors are increasingly scrutinizing whether to cover new products and the level of reimbursement for covered products. Because the Company's products are currently under development and have not received FDA clearance or 13 approval, uncertainty exists regarding the availability of third-party reimbursement for procedures that would use the Company's soundbridges. Failure by physicians, hospitals and other potential users of the Company's soundbridges to obtain sufficient reimbursement from third-party payors for the procedures in which the Company's soundbridges are intended to be used could have a material adverse effect on the Company's business, financial condition and results of operations. Third-party payors that do not use prospectively fixed payments increasingly use other cost-containment processes or require various outcomes data that may pose administrative hurdles to the use of the Company's soundbridges. In addition, third-party payors may deny reimbursement if they determine that the device used in a procedure is unnecessary, inappropriate, experimental, used for a non-approved indication or is not cost-effective. Potential purchasers must determine that the clinical benefits of the Company's products justify the additional cost or the additional effort required to obtain prior authorization or coverage and the uncertainty of actually obtaining such authorization or coverage. If the Company obtains the necessary foreign regulatory approvals, market acceptance of the Company's products and products currently under development in international markets would 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. 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 the Company's products in the international markets in which such approvals are sought. See "Business--Third-Party Reimbursement." DEPENDENCE UPON KEY PERSONNEL The Company's future success depends in significant part upon the continued service of certain key scientific, technical and management personnel. Competition for such personnel is intense and there can be no assurance that the Company can retain its key scientific, technical and managerial personnel or that it can attract, assimilate or retain other highly qualified scientific, technical and managerial personnel in the future. The loss of key personnel, especially if without advance notice, or the inability to hire or retain qualified personnel could have a material adverse effect upon the Company's business, financial condition and results of operations. The Company is the beneficiary under a $1.0 million key man insurance policy on Harry S. Robbins, the Company's President. PRODUCT LIABILITY RISK; POSSIBLE INSUFFICIENCY OF INSURANCE The manufacture, sale and implantation of the Company's products involve the risk of product liability claims. The Company currently has limited product liability insurance. There can be no assurance that such insurance will be available on commercially reasonable terms or that the coverage limits will be adequate. The Company intends to evaluate its coverage on a regular basis and in connection with the introduction of products currently under development. Such insurance is expensive and may not be available on acceptable terms, in sufficient amount of coverage or at all. A successful claim brought against the Company in excess of its insurance coverage would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Product Liability." CONTROL BY EXISTING STOCKHOLDERS After the completion of this offering, current stockholders, including certain executive officers and directors of the Company and their affiliates, will own approximately 81.1% of the outstanding Common Stock (assuming the exercise of all outstanding options and warrants). As a result, these 14 stockholders will, to the extent they act together, continue to have the ability to exert significant influence and control over matters requiring the approval of the Company's stockholders, including the election of a majority of the Company's Board of Directors. See "Principal Stockholders." POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE Sales of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this offering could materially and adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate. Upon the completion of this offering, the Company will have 11,696,021 shares of Common Stock outstanding (assuming no exercise of options after September 30, 1997), of which the 2,300,000 shares offered hereby will be freely tradeable (unless held by affiliates of the Company) without restriction. The remaining 9,396,021 shares will be restricted securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). The Company and its directors, executive officers and all other holders of such restricted securities, have entered into lock-up agreements with the Company or Cowen & Company (the "Lock-up Agreements") under which they have agreed not to offer, sell, contract to sell, grant any options to purchase or otherwise dispose of, directly or indirectly, any shares of Common Stock or options to acquire shares of Common Stock, or securities exchangeable or convertible into shares of Common Stock, owned by them for a period of 180 days following the day on which the Registration Statement becomes effective without the prior written consent of Cowen & Company or the Company, as the case may be except that, without such consent, the Company may issue Common Stock and grant options pursuant to the Stock Plans and issue Common Stock pursuant to the exercise of outstanding warrants and the current stockholders of the Company who are not executive officers or directors of the Company may sell Common Stock acquired in the offering or in the open market. The Company has agreed not to release any stockholders from the terms of the Lock-up Agreements with the Company. Cowen & Company may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to such Lock-up Agreements. As a result of the Lock-up Agreements and the provisions of Rules 144 and 701 promulgated under the Securities Act, upon consummation of this offering, such restricted securities will be available for public resale in the public market as follows: (i) no shares will be available for immediate sale on the date of this Prospectus and (ii) the remaining approximately 9,685,303 shares will be available for public resale 180 days after the date of this Prospectus, upon expiration of the Lock-up Agreements (including approximately 289,282 shares subject to outstanding vested options and outstanding warrants), subject in some cases to volume limitations pursuant to Rule 144. In addition, 6,715,694 of the shares outstanding immediately following the completion of this offering (including up to 33,611 shares of Common Stock issuable upon exercise of certain outstanding warrants) will be entitled to registration rights with respect to such shares upon termination of the Lock-up Agreements. The number of shares sold in the public market could increase if such registration rights are exercised and such sales may have an adverse effect on the market price of the Common Stock. See "Shares Eligible for Future Sale." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK Prior to this offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or be sustained or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock is determined by negotiations between the Company and the Underwriters. As such, the initial public offering price is not necessarily related to the Company's net worth or any other established criteria of value and may not bear any relationship to the market price of the Common Stock following the completion of the offering. The market prices for securities of medical device companies have historically been highly volatile. Announcements of technological innovations 15 or new products by the Company or its competitors, developments concerning proprietary rights, including patents and litigation matters, publicity regarding actual or potential results with respect to products under development by the Company or others, regulatory developments in both the United States and foreign countries and public concern as to the safety of new technologies, changes in financial estimates by securities analysts or failure of the Company to meet such estimates and other factors may have a significant impact on the market price of the Common Stock. In addition, the Company believes that fluctuations in its operating results may cause the market price of its Common Stock to fluctuate, perhaps substantially. See "Underwriting." DILUTION; ABSENCE OF DIVIDENDS Purchasers of shares of Common Stock offered hereby will experience an immediate dilution of $8.96 in the pro forma net tangible book value per share of their Common Stock from the assumed initial public offering price of $12.00 per share. The Company has never paid dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy" and "Dilution." ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER, BYLAWS AND CONTRACTUAL PROVISIONS Certain provisions of the Company's Restated Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions eliminate the right of stockholders to act by written consent without a meeting and specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings. In addition, the Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue shares of Preferred Stock. Certain provisions of Delaware law applicable to the Company could also delay or make more difficult a merger, tender offer or proxy contest involving the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. The existence of a classified Board of Directors, the inability of stockholders to act by written consent without a meeting, the procedures required for director nominations and stockholder proposals and Delaware law could have the effect of delaying, deferring or preventing a change in control of the Company, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the Company's Common Stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. In addition, the Company has granted one of its existing stockholders, Johnson & Johnson Development Corporation ("JJDC"), first negotiation rights with regard to certain proposed transactions, which may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. See "Certain Transactions" and "Description of Capital Stock." 16 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Prospectus, including without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import, constitute "forward-looking statements." Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Symphonix to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include the following: uncertainties related to the early stage of the Company's development; limited clinical testing experience; uncertainties related to the reliance on the Company's FMT technology; existing government regulations and changes in, or the failure to comply with, government regulations; the Company's limited manufacturing experience, the risk associated with manufacturing scale-up, and the Company's dependence on key suppliers; uncertainty of market acceptance; history of operating losses and expectations of future losses; the highly competitive market and the risk of competing hearing management approaches; dependence on patents and proprietary technology and uncertainty of patent protection; future capital needs and uncertainty of additional funding; dependence on key personnel; the Company's lack of sales, marketing and distribution experience and reliance on third parties to perform such functions; uncertain availability of third-party reimbursement and other factors referenced in this Prospectus. Certain of these factors are discussed in more detail elsewhere in this Prospectus, including, without limitation, under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Symphonix disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 17 USE OF PROCEEDS The net proceeds to the Company from the sale of 2,300,000 shares of Common Stock offered hereby are estimated to be approximately $24,868,000 ($28,718,200 if the Underwriters' over-allotment option is exercised in full), at an assumed initial public offering price of $12.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company anticipates that it will use approximately $10.0 million of the net proceeds of this offering to fund the Company's research and development efforts, including clinical trials, approximately $3.0 million to develop a sales and marketing organization and initiate commercial sales of its products, when and if approved for marketing by regulatory authorities and approximately $1.0 million for expenditures for constructing a clean room and other capital expenditures. The Company will use the remaining net proceeds for working capital and general corporate purposes. Although the Company believes the proceeds of this offering, together with its existing resources and projected interest income will be adequate to satisfy its capital needs for at least the next 18 months, the timing and amount of spending of such capital resources cannot be accurately determined at this time and will depend upon several factors, including the timing and cost of obtaining regulatory approvals, progress of its research and development efforts and preclinical and clinical activities, competing technological and market developments, commercialization of products currently under development, and market acceptance and demand for the Company's products if approved for marketing. The Company's management will retain broad discretion in the allocation of a substantial portion of the net proceeds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Pending such uses, the Company intends to invest the net proceeds in short- term, interest-bearing, investment grade securities. DIVIDEND POLICY The Company has not declared or paid any cash dividends on its capital stock. The Company currently expects to retain its future earnings for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1997, (i) on an actual basis, (ii) on a pro forma basis after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of the offering made hereby and the restatement of the Company's Certificate of Incorporation to provide for authorized capital stock consisting of 50,000,000 shares of Common Stock and 5,000,000 shares of undesignated Preferred Stock, and (iii) as adjusted to reflect the application of the estimated net proceeds from the sale of 2,300,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share:
SEPTEMBER 30, 1997 ---------------------------- PRO AS ACTUAL FORMA ADJUSTED -------- -------- -------- (IN THOUSANDS) Capital lease obligation, less current portion(1)...................................... $ 406 $ 406 $ 406 -------- -------- -------- Stockholders' equity: Preferred Stock; $0.001 par value; 9,750,000 shares authorized; 9,194,631 shares issued and outstanding, actual; 5,000,000 shares authorized, none issued and outstanding, pro forma and as adjusted......................... 9 -- -- Common Stock; $0.001 par value; 20,000,000 shares authorized; 2,713,938 shares issued and outstanding, actual; 50,000,000 shares authorized, 9,396,021 shares issued and outstanding, pro forma; 50,000,000 shares authorized, 11,696,021 shares issued and outstanding, as adjusted(2)................... 3 9 12 Notes receivable from stockholders............... (371) (371) (371) Deferred compensation............................ (300) (300) (300) Unrealized gains on short-term investments....... 1 1 1 Additional paid-in capital....................... 27,451 27,454 52,319 Deficit accumulated during the development stage. (16,138) (16,138) (16,138) -------- -------- -------- Total stockholders' equity................... $ 10,655 $ 10,655 $ 35,523 -------- -------- -------- Total capitalization......................... $ 11,061 $ 11,061 $ 35,929 ======== ======== ========
- -------- (1) See Note 5 of Notes to Financial Statements. (2) Based upon shares outstanding as of September 30, 1997. Excludes (i) 441,734 shares issuable upon exercise of options outstanding at a weighted average exercise price of $0.65 per share under the 1994 Option Plan and 223,683 shares reserved for future issuance thereunder and (ii) 33,611 shares issuable upon exercise of outstanding warrants to purchase Common Stock at a weighted average exercise price of $2.20 per share. See "Management--Incentive Stock Plans" and "Description of Capital Stock-- Warrants." 19 DILUTION The pro forma net tangible book value of the Company as of September 30, 1997 was $10.7 million or $1.13 per share of Common Stock. Pro forma net tangible book value per share represents the Company's total tangible assets less total liabilities, divided by the pro forma number of outstanding shares of Common Stock (after giving effect to the conversion of the Preferred Stock into Common Stock). Dilution per share represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share after the offering. After giving effect to the sale of 2,300,000 shares in this offering at an assumed initial public offering price of $12.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of the Company as of September 30, 1997 would have been $35.5 million or $3.04 per share. This represents an immediate increase of pro forma net tangible book value of $1.91 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $8.96 per share to new investors purchasing shares of Common Stock in this offering, as illustrated in the following table: Assumed initial public offering price per share................ $12.00 Pro forma net tangible book value per share before the offering.................................................... $1.13 Increase attributable to new investors....................... 1.91 ----- Pro forma net tangible book value per share after the offering. 3.04 ------ Dilution per share to new investors............................ $ 8.96 ======
The following table summarizes, on a pro forma basis as of September 30, 1997, the difference between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION ------------------ ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders...... 9,396,021 80.3% $27,184,651 49.6% $ 2.89 New investors.............. 2,300,000 19.7 27,600,000 50.4 12.00 ---------- ----- ----------- ----- Total.................... 11,696,021 100.0% $54,784,651 100.0% ========== ===== =========== =====
The computations in the above tables assume (i) no exercise of outstanding stock options or warrants and (ii) the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering. As of September 30, 1997, there were options outstanding to purchase up to 441,734 shares of Common Stock at a weighted average exercise price of $0.65 per share under the 1994 Option Plan and warrants outstanding to purchase up to 33,611 shares of Common Stock at a weighted average exercise price of $2.20 per share. To the extent outstanding options are exercised or warrants are further exercised, there will be further dilution to new investors. See "Management--Incentive Stock Plans," "Description of Capital Stock--Warrants" and "Underwriting." 20 SELECTED FINANCIAL INFORMATION The following selected financial data is qualified in its entirety by and should be read in conjunction with the Company's Financial Statements and the related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The statement of operations data for the period from May 17, 1994 (date of inception) to December 31, 1994 and for the years ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995 and 1996 are derived from audited financial statements included elsewhere in this Prospectus. The balance sheet data at December 31, 1994 is derived from financial statements that have been audited by Coopers & Lybrand L.L.P. that are not included in this Prospectus. The balance sheet data as of September 30, 1997 and the statement of operations data for the nine months ended September 30, 1996 and 1997 and for the period from May 17, 1994 (inception) to September 30, 1997 are derived from unaudited financial statements included elsewhere in this Prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's operating results and financial position for such periods. The operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year.
PERIOD FROM PERIOD FROM MAY 17, 1994 MAY 17, 1994 (DATE OF YEARS ENDED NINE MONTHS ENDED (DATE OF INCEPTION) TO DECEMBER 31, SEPTEMBER 30, INCEPTION) TO DECEMBER 31, ---------------- ------------------ SEPTEMBER 30, 1994 1995 1996 1996 1997 1997 ------------- ------- ------- -------- -------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Costs and expenses: Research and development........... $ 707 $ 3,307 $ 5,399 $ 3,801 $ 4,643 $ 14,056 General and administrative........ 141 625 1,047 830 1,330 3,143 ----- ------- ------- -------- -------- -------- Loss from operations.... (848) (3,932) (6,446) (4,631) (5,973) (17,199) Interest income, net.... 96 280 337 233 348 1,061 ----- ------- ------- -------- -------- -------- Net loss................ $(752) $(3,652) $(6,109) $ (4,398) $ (5,625) $(16,138) ===== ======= ======= ======== ======== ======== Pro forma net loss per share(1)............... $ (0.71) $ (0.59) ======= ======== Shares used in calculation of pro forma net loss per share(1)............... 8,546 9,533 ======= ========
DECEMBER 31, ----------------------- SEPTEMBER 30, 1994 1995 1996 1997 ------ ------ ------- ------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............................ $4,552 $6,803 $11,110 $11,528 Total assets............................ 4,910 7,685 11,951 12,557 Capital lease obligations, less current portion................................ 99 423 596 406 Deficit accumulated during the development stage...................... (752) (4,404) (10,513) (16,138) Total stockholders' equity.............. 4,568 6,593 10,238 10,655
- -------- (1) See Note 10 of Notes to Financial Statements for an explanation of the computation of pro forma net loss per share. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Since its inception in May 1994, Symphonix has been a development stage company. The Company is developing a family of proprietary semi-implantable and implantable soundbridges for the management of moderate to severe hearing impairment. The Company's family of Vibrant soundbridges are based on its patented core FMT technology. The Company has not generated any revenue from sales of products and as of September 30, 1997, had a cumulative deficit of $16.1 million. To date, the Company's principal sources of funding have been private equity financings and equipment leases. In September 1996, the Company initiated clinical trials of the Vibrant soundbridge in both the United States and Europe, and in July 1997, the Company initiated clinical trials of the Vibrant P in Europe. The Company will be required to conduct further research, development, testing and regulatory activities. The costs of these activities, together with the costs of establishing commercial-scale manufacturing and sales and marketing capabilities, and general and administrative expenses, are expected to result in substantial losses through at least 1999. RESULTS OF OPERATIONS Research and Development Expenses. Research and development expenses were $707,000 in the period ended December 31, 1994, $3.3 million and $5.4 million in the years ended December 31, 1995 and 1996, respectively, and $3.8 million and $4.6 million in the nine months ended September 30, 1996 and 1997, respectively. Research and development expenses consist primarily of personnel costs, professional services, materials, supplies and equipment in support of product development, clinical trials, regulatory submissions and patent applications. Expenses increased from the period ended December 31, 1994 to the year ended December 31, 1995, due to the inclusion of a full year of expenses in 1995, and to increases in the level of staffing, professional services, and other costs as the Company established a research and development organization and initiated its product development effort. Expenses increased from 1995 to 1996 and from the nine months ended September 30, 1996 to the nine months ended September 30, 1997, due to increases in the level of staffing and increased spending on supplies, professional services and equipment as the Company increased its product development effort, developed its clinical research and regulatory functions, initiated clinical trials of its products and established a pilot manufacturing capability. General and Administrative Expenses. General and administrative expenses were $141,000 in the period ended December 31, 1994, $625,000 and $1.0 million in the years ended December 31, 1995 and 1996, respectively, and $830,000 and $1.3 million in the nine months ended September 30, 1996 and 1997, respectively. General and administrative expenses consist primarily of personnel costs and professional services. Expenses increased from the period ended December 31, 1994 to the year ended December 31, 1995, due to the inclusion of a full year of expenses in 1995, and to increases in the level of staffing as the Company increased its product development activities. Expenses increased from 1995 to 1996 and from the nine months ended September 30, 1996 to the nine months ended September 30, 1997, due to further increases in the level of staffing and spending on professional services. 22 Deferred compensation of $322,000 was recorded in the nine months ended September 30, 1997, representing the difference between the exercise prices of certain options granted and the deemed fair value of the Company's Common Stock on the grant dates. Deferred compensation expense of $22,000 attributed to such options was amortized during the nine months ended September 30, 1997. The remaining deferred compensation will be amortized over the vesting period of the options (generally four years). In October 1997, the Company recorded an additional $1.0 million of deferred compensation associated with additional option grants. Interest Income, Net. Interest income, net was $96,000 in the period ended December 31, 1994, $280,000 and $337,000 in the years ended December 31, 1995 and 1996, respectively, and $233,000 and $348,000 in the nine months ended September 30, 1996 and 1997, respectively. The increases in interest income over these periods were primarily due to the Company's increasing average cash and short-term investment balances, which have been the result of the timing of the Company's private equity financings. Income Taxes. As a result of the net losses incurred, the Company has not incurred any income tax obligations. At December 31, 1996, the Company had net operating loss carry forwards of $8.2 million for both federal and state income tax purposes, which will expire at various dates through 2011 if not utilized. The principal differences between losses for financial and tax reporting purposes are the result of the capitalization of research and development and start-up expenses for tax purposes. United States and state tax laws contain provisions that may limit the net operating loss carry forwards that can be used in any given year, should certain changes in the beneficial ownership of the Company's shares occur. Such events could limit the future utilization of the Company's net operating loss carry forwards. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has funded its operations and its capital investments from the private sale of equity securities, totaling $26.7 million, and from equipment lease financing totaling $1.3 million. At September 30, 1997, the Company had $10.3 million in working capital, and its primary source of liquidity was $11.5 million in cash, cash equivalents and short-term investments. Capital expenditures, primarily related to the Company's research and development and manufacturing activities, were $294,000 in the period ended December 31, 1994, $691,000 and $409,000 in the years ended December 31, 1995 and 1996, respectively, and $394,000 and $301,000 in the nine months ended September 30, 1996 and 1997, respectively. At September 30, 1997, the Company did not have any material commitments for capital expenditures. In October 1997, the Company entered into a five-year lease commencing in January 1998 for a new facility (See Note 11 of Notes to Financial Statements). The Company anticipates that between the fourth quarter of 1997 and the first quarter of 1998, it will incur capital expenditures of approximately $1.0 million in constructing a clean room and other leasehold improvements in this facility. Cash used in operating activities was $519,000 in the period ended December 31, 1994, $3.1 million and $5.4 million in the years ended December 31, 1995 and 1996, respectively, and $3.9 million and $5.1 million in the nine months ended September 30, 1996 and 1997, respectively. The increases in cash used in operating activities over these periods reflect the increased net losses incurred, primarily as a result of higher research and development expenses. The Company will expend substantial funds in the future for research and development, preclinical and clinical testing, capital expenditures and the manufacturing, marketing and sale of its products. The timing and amount of spending of such capital resources cannot be accurately 23 predicted and will depend upon several factors, including the progress of its research and development efforts and preclinical and clinical activities, competing technological and market developments, the time and costs of obtaining regulatory approvals, the time and costs involved in filing, prosecuting and enforcing patent claims, the progress and cost of commercialization of products currently under development, market acceptance and demand for the Company's products if approved for marketing and other factors not within the Company's control. While the Company believes that the net proceeds of this offering, together with its existing capital resources and projected interest income, will be sufficient to fund its operations for at least the next 18 months, there can be no assurance that the Company will not require additional financing prior to that time. There can be no assurance that such additional financing will be available on a timely basis on terms acceptable to the Company, or at all, or that such financing will not be dilutive to stockholders. If adequate funds are not available, the Company could be required to delay development or commercialization of certain of its products, to license to third parties the rights to commercialize certain products or technologies that the Company would otherwise seek to commercialize for itself, or to reduce the marketing, customer support or other resources devoted to certain of its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. 24 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," and elsewhere in this Prospectus. OVERVIEW Symphonix is a leader in the development of proprietary semi-implantable and implantable products, or soundbridges, for the management of moderate to severe hearing impairment. In 1994, mild to severe hearing impairment affected approximately 26 million people in the United States, or 10% of the population, of whom approximately 17 million people were classified as moderately or severely hearing impaired. The Company believes that its family of Vibrant soundbridges, designed to overcome the inherent limitations of traditional hearing devices, represent a novel approach in the management of hearing impairment. The Company's initial product under development, the Vibrant soundbridge, is a semi-implantable device which mechanically drives the three small bones of the middle ear to overcome the user's hearing impairment. The Company's second generation product, the Vibrant P soundbridge, provides a greater degree of customization to address the specific needs of a particular user's hearing loss and expands the types of hearing loss that can be managed by the Company's products. In September 1996, the Company initiated clinical trials of the Vibrant soundbridge in both the United States and Europe, and in July 1997 the Company initiated clinical trials of the Vibrant P soundbridge in Europe. As of October 31, 1997, 41 patients have been implanted with the Company's soundbridges, of whom 37 have had the Audio Processor fitted and the soundbridge's performance evaluated. THE HEARING IMPAIRMENT MARKET Background The human ear consists of three regions: the outer ear, the middle ear and the inner ear. The outer ear consists of the external auricle and the ear canal. The ear canal is a passageway through which sound waves reach the middle ear. The outer ear is separated from the middle ear by the tympanic membrane, commonly referred to as the eardrum. The middle ear is a chamber that contains three tiny bones, the malleus, the incus, and the stapes, that together are known as the ossicles. The ossicles form a chain from the tympanic membrane to the inner ear. The inner ear includes the cochlea, which is a fluid-filled structure that contains a large number of delicate sensory hair cells that are connected to the auditory nerve. Sound, which is a wave-like vibration of the air, enters the ear canal and is slightly amplified by the natural resonant characteristics of the ear canal. These sound waves cause vibration of the tympanic membrane and are amplified and transmitted to the fluid filling the inner ear by the motion of the ossicles. The waves created in the fluid pass through the snail-shaped cochlea and stimulate the delicate sensory hair cells. These hair cells generate electrochemical signals that are detected by the auditory nerve and are then subsequently interpreted by the brain as sound. The signals that are interpreted by the brain as sound are distinguished by frequency and intensity. The frequency of sound is perceived as pitch and is measured in cycles per second, or Hertz ("Hz"). The normal human ear perceives sounds in the range of 20 to 18,000 Hz, although most components of human speech are generally in the range of 400 to 4,000 Hz. A more subtle aspect of frequency is that certain letters of the alphabet are spoken at a different frequency than others. For example, certain consonants such as "m," "n" and "g" and all vowels are spoken at relatively low frequencies while other consonants and sounds such as "t," "s," "f" and "sch" are spoken at higher frequencies. Accordingly, at a given volume, certain letters may be more audible than others. 25 The intensity of sound is perceived as loudness and is measured in decibels ("dB"). The lowest level of intensity at which an individual perceives sound is known as the threshold of hearing. The range in decibels from a person's threshold of hearing to the level at which the person perceives sound to be uncomfortably loud is known as the dynamic range. Both the threshold of hearing and the dynamic range vary with the frequency of sound. An individual with normal hearing can comfortably hear sounds ranging in intensity from approximately 30 dB to 100 dB. [ILLUSTRATION OF EAR ANATOMY] Hearing Impairment Hearing impairment can adversely effect a person's quality of life and psychological well-being. Hearing impaired people often withdraw from discussions and other social interactions to avoid frustration and embarrassment from not being able to fully participate in and understand conversations. Difficulty in communicating effectively can lead to negative emotions and attitudes, increased stress levels, reduced self-confidence, reduced sociability and reduced effectiveness in the workplace. In addition, recent studies suggest that hearing impairment may also contribute to physiological complications, such as heart disease. Audiologists typically classify the hearing impaired population into four categories: mild, moderate, severe and profound. In 1994, the total hearing impaired population in the United States was approximately 26 million people, of whom approximately 17 million were classified as either moderately or severely hearing impaired. While the exact causes of hearing impairment are varied and unclear, hearing impairment can be characterized according to its physiological source. There are two general categories of hearing impairment, conductive and sensorineural, although sometimes a combination of the two may arise. Conductive hearing impairment results from diseases or disorders that limit the transmission of sound through the outer and/or middle ear. Conductive hearing impairment is often treated surgically with an implanted prosthesis to replace part or all of the ossicles. The Company believes that people with a conductive hearing loss represent a small portion of the total hearing impaired population. 26 Sensorineural hearing impairment occurs in the inner ear and/or neural pathways and, the Company believes, accounts for the vast majority of hearing impairment. In patients with sensorineural hearing impairment, the external and middle ear function normally. The sound vibrations pass undisturbed through the eardrum and ossicles, and fluid waves are created in the cochlea. However, because some or many of the delicate sensory hair cells inside the cochlea have degenerated or been damaged, the inner ear cannot detect the full intensity and quality of the sound. Sensorineural hearing impairment typically occurs as a result of aging or exposure to loud noise over a protracted period of time. As people age, their level of hearing deteriorates and the dynamic range of audible frequencies is compressed, especially at the higher frequencies. While approximately 10% of the United States population is hearing impaired, based on 1994 data, this percentage increases to an average of approximately 25% for individuals over 55 years of age. The Company believes that with the growth and aging of the population, the hearing impaired population will continue to increase throughout the industrialized world. With the increasing exposure to noise in modern society, it has been observed that people may experience noise induced hearing loss from aircraft, automobiles, lawn mowers and high powered stereo equipment as well as military service and machinery within the workplace. Existing Therapies The traditional approaches to management of sensorineural hearing impairment have been the use of hearing aids and cochlear implants. Hearing aids are the most common devices used to manage mild to severe sensorineural hearing impairment. Cochlear implants have been used for the narrow segment of the sensorineural market represented by profound hearing impairment. However, both approaches have significant limitations in addressing their respective markets. Hearing Aids. The following table, based upon 1996 and 1997 articles in the Hearing Journal, illustrates the ownership of traditional hearing aids by the hearing impaired population in 1994. Approximately 18% of the hearing aid owners did not use their device.
TYPE OF HEARING IMPAIRED HEARING AID MARKET HEARING POPULATION OWNERS PENETRATION OF IMPAIRMENT (MILLIONS) (MILLIONS) HEARING AIDS ------------------------------------------------------------ Mild 8.0 0.3 4% Moderate 13.2 2.9 22% Severe 3.9 2.0 51% Profound 1.1 0.4 36% ---- --- Total 26.2 5.6 21%
Hearing aids are acoustic drive devices that amplify sound to increase the movement of the tympanic membrane and thereby indirectly vibrate the ossicles in an attempt to overcome the decrease in sensitivity of the delicate sensory hair cells inside the cochlea. The first electrically enhanced hearing aid was invented about a hundred years ago and consisted of a microphone, amplifier, battery and speaker. More recently, hearing aid manufacturers have increased the sophistication of sound processing, often using digital technology, to provide features such as programmability and multi-band compression, allowing different degrees of amplification at different frequencies. Hand-held programmers have also been developed to compensate for the inability of hearing aids to adequately process sound in a variety of acoustic environments. In addition, as technology has enabled greater miniaturization, less obtrusive hearing aids have become available. Although there have been continued advancements in hearing aid device technology, for optimal 27 performance all or part of the device must fit tightly in the ear canal, which results in significant drawbacks, including the following: Distorted sound quality. Obstructing the ear canal with either all or part of the hearing aid creates an effect known as occlusion, where outside sounds such as music are overwhelmed by internal sounds such as breathing or talking. Because the ear canal's natural resonance is significantly altered, the resulting sound can be unnatural and highly distorted. Acoustic feedback. Feedback is a high pitched squeal which results when a speaker and microphone are placed in close proximity and the sound from the speaker is loud enough to be picked up by the microphone. The problem of feedback is magnified since the volume of these devices must be turned up to not only compensate for the patient's hearing impairment but to overcome the reduction in sound caused by the blockage of the ear canal by the hearing aid. In addition, as hearing aids have been manufactured in smaller configurations, the problem of feedback has become inherently greater due to the closer proximity of the speaker to the microphone. Poor localization. Occlusion also results in the inability to differentiate the direction of sounds, as well as the inability to adequately differentiate between background noise and more important sounds, such as conversation. Social stigma. Many hearing aid users and potential users perceive a strong social stigma related to wearing a hearing aid. Discomfort. Hearing aids have been manufactured in smaller configurations in an attempt to address the perceived social stigma associated with wearing these devices. Since a tight fitting ear piece is required for optimal performance, the smaller versions of these devices must be placed deeper in the ear canal, which can cause substantial discomfort. Reliability. Hearing aids require frequent maintenance, in part due to their placement in the ear canal, where ear wax can cause problems with the speaker or dampen the sound produced by the hearing aid. Hearing aids generally have to be replaced every three or four years, either because of loss, damage or obsolescence. The need for periodic replacement increases the lifetime cost of wearing a hearing aid. Traditionally, most hearing aid users have paid for these devices directly. As a result of these problems, the benefits perceived by hearing aid users are generally very low. An article in the 1996 Hearing Journal reported that only approximately 53% of all hearing aid users are satisfied. Reflecting this low level of user satisfaction, in 1996 hearing aid manufacturers experienced product return rates ranging from 14% to 26%. Despite the inherent limitations of hearing aids, in 1995, approximately 1.7 million hearing aids were sold in the United States, representing a retail market of approximately $1.2 billion. The United States market represents approximately 38% of the worldwide hearing aid market. The Company estimates that the worldwide retail market for hearing aids exceeded $3.0 billion in 1995. Cochlear Implants. Cochlear implants have been developed for people who have a profound hearing loss and are essentially deaf. The cochlear implant is inserted into the inner ear in a highly invasive and non-reversible surgery. The implant electrically stimulates the auditory nerve through an electrode array that provides audible cues to the user which are not interpreted by the brain as normal sound. Instead, these cues have to be interpreted by the user, and primarily aid in lipreading and alerting the user to very loud or dangerous sounds. Users generally require intensive and extended counseling and training following surgery to achieve any benefit. Best results are achieved with adults whose hearing loss develops later in life or with children. Cochlear implants have been controversial both because of strong resistance from portions of the deaf community and because of the irreversible nature of the surgery in which the cochlea is invaded and any residual hearing is destroyed. Accordingly, the Company does not believe that cochlear implants will achieve significant market penetration beyond their initial indication of profound hearing impairment. The Company estimates that, in 1996, the worldwide market for cochlear implants was under $100 million. 28 THE SYMPHONIX SOLUTION The Company is developing a family of proprietary semi-implantable and implantable products, or soundbridges, for the management of moderate to severe hearing impairment. The Company's family of Vibrant soundbridges is based on its patented core technology, the Floating Mass Transducer ("FMT"). The FMT is a tiny transducer that is designed to enhance hearing by precisely mimicking and amplifying the movements of the ossicles by converting sound into mechanical vibrations. While conventional approaches have indirectly driven the ossicles by amplifying sound to increase the vibrations of the tympanic membrane, the FMT is attached directly to the ossicles and enhances the natural movement of these vibratory structures. This in turn generates enhanced stimulation of the delicate sensory hair cells in the inner ear. The FMT receives electrical signals from an Audio Processor, which picks up sound from the environment and converts these sounds into electrical signals. The Audio Processor transmits the signals to an implant under the skin. As a result, the ear canal is not obstructed, the natural resonance of the ear is maintained and an amplified, natural sound quality is achieved. The Company's soundbridges are implanted in a two hour surgery that can be performed on an outpatient basis utilizing the techniques which are similar to those employed in routine otologic procedures. Based on preclinical studies, the Company believes that the surgical procedure can be reversed without clinically meaningful damage to the patient's residual hearing. The Company believes that its family of Vibrant soundbridges offers a number of significant benefits, including: Improved sound quality and speech intelligibility. By leaving the ear canal unobstructed and the natural resonance undisturbed, a more natural sound quality is obtained over a broader range of frequencies, and the user's ability to understand speech is expected to be greater. Elimination of acoustic feedback. Since the Vibrant soundbridge mechanically drives the ossicles, it does not generate any acoustic feedback. Improved sound localization. Users are able to comprehend the acoustic sound environment, identify specific sounds and their source and differentiate sounds from background noise. Minimized social stigma. In the semi-implantable versions of the Company's soundbridges, the only external component is located behind the ear and generally hidden by the user's hair. As a result, social stigma is minimized. The totally implantable versions of the Company's soundbridges are being designed with no external components, and aesthetic considerations would be completely eliminated. Improved comfort. No part of the Vibrant soundbridge is inserted in the ear canal, resulting in increased comfort for users of the Vibrant soundbridge. Improved reliability. Since no components of the Vibrant soundbridge will be within the ear canal, the reliability problems caused by wax and moisture are eliminated. STRATEGY The Company's objectives are to establish its family of Vibrant soundbridges as the standard of care worldwide for the management of moderate to severe hearing impairment and to establish Symphonix as the leading company in the hearing management market. The following are key elements of the Company's strategy: Demonstrate improved quality of life. The Company intends to promote the potential benefits of its products to the hearing impaired population in order to expand the market to include not only current dissatisfied hearing aid users but also former users who have abandoned hearing aids due to either previous dissatisfaction or perceived social stigma. The Company believes that achieving real patient benefit in the form of improved quality of life will be an important factor in differentiating its products from the traditional approaches to hearing management. 29 Develop surgeon endorsement of the Company's family of soundbridges. The Company intends to position the family of Vibrant soundbridges as technologically advanced implants that address an unmet patient need and add to the products and services that surgeons can offer. The Company's strategy is to market its soundbridges initially to those specialists in otology who are currently most active in ear surgery and, thereafter, to the general population of ENT surgeons. Because the surgical procedure for implementing the Vibrant soundbridge utilizes many of the same techniques employed by surgeons trained and experienced in cochlear implant surgery, the Company believes that surgeon training will not be a significant impediment to market acceptance. Leverage the Company's patented core technology. The Company intends to leverage its patented core FMT technology to develop new soundbridges and enhancements to its current technology. The Company intends to continue to dedicate significant resources to research and development to further develop its technology base and to expand the market it addresses through development of a family of alternate configurations of soundbridges. The Company is developing the Vibrant P soundbridge to permit a greater degree of customization to address the specific needs of a particular patient, the Vibrant D soundbridge to permit an even greater degree of customization along with the additional benefit of digital signal processing, and the Vibrant HF soundbridge to provide a benefit suited to those individuals who have a noise-induced hearing loss at high frequencies but relatively normal hearing at lower frequencies. Protect and enhance the Company's proprietary position. The Company intends to continue to aggressively pursue proprietary protection for its technologies and products. The Company has three patents issued in the United States and 20 patents pending both in the United States and internationally covering a number of fundamental aspects of the FMT and related technologies. PRODUCTS UNDER DEVELOPMENT Symphonix is developing proprietary semi-implantable and implantable soundbridges, utilizing the Company's core FMT technology to manage hearing impairment. The Company believes that the Vibrant soundbridge, Vibrant P soundbridge, Vibrant HF soundbridge and Vibrant D soundbridge will enable the Company to address a significant portion of the moderate to severe hearing impairment market currently not satisfied with traditional hearing aid devices. The Vibrant XP soundbridge has the potential to enable the Company to address a portion of the profound hearing impairment market currently served by cochlear implants. In addition, the Company is in the early stage of developing the Vibrant TI which is being designed to be totally implantable with no external components. The Vibrant soundbridge, Vibrant P soundbridge, Vibrant HF soundbridge and Vibrant D soundbridge are designed to utilize the same implant, with the differences in function being provided by modifications to the external Audio Processor, its software and programming unit. Utilization of a common implant will allow a user to upgrade the Audio Processor if a user's hearing changes over time. 30 The following table sets out the soundbridges under development by the Company and their development status:
SOUNDBRIDGE Description HEARING LOSS ADDRESSED STATUS(1)(2) - --------------------------------------------------------------------------------------- Vibrant First generation semi- Moderate to IDE approved; Phase I implantable hearing moderately severe clinical trial device. complete in the United States; EN 540 clinical trial complete in Europe - --------------------------------------------------------------------------------------- Vibrant P Second generation semi- Moderate to severe IDE supplement implantable hearing submitted in the device, with fourth quarter of programmable dual-band 1997; EN 540 clinical analog signal trial complete in processing. Europe - --------------------------------------------------------------------------------------- Vibrant HF Second generation semi- Noise-induced high IDE expected to be implantable hearing frequency loss submitted in 1997 device designed to address noise induced high frequency hearing loss, by using modified signal processing. - --------------------------------------------------------------------------------------- Vibrant D Third generation semi- Moderate to severe implantable hearing IDE supplement device, with expected to be programmable 3-band submitted in the digital signal fourth quarter of processing. 1998 - --------------------------------------------------------------------------------------- Vibrant XP Second generation semi- Severe to profound Limited feasibility implantable hearing study expected to be device designed to performed in 1998 address more severe hearing impairment by using modified signal processing and an external battery in a body-worn pack, coupled with a modified implant. - --------------------------------------------------------------------------------------- Vibrant TI A second family of Moderate to severe Early stage of Vibrant soundbridges development which are being designed to be totally implantable with no external components.
(1) Regulatory filing dates reflect the Company's plans and are subject to delay or cancellation depending upon contingencies that may arise in the development process. See "Risk Factors--Limited Clinical Testing Experience" and "--Limited Manufacturing Experience; Scale-Up Risk; Dependence on Key Suppliers." (2) "Phase I" indicates limited safety and efficacy testing in humans. "EN 540" indicates European clinical trial standards to determine the safety and performance of products. 31 Vibrant soundbridge The Company's initial product under development, the Vibrant soundbridge, has both external and implantable components. The external Audio Processor consists of (i) a microphone that picks up sound from the environment, (ii) sound processing circuitry that converts the sound to an electronic signal and modulates the signal to reduce potential noise interference from broad band electromagnetic fields and (iii) a small 1.5 volt battery that powers the device. The Audio Processor is placed on the skull behind the ear and is held in place by magnetic attraction to an implanted receiver, the VORP (Vibrating Ossicular Prosthesis). The Audio Processor is small enough to be concealed by the user's hair. [ILLUSTRATION OF VIBRANT SOUNDBRIDGE IN PLACE] The VORP converts the electronic signal to a mechanical vibration of the ossicles in the middle ear. The VORP consists of (i) a receiver unit that receives the electromagnetic signal through the skin from the external Audio Processor and breaks down the electrical signal to the appropriate drive signal for the FMT, (ii) a conductor link that connects the implanted receiver unit to the FMT and (iii) the FMT itself, which is attached to the incus using a titanium clip. All of these components are insulated from body chemistry using well established implantable device materials used in pacemaker and implantable defibrillator systems. 32 The FMT is a tiny transducer, smaller than a grain of rice, that comprises a floating magnet contained within a titanium housing. A coil surrounding the housing generates a small electromagnetic field based on a signal received from the VORP's receiver unit. The electromagnetic interaction of the magnet and the coil creates a mechanical vibration of the entire FMT. This vibration enhances the natural movement of the ossicles, which in turn generates enhanced stimulation of the delicate sensory hair cells in the inner ear. A critical element of the proprietary FMT design is the proximity of the magnet to the electromagnetic field that causes the magnet to vibrate. By keeping the magnet and the coil close together, the FMT maximizes electromagnetic coupling while minimizing power consumption. [ILLUSTRATION OF FMT AND PHOTOGRAPH OF FMT PICTURED AGAINST A DIME] The surgical procedure for the implantation of the Vibrant involves techniques which are similar to those employed in other common otologic procedures. The internal receiver unit is implanted below the skin and muscle behind the ear. The conductor link connecting the receiver unit to the FMT is placed through the excavated mastoid bone. These steps are similar to those required for the surgical placement of a cochlear implant receiver. In the middle ear, the FMT is attached to the ossicles in a manner similar to the way otologists have traditionally attached ossicular prostheses for management of conductive hearing loss. Because the surgery involves surgical techniques that are familiar to ear surgeons, the Company believes that surgeon training will not be a significant impediment to market acceptance. The procedure may be performed on an outpatient basis, and initial clinical experience has indicated that the procedure can be performed in about two hours. Approximately eight weeks following the surgery, the Audio Processor is fitted by an audiologist with the appropriate sound processing settings. The Company's approved IDE only permits implantation in one ear. This will generally be the ear with the poorest unaided functional hearing. Based on preclinical studies, the Company believes that the surgical procedure can be reversed without damage to the patient's residual hearing. Limited clinical trials of the Vibrant were initiated in late 1996 in the United States. Also in late 1996, an EN 540 clinical trial was initiated in Europe. As of October 31, 1997, five patients in the United States have been implanted with the Vibrant soundbridge, all of whom have had the Audio Processor fitted and the soundbridge's performance evaluated. Additionally, 19 patients in Europe have been implanted with the Company's Vibrant soundbridge, all of whom have had the Audio Processor fitted and the soundbridge's performance evaluated. Vibrant P soundbridge The Vibrant P soundbridge under development is similar to the Vibrant soundbridge but is designed to permit a greater degree of customization to address the specific needs of a particular user's hearing loss and expand the types of hearing loss that can be managed by the Company's products. At the time of fitting, the Audio Processor is connected to a hand-held programming unit 33 which allows the audiologist to adjust separately the low and high frequencies. This permits a greater degree of customization in either the high or low frequency band. The Company has received approval to incorporate the Vibrant P into its current European clinical trial of the Vibrant and this trial was initiated in July 1997. In the United States, the Company has filed an IDE supplement seeking FDA approval to use the Vibrant P as part of the clinical trial of the Vibrant. On October 31, 1997, the Company received notification from the FDA that it would require additional audiologic and safety data prior to commencement of the next phase of clinical testing. On November 14, 1997, the Company submitted the additional information. There can be no assurance, however, that the Company will not be required to file a separate IDE for the Vibrant P, which would result in a delay in approval. As of October 31, 1997, 17 patients have been implanted with the Vibrant P in Europe, of whom 13 have had the Audio Processor fitted and the soundbridge's performance evaluated. Vibrant HF soundbridge The Vibrant HF soundbridge is being developed to provide a benefit for those individuals who have a hearing loss at high frequencies but relatively normal hearing at lower frequencies. Hearing aids usually are limited in effectiveness at higher frequencies due to acoustic feedback and internal speaker response. With the increasing exposure to noise in modern society, it has been observed that people may experience noise-induced hearing loss from aircraft, automobiles, lawn mowers and high powered stereo equipment as well as military service and machinery within the workplace. The Vibrant HF will be configured through selective signal processing. The Company intends to submit an IDE in 1997 for FDA approval to commence clinical trials of the Vibrant HF and intends to initiate European clinical trials in 1998. Vibrant D soundbridge The Vibrant D soundbridge under development is similar to the Vibrant P, but is designed to permit an even greater degree of customization to address the specific needs of a particular user's hearing loss. The Vibrant D features digital signal processing. Fully automatic and independent sound processing in three separate frequency bands is provided. At the time of fitting, the Audio Processor is connected to a programming unit which allows the audiologist to adjust separately the low, mid and high frequencies. This sophisticated system will be capable of analyzing sound and automatically adjusting the soundbridge's response. The Company intends to seek approval of an IDE supplement for the Vibrant D during 1998 and to initiate European clinical trials in 1998. There can be no assurance, however, that the Company will not be required to submit a separate IDE for the Vibrant D, which would result in a delay in regulatory approval. Vibrant XP soundbridge The Vibrant XP soundbridge is being developed to provide a benefit for those individuals who have a severe to profound hearing loss with speech recognition above 30%. Currently, there are only limited treatment options for such individuals. The Vibrant XP will be configured to provide modified signal processing and higher output from the FMT, thereby providing additional benefit for certain people with a severe to profound hearing impairment. Generating this higher output will require an external body-worn battery pack, similar to those used for cochlear implants. However, unlike cochlear implants, the Vibrant XP will not require penetration of the inner ear with its attendant damage to residual hearing. 34 The Company intends to conduct a feasibility study in 1998 on a limited number of patients in Europe to assess the viability of this product concept. Based on the results of this feasibility study, the Company may seek approval to initiate U.S. clinical trials of the Vibrant XP by submitting an IDE during 1998 and may initiate European clinical trials in 1998. Vibrant TI soundbridge The Company is in the early stages of developing versions of the Vibrant for the management of moderate to severe hearing impairment that are totally implantable with no external components. The essential functions of the core FMT technology of these products will be the same as in the semi-implantable products. However, all the functions currently performed by the external Audio Processor are being designed to be performed by implanted components. The Company believes that the Vibrant TI, if successfully developed, will be applicable especially for people who are particularly physically active or who are concerned about aesthetics. Two critical elements of producing the Vibrant TI are the development of an implantable microphone that can adequately pick up sound from the external environment, and the development of a transcutaneously rechargeable battery to power the device. The microphone is being developed internally by the Company and the battery is being developed under a cooperative development project with a specialized battery manufacturer. However, there can be no assurance that such components will be successfully developed in a timely manner, if ever. Since all of the Company's products are in development, significant revenues from product sales will not be realized for at least several years, if ever. There can be no assurance that any of the Company's product development efforts will be successfully completed, that any of the Company's products will be proven to be safe and effective, that regulatory approvals will be obtained or labeling claims will be as broad as sought, that the Company's products will be capable of being produced in commercial quantities with acceptable yields at reasonable costs, or that any products, if introduced, will achieve market acceptance. CLINICAL TRIAL ACTIVITIES United States On February 23, 1996, the Company received approval of an IDE for the Vibrant from the FDA. The Company has completed a Phase I trial under the IDE and submitted the interim report to the FDA. This trial was limited to five subjects, including Geoffrey R. Ball, a founder of the Company, at two investigational sites and was intended to test the safety and provide preliminary evidence of efficacy of the device and the surgical procedures used to implant the device. Due to the limited number of subjects evaluated, no statistically valid conclusions can be made from the results reported to the FDA. The Company observed the following performance characteristics: increased functional gain at higher frequencies (i.e., >2000 Hz); elimination of occlusion effect; elimination of acoustic feedback; elimination of placement loss; reduction of maintenance issues; and elimination of ear mold issues. A standardized hearing test was also administered to evaluate each subject's ability to comprehend speech in a noisy environment. Three of the five subjects demonstrated a 50% improvement with the Vibrant compared to their hearing aid. The trial included a self-assessment questionnaire of improvement for the following seven categories of device performance as compared to a hearing aid: communication, reverberation, familiar talker, reduced cues, background noise, aversion to sounds and distortion of sounds. Subjects reported an improvement greater than 20% in six of the seven categories with the Vibrant when compared to their current hearing aid. On October 3, 1997, the Company submitted a Phase I report and an IDE supplement to the FDA requesting modification and expansion to the next phase of clinical testing. On October 31, 1997, the 35 Company received notification from the FDA that it would require additional audiologic and safety data prior to commencement of the next phase of clinical testing. On November 14, 1997, the Company submitted the additional information. Europe The Company has conducted a multi-center EN 540 clinical trial in Europe at seven institutions. Clinical sites were located in Germany, Italy, the Netherlands, the United Kingdom, Switzerland and France. The EN 540 protocol investigated the safety and performance of the Vibrant and the Vibrant P. As of October 31, 1997, 36 subjects have been implanted with the Company's soundbridges, 19 with the Vibrant and 17 with the Vibrant P. With the Vibrant, performance was only evaluated for functional gain and the results were comparable to those achieved by the subjects in the United States trial. With the Vibrant P, the subjects demonstrated functional gains as high as 50 dB at 1000 Hz, 55 dB at 1500 Hz, 60 dB at 2000 Hz, 40 dB at 3000 Hz, 50 dB at 4000 Hz, 40 dB at 6000 Hz, and 35 dB at 8000 Hz. These functional gain values reported were at "user settings" and did not necessarily reflect the maximum functional gains attainable with the device. There can be no assurance that regulatory approvals to commence Phase II or Phase III clinical trials will be obtained in a timely fashion, or at all, or that the Company's clinical trial efforts will progress as expected, not be delayed or that such efforts will lead to the successful development of any product. No assurance can be given that any of the Company's clinical trials will be allowed by the FDA or other regulatory agencies or that clinical trials will commence as planned. Any delays in the Company's clinical trials would have a material adverse effect on the Company's business, financial condition and results of operations. Success in preclinical studies or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Further, there can be no assurance that if such testing of products under development is completed, any such devices will be accepted for formal review by the FDA or approved by the FDA for marketing in the United States. RESEARCH AND DEVELOPMENT The Company had 20 employees engaged in research and development, including regulatory and clinical affairs, as of September 30, 1997. The Company's research and development has focused on developing its patented core FMT technology, developing the Vibrant soundbridge and conducting appropriate preclinical and clinical testing. The Company expended approximately $3.3 million, $5.4 million and $4.6 million for the years ended December 31, 1995 and 1996 and for the nine months ended September 30, 1997, respectively, on research and development, and anticipates that it will continue to expend substantial resources on completion of the clinical testing of the Vibrant and Vibrant P soundbridges, development and clinical testing of the Vibrant HF and Vibrant D soundbridges, and supporting manufacturing scale-up. In addition, the Company expects to devote substantial resources to the development of the Vibrant XP soundbridge and of the Vibrant TI family of totally implantable versions of the Vibrant soundbridge. In addition, the Company may devote resources for the development of products for the treatment of conductive hearing loss. Product development involves a high degree of risk and there can be no assurance that the Company's product development efforts will result in any commercially successful products. MANUFACTURING The Company currently manufactures its products in limited quantities for laboratory testing and for its United States and European clinical trials. The manufacture of the Company's soundbridges is a complex operation involving a number of separate processes, components and assemblies. Each 36 device is assembled and individually tested by the Company. The manufacturing process consists primarily of assembly of internally manufactured and purchased components and subassemblies, and certain processes are performed in a clean room environment. After completion of the manufacturing and testing processes, implantable devices are sterilized by a sub-contracted supplier. The Company has no experience manufacturing its products in the volumes or with the yields that will be necessary for the Company to achieve significant commercial sales, and there can be no assurance that the Company can establish high volume manufacturing capacity or, if established, that the Company will be able to manufacture its products in high volumes with commercially acceptable yields. If the Company receives regulatory approval to commercialize its products, it will need to expend significant capital resources and develop manufacturing expertise to establish commercial-scale manufacturing capabilities. Before the Company commences commercial-scale manufacturing activities, it intends to move to a new facility. Furthermore, prior to approval of a PMA, the Company's facilities, procedures and practices will be subject to a pre-approval inspection by the FDA. The Company's inability to successfully manufacture or commercialize its soundbridges in a timely matter could have a material adverse effect on the Company's business, financial condition and results of operations. Raw materials, components and subassemblies for the Company's soundbridges are purchased from various qualified suppliers and are subject to stringent quality specifications and inspections. The Company conducts quality audits of its key suppliers, several of whom are experienced in the supply of components to manufacturers of implantable medical devices, such as pacemakers, defibrillators and drug delivery pumps. A number of components and subassemblies, such as silicone, control electronics and implant packaging are provided by single source suppliers. None of the Company's suppliers is contractually obligated to continue to supply the Company nor is the Company contractually obligated to buy from a particular supplier. For certain of these 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. In addition, if the Company wishes to significantly modify its manufacturing processes or change the supplier of a critical component, additional approvals will be required from the FDA before the change can be implemented. Because of the long lead time for some components and subassemblies that are currently available from a single source, a supplier's inability or failure to supply such components or subassemblies in a timely manner or the Company's decision to change suppliers could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company believes that its current facilities are sufficient to meet its clinical manufacturing needs, before the Company commences commercial-scale manufacturing operations, it intends to move to a new facility. The Company has signed a lease on a new facility and is in the process of constructing a clean room and other leasehold improvements in this building and expects to occupy the building in the first quarter of 1998. This new facility, which will replace the current facility, is necessary for the establishment of commercial-scale manufacturing. The Company's manufacturing facilities are subject to periodic inspection by regulatory authorities, and its operations must undergo QS regulation compliance inspections conducted by the FDA and corresponding state agencies. Additionally, prior to approval of a PMA, the Company's and its third-party manufacturers' facilities, procedures and practices will be subject to pre- approval QS regulation inspections. The Company has been inspected by the Food and Drug Branch of the California Department of Health Services ("CDHS") and a Device Manufacturing License has been issued to the Company. The Company will be required to comply with the QS regulation requirements in order to produce products for sale in the United States and with applicable quality system standards and directives in order to produce products for sale in the EU. Any failure of the Company to comply with the QS regulation or applicable standards and directives may result in the Company being required to take corrective actions, such as modification of its policies and 37 procedures. Pending such corrective actions, the Company could be unable to manufacture or ship any products, which could have a material adverse effect on the Company's business, financial condition and results of operations. SALES, MARKETING AND TRAINING The primary market for the Vibrant soundbridge is well defined and highly concentrated. Of the approximately 8,000 ENT surgeons in the United States, approximately 400 are specialists in otology. The Company's strategy is to market its products initially to those specialists in otology who are currently most active in ear surgery, and, subsequently, to the general population of ENT surgeons. Because the surgical procedure for implementing the Vibrant soundbridge utilizes many of the same techniques employed by surgeons trained and experienced in cochlear implant surgery, the Company believes that surgeon training will not be a significant impediment to market acceptance. The Company intends to position the family of Vibrant soundbridges as technologically advanced implants that address an unmet patient need and add to the products and services that surgeons can offer. Patients who have traditionally been candidates for a hearing aid often are first seen by an ENT surgeon, prior to being referred to a hearing device dealer or dispensing audiologist. Accordingly, endorsement by the surgical community will be an important goal of the Company's marketing programs. The Company will also seek to develop a high degree of awareness by and endorsement from audiologists. The Company intends to promote the benefits of its products to consumers in order to expand usage to include not only those who are currently dissatisfied with hearing aids, but also those who have abandoned hearing aids due to either dissatisfaction or perceived social stigma. Because the target market is quite concentrated, the Company believes that it can address the market in the United States with a small direct sales force. The Company is in the process of establishing a sales and marketing organization in Europe. An office has been established in Basel, Switzerland, where the Company's Director of European Sales and Marketing and European Clinical Manager are based. The Company expects to recruit sales personnel to provide direct sales coverage in Germany, France and the United Kingdom by the first quarter of 1998. By the end of the first quarter of 1998, the Company intends to establish distributors in Italy, Spain and the Benelux countries. In other international markets, including Japan, the Company will seek to establish a network of distributors. There can be no assurance that the Company will be able to build a direct sales force or marketing organization in any country, that establishing a direct sales force or marketing organization will be cost-effective or that the Company's sales and marketing efforts will be successful. In addition, the Company has had only limited discussions with potential international distributors and has not yet entered into any agreements with distributors. There can be no assurance that the Company will be able to enter into agreements with qualified distributors on a timely basis on terms acceptable to the Company, or at all, or that such distributors will devote adequate resources to selling the Company's products. COMPETITION The medical device industry is subject to intense competition in the United States and abroad. The Company believes its products will compete primarily with the traditional approaches to managing hearing impairment, principally hearing aids. Principal manufacturers of acoustic hearing aids include Siemens Hearing Instruments, Inc., Philips Medical Systems North America Co., Starkey Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp., Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no assurance that the Company's soundbridges will be able to successfully compete with established hearing aid products. Although, to the Company's knowledge, none of these acoustic hearing aid manufacturers are currently developing 38 direct drive devices, there can be no assurance that these potential competitors will not succeed in developing technologies and products in the future that are more effective, less expensive than those being developed by the Company or that do not require surgery. The Company is aware of several university research groups and development-stage companies that have active research or development programs related to direct drive sensorineural hearing devices. Research of this type has been conducted at various sites for over 20 years. In addition, some large medical device companies, some of which are currently marketing implantable medical devices, may develop programs in hearing management. Certain of these companies have substantially greater financial, technical, manufacturing, marketing and other resources than the Company. In addition, there can be no assurance that certain of the Company's competitors will not develop technologies and products that may be more effective in managing hearing impairment than the Company's products or that render the Company's products obsolete. The Company believes that the primary competitive factors in the hearing management market will be the quality of the hearing enhancement, safety, whether surgery is required, reliability, endorsement by the surgeon and audiology communities, patient comfort, cosmetic result and price. The medical device industry is characterized by rapid and significant technological change. Accordingly, the Company's success will depend in part on its ability to respond quickly to medical and technological change and user preference through the development and introduction of new products that are of high quality and that address patient and surgeon requirements. PATENTS AND PROPRIETARY TECHNOLOGY In the United States, the Company holds three issued patents and ten pending patent applications. Additionally, the Company has ten pending foreign patent applications. These patents and patent applications generally cover the invention and application of the FMT as well as the specific application of the FMT and other concepts in the field of hearing impairment. In addition, the Company has licensed, on a royalty-free basis, a United States patent covering the magnetic attachment of an external audio processor to an implanted receiver. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its trade secrets, and to operate without infringing or violating the proprietary rights of others. The patent positions and trade secret provisions of medical device companies, including those of the Company, 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 the Company, that any of the Company's 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 the Company. 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, the Company cannot be certain that it was 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 he Company's ability to make, use or sell its products either in the United States or in international markets. Although the Company has conducted searches of patents issued to other companies, research or academic institutions or others, there can be no assurance that such patents do not exist, have not been filed or could not be filed or issued, which contain claims relating to the Company's technology, products or processes. 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 39 current and potential competitors and other third parties have not filed or in the future will not file applications for, or have not received or in the future will not receive, patents or obtain additional proprietary rights relating to products or processes used or proposed to be used by the Company. In addition, patent applications in foreign countries 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. There may be pending applications, which if issued with claims in their present form, might provide proprietary rights to third parties relating to products or processes used or proposed to be used by the Company. The Company may be required to obtain licenses to patents or proprietary rights of others. Further, the laws of certain foreign countries do not protect the Company's 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 the Company, may also be necessary to enforce patent or other intellectual property rights of the Company or to determine the scope and validity of other parties' proprietary rights. There can be no assurance that the Company will have the financial resources to defend its patents from infringement or claims of invalidity. The Company also relies upon trade secrets and other 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 the Company's proprietary technology or that the Company can meaningfully protect its rights in such unpatented proprietary technology. The Company's policy is to require each of its employees, consultants, investigators and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. These agreements generally provide that all inventions conceived by the individual during the term of the relationship shall be the exclusive property of the Company 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 for the Company's proprietary information in the event of unauthorized use or disclosure of such information. Recently Public Law 104-208 was signed into law in the United States and limits the enforcement of patents relating to the performance of surgical or medical procedures on a body. This law 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 the Company's ability to enforce any of its proprietary methods or procedures deemed to be surgical or medical procedures on a body. In certain other countries outside the United States, patent coverage relating to the performance of surgical or medical procedures is not available. Therefore, patent coverage in such countries will be limited to the FMT or to narrower aspects of the FMT. The medical device industry in general has been characterized by substantial litigation. Litigation regarding patent and other intellectual property rights, whether with or without merit, could be time-consuming and expensive to respond to and could distract the Company's technical and management personnel. The Company may become involved in litigation to defend against claims of infringement by the Company, to enforce patents issued to the Company or to protect trade secrets of the Company. If any relevant claims of third-party patents are held as infringed and not invalid in any litigation or administrative proceeding, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each such patent, or to redesign its products or processes to avoid infringement. In addition, in the event of any possible infringement, there can be no assurance that the Company would be successful in any attempt to redesign its products or processes to avoid such infringement or in obtaining licenses on terms acceptable to the Company, if at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure by the Company to redesign its products or processes 40 or to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company has not been involved in any litigation to date, in the future, costly and time-consuming litigation brought by the Company may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to determine the enforceability, scope and validity of the proprietary rights of others. GOVERNMENT REGULATION The Company's medical products, such as the Vibrant soundbridge, are regulated as medical devices. Accordingly, clinical trials, product development, labeling, manufacturing processes and promotional activities are subject to extensive review and rigorous regulation by government agencies in most countries in which the Company will seek to commercialize its products. United States In the United States, the Company's products are subject to applicable provisions of the United States Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other federal statutes and regulations governing, among other things, the design, manufacture, testing, safety, labeling, storage, record keeping, reporting, approval, advertising and promotion of medical devices. Noncompliance with applicable requirements can result in warning letters, fines, recalls or seizure of products, civil penalties, injunctions, total or partial suspension of production, withdrawal of approval or refusal to approve new marketing applications and criminal prosecution. Changes in existing requirements or adoption of new requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Pursuant to the FDC Act, the FDA regulates the design, manufacture, distribution, preclinical and clinical study and approval of medical devices in the United States. Medical devices are classified in one of three classes (Class I, Class II or Class III) on the basis of the controls necessary to reasonably assure their safety and effectiveness. Safety and effectiveness is considered to be reasonably assured for Class I devices through general controls (e.g., labeling, premarket notification and adherence to current QS regulations) and for Class II devices through the use of additional special controls (e.g., performance standards, post-market surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to reasonably assure their safety and effectiveness (e.g., life- sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices, or devices whose safety and effectiveness cannot be reasonably assured through general controls, even if supplemented by additional special controls). Active implantable devices, such as the Company's implantable hearing devices, are considered Class III devices. Before a new device can be introduced to the market, the manufacturer generally must obtain FDA clearance through a 510(k) Premarket Notification or FDA approval through a PMA application. While the Company has no products for which it expects to seek 510(k) clearance, it may file 510(k) submissions with respect to future products. A 510(k) clearance will generally only be granted if the information submitted to the FDA establishes that the device is "substantially equivalent" to a legally marketed predicate medical device. Frequently, the FDA will require clinical data in support of a 510(k) submission, and the 510(k) process can become time-consuming and expensive. Significant modifications of the labeling, manufacturing and design of any product that has been cleared through the 510(k) process will require a new 510(k) Premarket Notification, if those modifications could significantly affect the safety, effectiveness or intended use of the device. A PMA must be submitted if the device cannot be cleared through the 510(k) process. A PMA must be supported by extensive data, including, but not limited to, technical, preclinical, clinical 41 trials, manufacturing, and labeling to demonstrate the safety and effectiveness of the device. The Company believes that all versions of the Vibrant soundbridge currently under development are Class III devices and will require a PMA, as will future configurations of implantable hearing devices. Before the Company's products can be commercialized in the United States, the Company must submit, in a PMA, extensive data on preclinical studies and clinical trials, device design, manufacturing, labeling, promotion and advertising, as well as other aspects of the product. In addition, the Company must submit clinical data gathered in trials conducted under an IDE demonstrating to the satisfaction of the FDA that the product is safe and effective and represents an improvement in hearing compared to currently marketed well-functioning acoustic hearing aids, and obtain marketing approval from the FDA. To date, the Company has received FDA approval of an IDE to commence clinical testing of the Vibrant. The testing will be conducted in phases. Phase I has been completed, was limited to two sites and five patients and was intended to test the safety and provide preliminary evidence of efficacy of the device and the surgical procedure used to implant the device. The Company intends to initiate a multi-site Phase II study with ten additional patients, followed by a multi-site Phase III pivotal trial in approximately 85 patients. The Company has filed an IDE supplement to incorporate the Vibrant P into the Phase II and Phase III trials for the Vibrant soundbridge, but there can be no assurance that the FDA will not require a separate IDE for the Vibrant P. If the Company is required to submit a separate IDE, regulatory approval of the Vibrant P would be delayed. On October 3, 1997, the Company submitted a Phase I report and an IDE supplement to the FDA requesting modification and expansion to the next phase of clinical testing. On October 31, 1997, the Company received notification from the FDA that it would require additional audiologic and safety data prior to commencement of the next phase of clinical testing. On November 14, 1997, the Company submitted the additional information. There can be no assurance that additional approvals to commence Phase II or Phase III clinical trials will be obtained in a timely fashion, or at all, or that the Company's clinical trial effort will progress as expected, not be delayed or that such effort will lead to the successful development of any product. No assurance can be given that any of the Company's proposed clinical trials will be allowed by the FDA or other regulatory agencies or that clinical trials will commence as planned. As of October 1997, the five patients required for the Phase I clinical trial have been implanted with the Vibrant soundbridge, have had the Audio Processor fitted, and have completed the follow-up required by the trial protocol. Any delays in the Company's clinical trials would have a material adverse effect on the Company's business, financial condition and results of operations. Success in preclinical studies or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Further, there can be no assurance that if such testing of products under development is completed, any such devices will be accepted for formal review by the FDA, or approved by the FDA for marketing in the United States. After a PMA is filed, the FDA begins its review of the submitted information, which generally takes between one and two years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA will be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with QS regulation requirements. There can be no assurance that the Company will be able to meet the FDA's requirements or that any necessary approval will be granted in a reasonable time frame, or at all. New PMAs or PMA supplements are required for significant modifications to the manufacture, labeling and design of a device that is approved through the PMA process. Supplements to a PMA 42 often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. The PMA process can be expensive, uncertain and can frequently require several years. Even when a PMA is approved, the FDA may impose restrictions on the indications for which the device can be marketed. There can be no assurance that the Company will be able to obtain necessary approvals on a timely basis, or at all, and delays in obtaining or failure to obtain such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements could have an adverse effect on the Company's business, financial condition and results of operations. Subsequent to the receipt of an FDA approval, the Company will continue to be regulated by the FDA with regard to the reporting of adverse events related to its products, and ongoing compliance with QS regulation. The Company's manufacturing facility must be registered with the FDA and the California Food and Drug Branch and will be subject to periodic inspections by the FDA and by the California Food and Drug Branch. A Device Manufacturing License has been issued by the State of California and this license must be renewed annually for the Company to continue manufacture of medical devices in California. Europe The primary regulatory environment in Europe is that of the EU which consists of 15 countries encompassing most of the major countries in Europe. The EU has adopted numerous directives and standards regulating the design, manufacture, clinical trial, labeling, and adverse event reporting for medical devices. The principal directives prescribing the laws and regulations pertaining to medical devices in the EU are the MDD and the AIMDD. In the EU, the Company's soundbridges will be regulated as active implantables and therefore be governed by the AIMDD. For products, such as those of the Company, that have not previously been commercialized in the EU, CE marking is required prior to initiation of sales in the EU. Certain other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the EU with respect to medical devices. 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. For purposes of determining the necessary steps for assessing conformity, devices are classified under the Directives as Class I, Class IIa, Class IIb, Class III, or Active Implantable Medical Devices. Devices having a higher classification are considered to have a higher risk and, accordingly, are subject to more controls in order to bear CE marking. The Vibrant is designated as an Active Implantable Medical Device. Essential requirements under the AIMDD include substantiating that the device meets the manufacturer's performance claims and that safety issues, if any, constitute an acceptable risk when weighed against the intended benefits of the device. The two principal aspects of assessing conformity for Active Implantable Medical Devices are determinations from the Notified Body that the processes employed in the design and manufacture of a device qualify as a full quality system in compliance with applicable standards (e.g., EN ISO 9001, EN 46001 and 90/385/EEC), and 43 that the technical, preclinical, and clinical data gathered on the device are adequate to support CE marking. The Company has undergone an inspection by its Notified Body and its quality system has been certified by the Notified Body as being in compliance with the required standards. The Company is in the process of submitting the technical, preclinical and clinical data that its Notified Body has indicated will be required to satisfy the essential requirements of the AIMDD. To satisfy these requirements, the Company must complete a clinical trial conducted under European clinical trial standards (EN 540) to determine the safety and performance of the products. The Company must continue to pass annual ISO 9001/EN 46001 and AIMDD 2.3 annual quality system audits in order to retain international approvals. As of October 31, 1997, a total of 36 patients in the European clinical trial have been implanted with the Company's soundbridges (19 with the Vibrant and 17 with the Vibrant P) of whom 32 have had the Audio Processor fitted and the soundbridge's performance evaluated. The Company intends to complete its submission to the Notified Body by the end of 1997. There can be no assurance that such data will be accepted by the Company's Notified Body, or that the Notified Body will not require the Company to obtain additional data from additional clinical trials involving more patients in order to demonstrate the safety and performance of the Vibrant and the Vibrant P. Once a manufacturer has satisfactorily completed the regulatory compliance tasks required by the directives and received favorable determinations by the Notified Body, it is eligible to place the CE mark on its products. Manufacturers are subject to ongoing regulation under the AIMDD. The quality system will be subject to periodic audit and recertification, and serious adverse events must be reported to the authorities in the country where the incident takes place. If such incidents occur, the manufacturer may have to take remedial action, including withdrawal of the product from the EU market. While no additional premarket approvals in 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. Also, as the directives do not cover reimbursement and distribution practices, differences may occur in these and other areas. THIRD-PARTY REIMBURSEMENT The Company believes that its products will generally be purchased by hospitals and clinics upon the recommendation of a surgeon. In the United States, hospitals, physicians and other health care providers that purchase medical devices generally rely on third-party payors, principally Medicare, Medicaid, private health insurance plans, health maintenance organizations and other sources of reimbursement for health care costs, to reimburse all or part of the cost of the procedure in which the medical device is being used. Such third-party payors have become increasingly sensitive to cost containment in recent years and place a high degree of scrutiny on coverage and payment decisions for new technologies and procedures. Hearing aids, which are the subject of 510(k) and do not involve surgery, are generally not reimbursed, although a modest reimbursement is provided under certain insurance plans. Traditionally, hearing aid users have paid for these devices directly. For cochlear implants, however, that are technologically advanced and FDA-approved through the PMA process for the treatment of profound hearing impairment, a reimbursement is available for the device, the audiological testing, and the surgery. Similarly, reimbursement is available for ossicular replacement prostheses that are FDA-approved for the treatment of conductive hearing impairment. The Company anticipates that, as surgically implanted devices that require FDA approval, the Company's products may also be the 44 subject of reimbursement in the future. During clinical trials, the Company does not anticipate that there will be any reimbursement for the Vibrant soundbridge implant or procedure. The Company's strategy is to pursue reimbursement for the Vibrant soundbridge, once a PMA is approved by the FDA, based on surgeon endorsement and demonstration of improved quality of life for specific patient groups. Quality of life issues are included in the Company's clinical trial to provide data in support of this reimbursement strategy. There can be no assurance that the Company will be able to demonstrate improvement in quality of life or that reimbursement will ever be available for the Company's products. Certain third-party payors are moving toward a managed care system in which they contract to provide comprehensive health care for a fixed cost per person. The fixed cost per person established by these third-party payors may be independent of the hospital's cost incurred for the specific case and the specific devices used. Medicare and other third-party payors are increasingly scrutinizing whether to cover new products and the level of reimbursement for covered products. Because the Company's hearing prostheses are currently under development and have not received FDA clearance or approval, uncertainty exists regarding the availability of third-party reimbursement for procedures that would use the Company's soundbridges. Failure by physicians, hospitals and other potential users of the Company's soundbridges to obtain sufficient reimbursement from third-party payors for the procedures in which the Company's soundbridges are intended to be used could have a material adverse effect on the Company's business, financial condition and results of operations. Third-party payors that do not use prospectively fixed payments increasingly use other cost-containment processes or require various outcomes data that may pose administrative hurdles to the use of the Company's soundbridges. In addition, third-party payors may deny reimbursement if they determine that the device used in a procedure is unnecessary, inappropriate, experimental, used for a non-approved indication or is not cost-effective. Potential purchasers must determine that the clinical benefits of the Company's products justify the additional cost or the additional effort required to obtain prior authorization or coverage and the uncertainty of actually obtaining such authorization or coverage. If the Company obtains the necessary foreign regulatory approvals, market acceptance of the Company's products and products currently under development in international markets would 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. 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 the Company's products in the international markets in which such approvals are sought. The Company believes that in the future reimbursement will be subject to increased restrictions both in the United States and in international markets. The Company believes that the overall escalating cost of medical products and services will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including the Company's products and products currently under development. There can be no assurance in either United States or international markets that third-party reimbursement and coverage will be available or adequate, that future legislation, regulation or reimbursement policies of third-party payors will not otherwise adversely affect the demand for the Company's products or products currently under development or its ability to sell its products on a profitable basis. The unavailability of third-party payor coverage or the inadequacy of reimbursement could have a material adverse effect on the Company's business, financial condition and results of operations. 45 PRODUCT LIABILITY The Company's business involves the inherent risk of product liability claims. The Company maintains limited product liability insurance. However, there can be no assurance that such insurance will continue to be available on commercially reasonable terms, or at all, or that such insurance will be adequate to cover liabilities that may arise. Any claims that are brought against the Company could, if successful, have an adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES At September 30, 1997, the Company had 40 employees. Of these employees, 20 were in research and development, regulatory and clinical affairs, 15 were in manufacturing and quality assurance and five were in administration, sales and marketing. None of the Company's employees is covered by a collective bargaining agreement and the Company believes that it maintains good relations with its employees. FACILITIES The Company's principal administrative, manufacturing and research and development facility occupies approximately 11,500 square feet in San Jose, California, pursuant to a lease that expires in August 1998. The Company has signed a lease on a facility of approximately 30,500 square feet in San Jose, California that expires in December 2002. The Company is in the process of constructing a clean room and other leasehold improvements in this building and expects to occupy the facility in the first quarter of 1998. This new facility, which will replace the current facility, is necessary for the establishment of commercial-scale manufacturing, and will house all of the Company's U.S. operations. The Company has established an office in Basel, Switzerland for the headquarters of its European sales and marketing organization. LEGAL MATTERS The Company is not currently engaged in any legal proceedings. 46 SCIENTIFIC ADVISORY BOARD The Company has established a Scientific Advisory Board consisting of leading professionals in the fields of otology, otolaryngology and audiology. Each member of the Board has received options for stock, pursuant to the 1994 Option Plan, for participation on the Board. The Board meets periodically and reviews the Company's clinical progress and product development plans. In addition, members of the Scientific Advisory Board are available on an individual basis to consult with the Company. The members of the Scientific Advisory Board are as follows: BYRON J. BAILEY, MD. Dr. Bailey is an otolaryngologist. He is Chairman of the Department of Otolaryngology at the University of Texas Medical Branch at Galveston, Texas. Dr. Bailey has served on numerous committees with the American Academy of Otolaryngology-Head and Neck Surgery as well as advisory committees for the FDA. He is a past president of the American Academy of Otolaryngology-Head and Neck Surgery. CHARLES I. BERLIN, PH.D. Dr. Berlin is a clinical audiologist. He is Director of the Kresge Hearing Research Laboratory of the South, part of Louisiana State University Medical Center ("LSUMC") in New Orleans, Louisiana. At LSUMC, Dr. Berlin is also a Professor in the Department of Otorhinolaryngology and Biocommunication, in the Department of Physiology and in the School of Allied Health's Department of Communication Disorders. DERALD E. BRACKMANN, MD. Dr. Brackmann is an otologist and neurotologist. He is President of the House Ear Clinic, and Chief of the Otology Service at St. Vincent Medical Center in Los Angeles, California and at the University of Southern California/Los Angeles County Medical Center. Dr. Brackmann has published more than 200 papers and has three textbooks to his credit. He is a past president of the American Academy of Otolaryngology-Head and Neck Surgery, the American Otological Society and the North American Skull Base Society. RICHARD A. CHOLE, MD, PH.D. Dr. Chole is an otologist and neurotologist. He is Chairman of the Department of Otolaryngology at the University of California, Davis School of Medicine. Dr. Chole's research has been supported by the National Institutes of Health, The Deafness Research Foundation, the American Otologic Society and the University of California. He serves on the Expert Panel on Hearing and Hearing Impairment for the National Institute of Deafness and Communication Disorders. CHARLES M. LUETJE, MD. Dr. Luetje is an otologist and neurotologist in private practice. Additionally, Dr. Luetje serves as a Clinical Assistant Professor in the Department of Surgery/Otolaryngology at the University of Missouri Medical Center and as a preceptor and instructor in the Department of Otolaryngology at the University of Kansas Medical Center. He has over 100 presentations and papers to his credit and serves as the President Elect of the American Otological Society. 47 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The executive officers, directors and key employees of the Company, their positions with the Company and ages as of September 30, 1997, are as follows:
Name AGE POSITION ---- --- -------- Harry S. Robbins............ 50 Chairman of the Board of Directors, President and Chief Executive Officer Geoffrey R. Ball............ 33 Vice President, Chief Technical Officer and Director R. Michael Crompton......... 39 Vice President of Regulatory Affairs and Quality Assurance Peter Hertzmann............. 49 Vice President of Marketing and Clinical Affairs Bob H. Katz................. 37 Vice President of Research and Development Alfred G. Merriweather...... 43 Vice President of Finance and Chief Financial Officer Patrick J. Rimroth.......... 42 Vice President of Operations John de Mora-Mieszkowski.... 52 Director of European Sales and Marketing B.J. Cassin(1)(2)........... 63 Director Terry Gould................. 40 Director Michael J. Levinthal(1)(2).. 43 Director Petri T. Vainio(1)(2)....... 38 Director
- -------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. HARRY S. ROBBINS co-founded the Company and has served as Chairman of the Board of Directors, President and Chief Executive Officer of the Company since its founding in May 1994. From January 1991 to December 1993, Mr. Robbins was President and Chief Executive Officer of CardioRhythm, Inc., a medical device company that, from May 1992, was a subsidiary of Medtronic Inc. Previously, Mr. Robbins held executive sales and marketing positions with Laserscope and Diasonics, Inc., medical device companies. Mr. Robbins is a director of Business Resource Group, a distributor of office furniture and systems. Mr. Robbins holds a B.A. degree in arts and sciences from Pennsylvania State University. GEOFFREY R. BALL invented the FMT, co-founded the Company and has served as Vice President and Chief Technical Officer and a director since May 1994. From 1987 to March 1994, Mr. Ball was a biomedical engineer in the hearing research laboratory at the Veterans Hospital in Palo Alto, California, affiliated with Stanford University. Mr. Ball holds an M.S. degree in systems management from the University of Southern California and a B.S. degree in human development and performance from the University of Oregon. R. MICHAEL CROMPTON has been Vice President of Regulatory Affairs and Quality Assurance of the Company since June 1996. From June 1995 to May 1996, from October 1993 to January 1994 and from February 1992 to August 1992, Mr. Crompton was employed by Advanced Bioresearch Associates, a medical device consulting company, where he specialized in regulatory consultation for FDA- regulated products. From February 1994 to May 1995, Mr. Crompton was an attorney with Hyman, Phelps & McNamara, a Washington, D.C. law firm specializing in FDA matters. From September 1992 to September 1993, Mr. Crompton was Manager of Regulatory Affairs at Tosoh Medics, Inc., a medical device company. Mr. Crompton has a J.D. degree from the University of San Francisco, and a B.A. degree in biochemistry and an M.P.H. degree in biomedical sciences from the University of California at Berkeley. 48 PETER HERTZMANN has been Vice President of Marketing and Clinical Affairs of the Company since October 1994. From July 1990 to October 1994, Mr. Hertzmann was the president of Peter Hertzmann, Inc., a marketing consulting firm to the medical device and surgical community. Mr. Hertzmann holds a B.S. degree in photographic science and instrumentation from the Rochester Institute of Technology. BOB H. KATZ has been Vice President of Research and Development of the Company since October 1994. From April 1990 to October 1994, Mr. Katz was employed by Telectronics Pacing Systems, a manufacturer of implantable medical devices. At Telectronics Pacing Systems, he served as Program Manager, Bradycardia Product Development, from 1990 to September 1993 and as Director of Strategic Planning, Instrument Systems, from September 1993 to October 1994. Mr. Katz holds a B.A. degree in business administration and a B.S. degree in electrical engineering from Rutgers University, an M.S. degree in biomedical engineering from Boston University and an M.B.A. from Nova Southeastern University. ALFRED G. MERRIWEATHER has been Vice President of Finance and Chief Financial Officer of the Company since March 1996. From September 1993 to March 1996, Mr. Merriweather was Senior Vice President of Finance and Administration and Chief Financial Officer of LipoMatrix Inc., a medical device company. From 1983 to August 1993, Mr. Merriweather held executive management positions with Laserscope, including serving as Vice President of Finance and Chief Financial Officer from 1988. Mr. Merriweather holds a B.A. degree in economics from the University of Cambridge, England. PATRICK J. RIMROTH has served as Vice President of Operations of the Company since March 1996 and as Vice President of Manufacturing, from November 1995 to March 1996. From June 1994 to October 1995, Mr. Rimroth was Vice President of Research and Development for Camino Neurocare, a medical device company. From December 1988 to June 1994, Mr. Rimroth held multiple research and development management positions with divisions of C.R. Bard, Inc., a medical device company. Mr. Rimroth has a B.S. degree in biology and a B.S.E.E. degree in electronic engineering from Purdue University. JOHN DE MORA-MIESZKOWSKI has been Director of European Sales and Marketing since September 1997. From September 1994 to August 1997, Mr. de Mora- Mieszkowski was Marketing and Sales Manager, Europe, for Cochlear AG, a distributor of cochlear implants. From March 1992 to September 1994, Mr. de Mora-Mieszkowski was Divisional Sales Manager for Cilag International AG, a pharmaceutical company. Mr. de Mora-Mieszkowski holds a B.S. degree in biochemistry from the University of London, England. B.J. CASSIN has served as a director of the Company since July 1994. Mr. Cassin has been a private venture capital investor since 1979. Previously, he co-founded Xidex Corporation, a manufacturer of data storage media, and served as Vice President of Marketing. Mr. Cassin is a director of Advanced Fiber Communications, Inc. and Cerus Corporation (of which he is Chairman). Mr. Cassin holds an A.B. degree from Holy Cross College. TERRY GOULD has served as a director of the Company since May 1996. Mr. Gould has been a partner in the Private Markets Group of Brinson Partners, Inc. since January 1994. From November 1989 to December 1993, Mr. Gould was employed by Trinity Ventures Ltd., a venture capital firm. Mr. Gould holds a B.A. degree in engineering science from Dartmouth College and an M.B.A. degree from Stanford University. MICHAEL J. LEVINTHAL has served as a director of the Company since July 1994. Mr. Levinthal has been a General Partner of several venture capital funds affiliated with Mayfield Fund since 1984. He currently serves as a director of InControl, Inc., Focal, Inc. and Heartstream, Inc., medical device companies. Mr. Levinthal holds a B.S., an M.S. and an M.B.A. degree from Stanford University. 49 PETRI T. VAINIO has served as a director of the Company since July 1994. Dr. Vainio is a general partner of Sierra Ventures, a venture capital firm he joined in 1988. He currently serves as a director of Heartport, Inc., a medical device company. Dr. Vainio holds M.D. and Ph.D. degrees from the University of Helsinki, Finland, and an M.B.A. degree from Stanford University. BOARD COMPOSITION The Company currently has authorized six directors. In accordance with the terms of the Company's Restated Certificate of Incorporation, to be filed after the closing of this offering, the terms of office of the Board of Directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 1999; Class II, whose term will expire at the annual meeting of stockholders to be held in 2000; and Class III, whose term will expire at the annual meeting of stockholders to be held in 2001. The Class I directors will be Terry Gould and Geoffrey R. Ball, the Class II directors will be Petri T. Vainio and Michael J. Levinthal and the Class III directors will be B.J. Cassin and Harry S. Robbins. At each annual meeting of stockholders after the initial classification of the Board of Directors, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following such election. In addition, the Company's Restated Certificate of Incorporation provides that the authorized number of directors may be changed only by resolution of the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the Board of Directors may have the effect of delaying or preventing changes in control or management of the Company. Each officer is elected by and serves at the discretion of the Board of Directors. Each of the Company's officers, directors and key employees, other than nonemployee directors, devote substantially full time to the affairs of the Company. The Company's nonemployee directors devote such time to the affairs of the Company as is necessary to discharge their duties. There are no family relationships among any of the directors, officers or key employees of the Company. BOARD COMMITTEES The Audit Committee of the Board of Directors reviews the internal accounting procedures of the Company and consults with and reviews the services provided by the Company's independent accountants. The members of the Audit Committee are B.J. Cassin, Michael J. Levinthal and Petri T. Vainio. The Compensation Committee of the Board of Directors reviews and recommends to the Board the compensation and benefits of all officers of the Company and establishes and reviews general policies relating to compensation and benefits of employees of the Company. The members of the Compensation Committee are B.J. Cassin, Michael J. Levinthal and Petri T. Vainio. DIRECTOR COMPENSATION The Company does not compensate the directors for the services they provide as directors other than reasonable expenses in connection with attendance at Board Meetings, for which directors may receive reimbursement. However, in the past, stock options have been granted to individuals who serve as directors. 50 EXECUTIVE COMPENSATION The following table sets forth the summary of the compensation paid by the Company during the fiscal year ended December 31, 1996 to the Company's Chief Executive Officer and each of the Company's other most highly compensated executive officers (collectively the "Named Executive Officers"), whose total annual salary and bonus for such fiscal year were in excess of $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------- SECURITIES NAME AND PRINCIPAL OTHER UNDERLYING POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS - ------------------ ---- --------- -------- ------------------ ------------ Harry S. Robbins........ 1996 $199,039 $82,000 -- 250,600 President and Chief Executive Officer Geoffrey R. Ball........ 1996 102,835 28,118 -- -- Vice President, Chief Technical Officer Peter Hertzmann......... 1996 114,192 19,838 -- 14,534 Vice President of Marketing and Clinical Affairs Bob H. Katz............. 1996 116,473 29,208 -- 14,534 Vice President of Research and Development Patrick J. Rimroth...... 1996 115,008 33,961 $13,920 14,534 Vice President of Operations
- -------- (1) Other compensation represents relocation expenses paid. 51 The following table sets forth each grant of stock options made during the fiscal year ended December 31, 1996 to each of the Named Executive Officers: OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996 INDIVIDUAL GRANTS
POTENTIAL REALIZABLE PERCENTAGE OF VALUE AT ASSUMED TOTAL OPTIONS ANNUAL RATE OF STOCK GRANTED TO EXERCISE PRICE APPRECIATION OPTIONS EMPLOYEES IN OR BASE FOR OPTION TERM(5) GRANTED FISCAL YEAR PRICE EXPIRATION --------------------- NAME (#)(1) (%)(3) ($/Sh)(4) DATE 5% ($) 10% ($) - ---- ------- ------------- --------- ---------- ---------- ---------- Harry S. Robbins(2)..... 125,300 21.9 0.80 8/2/2001 1,818,777 2,321,323 125,300 21.9 0.80 8/2/2001 1,818,777 2,321,323 Peter Hertzmann......... 14,534 2.5 0.73 8/2/2006 273,482 441,760 Bob H. Katz............. 14,534 2.5 0.73 8/2/2006 273,482 441,760 Patrick J. Rimroth...... 14,534 2.5 0.73 8/2/2006 273,482 441,760
- -------- (1) Each grant for 14,534 shares vests as follows: The options were immediately exercisable, conditioned upon the optionee entering into a restricted stock purchase agreement with the Company with respect to any unvested shares. The options vest or are released from the repurchase option at the rate of one forty-eighth ( 1/48) at the end of each full month beginning on the third anniversary of the commencement of each optionee's employment with the Company. Vesting of such options will commence as follows: Peter Hertzmann--October 31, 1997, Bob H. Katz--October 30, 1997 and Patrick J. Rimroth--November 10, 1998. (2) Of these shares, 125,300 were immediately exercisable and 125,300 shares were exercisable January 1, 1997, conditioned upon the optionee entering into a restricted stock purchase agreement with respect to any unvested options. The options vest or are released from the repurchase option at the rate of one forty-eighth ( 1/48) at the end of each full month following March 1, 1998. (3) Based on an aggregate of 571,616 options granted by the Company in the year ended December 31, 1996 to employees of and consultants to the Company, including the Named Executive Officers. (4) The exercise price per share of each option was equal to the fair market value of the Common Stock on the date of grant as determined by the Board of Directors. The exercise prices per share of the options granted to Harry S. Robbins were granted at 110% of the fair market value of the Common Stock on the date of grant due to Mr. Robbin's ownership of 10% or greater of the outstanding capital stock of the Company. (5) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the option term will be at the assumed 5% or 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. The potential realizable value is calculated by assuming that the initial public offering price of $12.00 per share appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. 52 The following table sets forth the information with respect to stock option exercises during the year ended December 31, 1996 by each of the Named Executive Officers, and the number and value of securities underlying unexercised options held by the Named Executive Officers at December 31, 1996: AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1996 AND OPTION VALUES AT DECEMBER 31, 1996
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES VALUE FISCAL YEAR-END (#)(1) FISCAL YEAR-END ($)(2) ACQUIRED ON REALIZED ------------------------- ------------------------- NAME EXERCISE (#)(1) ($)(2) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- --------------- --------- ------------------------- ------------------------- Harry S. Robbins........ -- -- 125,300/125,300 1,403,360/1,403,360 Peter Hertzmann......... 14,534 163,798 --/-- --/-- Bob H. Katz............. 130,813 1,551,442 --/-- --/-- 14,534 163,798 --/-- --/-- Patrick J. Rimroth...... 65,406 748,899 --/-- --/-- 14,534 163,798 --/-- --/--
- -------- (1) Shares and options held by the above Named Executive Officers are subject to vesting over a four year period. (2) Based on the assumed initial public offering price of $12.00 per share, minus the per share exercise price, multiplied by the number of shares underlying the option. OPTION VESTING AGREEMENTS The Company has entered into an option vesting agreement with each of its officers with whom it has entered into a stock option agreement, to provide for accelerated vesting of all shares subject to such option (i) 12 months after a change in control or (ii) in the event such officer is involuntarily terminated within the 12 month period following a change in control. For purposes of the option vesting agreement, "change in control" is defined as (i) the closing of a merger, reorganization, sale of shares or sale of substantially all of the assets of the Company in which the stockholders of the Company immediately prior to the closing of the transaction own less than 50% of the voting power of the surviving or controlling entity (or its parent) immediately after the transaction, or (ii) the date of the approval by the stockholders of the Company of a plan of complete liquidation of the Company. The following officers held the following options to purchase shares of Common Stock as of September 30, 1997, which options vest over four years from the date of grant: R. Michael Crompton (79,940 shares); Peter Hertzmann (94,474 shares); Bob H. Katz (159,881 shares); Alfred G. Merriweather (98,109 shares); Patrick J. Rimroth (94,474 shares); and Harry S. Robbins (250,600 shares). INCENTIVE STOCK PLANS 1994 Option Plan. The 1994 Option Plan was adopted by the Board of Directors and approved by the stockholders in July 1994. As of September 30, 1997, 441,734 shares were subject to outstanding options at exercise prices ranging from $0.14 to $1.10 per share and 223,683 shares were available for future grant under the 1994 Option Plan. In November 1997 the Board of Directors approved an increase of 375,000 shares available for grant under the 1994 Option Plan subject to approval of the stockholders within 12 months of the approval by the Board of Directors. The purposes of the 1994 Option Plan are to attract and retain qualified personnel, to provide additional incentives to employees, officers and consultants of the Company and to promote the success of the Company's business. Pursuant to the 1994 Option Plan, the Company may grant options which qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as 53 amended (the "Code"), to employees (including officers and directors who are employees) and nonqualified stock options to employees, officers, directors and consultants. The Compensation Committee is authorized to administer the 1994 Option Plan, including the selection of the employees, directors and consultants of the Company to whom stock options may be granted and the interpretation and adoption of rules for the operation of the 1994 Option Plan. Options granted under the 1994 Option Plan generally vest incrementally over a four-year period. However, the vesting schedule is subject to modification by the Board of Directors. The maximum term for options granted under the 1994 Option Plan is ten years, except that, if at the time of the grant the optionee possesses more than 10% of the combined voting power of the Company (a "10% Stockholder"), the maximum term of an option is five years. The exercise price of incentive stock options granted to a 10% stockholder must be at least 110% of the fair market value of the stock subject to the option on the date of grant. Except pursuant to a merger or other corporate transaction, the exercise price of nonqualified stock options granted under the 1994 Option Plan must be at least 100% of the fair market value of the stock subject to the option on the date of grant. Payment of the exercise price may be made by cash, check, promissory note, other shares of Common Stock of the Company owned by the optionee for a sufficient period, cancellation of indebtedness pursuant to a cashless exercise program, if one is implemented by the Company, and any other method permitted by law. The 1994 Option Plan may be amended at any time by the Board of Directors, although certain amendments would require stockholder approval. The 1994 Option Plan will terminate in 2004, unless earlier terminated by the Board of Directors. Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Company's Board of Directors in November 1997 and the Company anticipates that the Purchase Plan will be approved by the stockholders prior to the closing of this offering. The Purchase Plan is intended to qualify under Section 423 of the Code. The Company has reserved 75,000 shares of Common Stock for issuance under the Purchase Plan. Under the Purchase Plan, an eligible employee may purchase shares of Common Stock from the Company through payroll deductions of up to 10% of his or her compensation, at a price per share equal to 85% of the lower of (i) the fair market value of the Company's Common Stock on the first day of an offering period under the Purchase Plan or (ii) the fair market value of the Common Stock on the last day of a purchase period. Each offering period will last for 24 months and will commence the first day on which the national stock exchanges and The Nasdaq Stock Market are open for trading on or after May 1 and November 1 of each year. The first offering period will begin upon the effective date of this offering and will end on October 31, 1998. Any employee who is customarily employed for at least 20 hours per week and more than five months per calendar year is eligible to participate in the Purchase Plan. No shares have been purchased under the Purchase Plan to date. EMPLOYEE RETIREMENT PLANS In April 1996, the Company implemented a Retirement Savings and Investment Plan that is intended to qualify under Section 401(k) of the Code (the "401(k) Plan") covering all of the Company's employees who have attained age 18. An employee may elect to defer, in the form of contributions to the 401(k) Plan on his or her behalf, up to 20% of the total compensation that would otherwise be paid to the employee, not to exceed the amount allowed by applicable Internal Revenue Service guidelines. The Company may in its discretion make matching contributions to the 401(k) Plan, but has not yet done so. Contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan. Contributions by the Company are deductible by the Company when made. 54 CERTAIN TRANSACTIONS In July, August and October 1994 and January 1995, the Company issued and sold 5,463,000 shares of Series A Preferred Stock at a purchase price of $1.00 per share to a total of 40 investors. The directors, officers and 5% stockholders that purchased shares of Series A Preferred Stock and the number of shares that each purchased are (i) B.J. Cassin and affiliates, 295,000 shares, (ii) Coral Partners IV, Limited Partnership, 1,000,000 shares; (iii) Mayfield VII and affiliates, 1,500,000 shares, (iv) Peter Hertzmann, Inc., 15,000 shares and (v) Sierra Ventures IV and affiliates, 1,750,000 shares. Upon completion of this offering at an assumed initial public offering price of $12.00 per share, all outstanding shares of Preferred Stock will convert into shares of Common Stock at a 1.376-to-one ratio. In June 1995, the Company issued and sold 1,378,500 shares of Series B Preferred Stock at a purchase price of $4.00 per share to a total of 31 investors. The directors, officers and 5% stockholders that purchased shares of Series B Preferred Stock and the number of shares that each purchased are (i) B.J. Cassin and affiliates, 111,188 shares, (ii) Coral Partners IV, Limited Partnership, 250,000 shares, (iii) Mayfield VII and affiliates, 375,000 shares, (iv) Peter Hertzmann, Inc., 3,750 shares and (v) Sierra Ventures IV and affiliates, 437,500 shares. In May and June 1996, the Company issued and sold 1,162,451 shares of Series C Preferred Stock at a purchase price of $5.35 per share to a total of 20 investors pursuant to the terms of the Series C Preferred Stock Purchase Agreement. The directors, officers and 5% stockholders that purchased or beneficially held shares of Series C Preferred Stock and the number of shares that each purchased or beneficially held are (i) B.J. Cassin, 18,690 shares, (ii) Brinson Venture Capital Fund III, L.P. and affiliates, 373,832 shares, (iii) Coral Partners IV, Limited Partnership, 170,841 shares, (iv) Mayfield VII and affiliates, 256,262 shares, (v) Peter Hertzmann, Inc., 2,804 shares and (vi) Sierra Ventures IV and affiliates, 299,065 shares. In November and December 1996 and June 1997, the Company issued and sold 1,190,680 shares of Series D Preferred Stock at a purchase price of $8.00 per share to a total of 14 investors. The 5% stockholders that purchased or beneficially held shares of Series D Preferred Stock and the number of shares that each purchased or beneficially held are (i) B.J. Cassin, 23,125 shares, (ii) Coral Partners IV, Limited Partnership, 92,706 shares, (iii) Mayfield VII and affiliates, 139,036 shares, (iv) Sierra Ventures and affiliates, 162,238 shares and (v) JJDC, 750,000 shares. In connection with the Company's Series D Preferred Stock issuances, the Company granted one of the investors, JJDC, first negotiation rights, whereby the Company agreed that it will not (i) transfer, dispose of, sell, lease or license (exclusively or nonexclusively) to any third party, any of certain defined intellectual property rights that are or may be used or may have application in the field of implantable and semi-implantable hearing aid devices or (ii) transfer or dispose of all or substantially all of the assets or voting securities of the Company to any third party until it provides JJDC the opportunity to consummate a similar transaction. JJDC's first negotiation rights survive for a period of 18 months from the date of the June 1997 Series D Preferred Stock financing or 12 months from the effective date of the Company's registration statement relating to its initial public offering, whichever first occurs. Notwithstanding the foregoing, JJDC's first negotiation rights terminate in the event that JJDC, either directly or through an affiliate, does not participate as an investor in this offering. On March 14, 1997, the Company entered into an assignment agreement with VibRx, Inc., a Delaware corporation ("VibRx"), whereby the Company assigned to VibRx all of the right, title and interest of the Company in and to any and all existing inventions, original works of authorship, developments, improvements, trade secrets, patents and patent applications relating to (i) an apparatus and method for sonically enhanced drug delivery and (ii) an apparatus and method for 55 sonically enhanced drug delivery with micro electromechanical machining. Harry S. Robbins, the Company's President, is the President, sole director and sole stockholder of VibRx. Immediately prior to the VibRx closing an initial financing of at least $500,000 to VibRx, VibRx will issue to Symphonix that number of shares of common stock equal to 20% of the then outstanding capital stock of VibRx (including reserved shares). The Company has granted certain officers options to purchase shares of the Company's Common Stock, which options were early exercised and paid for by delivery of promissory notes to the Company by the following officers in the following aggregate amounts: Bob H. Katz ($90,600), Alfred G. Merriweather ($88,600) and Patrick J. Rimroth ($94,600). The notes have a term of five years and accrue interest at an annual rate of approximately 6.5%. 56 PRINCIPAL STOCKHOLDERS The following table sets forth information known to the Company with respect to the beneficial ownership of its Common Stock as of September 30, 1997, and as adjusted to reflect the sale of Common Stock offered by the Company hereby for (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) each Named Executive Officers and (iv) all directors and executive officers of the Company as a group.
PERCENT BENEFICIALLY OWNED SHARES ----------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING - ------------------------------------ ------------ -------- -------- Entities Affiliated with Sierra Ventures(2)..... 1,952,250 20.7% 16.7% 3000 Sand Hill Road Building 4, Suite 210 Menlo Park, CA 94025 Entities Affiliated with Mayfield(3)............ 1,682,638 17.9% 14.4% 2800 Sand Hill Road, 2nd Floor Menlo Park, CA 94025 Harry S. Robbins(4)............................. 1,326,181 14.1% 11.3% Coral Partners IV, Limited Partnership.......... 1,099,960 11.7% 9.4% 60 South Sixth Street, Suite 3510 Minneapolis, MN 55402 Geoffrey R. Ball................................ 672,238 7.2% 5.8% Petri T. Vainio(2).............................. 1,952,250 20.7% 16.7% Michael J. Levinthal(3)......................... 1,682,638 17.9% 14.4% Johnson & Johnson Development Corporation....... 545,058 5.8% 4.7% One Johnson & Johnson Plaza New Brunswick, NJ 08933 B.J. Cassin(5).................................. 352,831 3.7% 3.0% Terry Gould(6).................................. 286,486 3.1% 2.5% Bob H. Katz..................................... 159,881 1.7% 1.4% Peter Hertzmann(7).............................. 110,137 1.2% * Patrick J. Rimroth.............................. 94,474 1.0% * All directors and executive officers as a group (11 persons) (2)(3)(4)(5)(6)(7)(8).......................... 6,815,165 71.6% 57.7%
- -------- * Represents beneficial ownership of less than one percent. (1) Except as otherwise noted in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock. (2) Consists of 1,850,887 shares held by Sierra Ventures IV, 74,111 shares held by Sierra Ventures IV International and an option to purchase up to 27,252 shares exercisable within 60 days after September 30, 1997 held by Petri T. Vainio. Mr. Vainio, a director of the Company, is a General Partner of the Sierra entities and disclaims beneficial ownership of the shares held by such entities except to the extent of his proportionate partnership interest therein. (3) Consists of 1,567,441 shares held by Mayfield VII, 82,494 shares held by Mayfield Associates Fund II and 32,703 shares held by Mayfield VII Management Partners. Mr. Levinthal is a General Partner of Mayfield VII Management Partners, which is General Partner of Mayfield VII and Mayfield Associates Fund II, and disclaims beneficial ownership of the shares held by such entities except to the extent of his proportionate partnership interest. 57 (4) All such shares are held in the name of the Robbins Family Trust. Mr. Robbins holds voting and dispositive power over all such shares. (5) Consists of (i) 230,195 shares held in the name of the Cassin Family Trust, over which Mr. Cassin holds voting and dispositive power, (ii) 95,384 shares held by Cassin Family Partners, a California Limited Partnership, over which Mr. Cassin holds voting and dispositive power and (iii) an option to purchase up to 27,252 shares exercisable within 60 days after September 30, 1997. (6) Consists of 246,316 shares held by Brinson Venture Capital Fund III, L.P. ("Brinson L.P.") and 40,170 shares held by Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III ("Brinson MAP"). Mr. Gould, a director of the Company, is a partner in the Private Markets Group of Brinson Partners, Inc. Brinson Partners, Inc. is the General Partner of Brinson L.P. and the manager of Brinson MAP. Mr. Gould disclaims beneficial ownership of the shares held by such entities. (7) Consists of 94,474 shares held in the name of the Peter Hertzmann Revocable Trust and 15,663 shares held by Peter Hertzmann, Inc. Mr. Hertzmann holds voting and dispositive power over all such shares. (8) Includes options to purchase up to 65,406 shares exercisable within 60 days after September 30, 1997. 58 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock and the restatement of the Company's Certificate of Incorporation after the closing of this offering. The following summary of certain provisions of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Restated Certificate of Incorporation which is included as an exhibit to the Registration Statement of which this Prospectus is a part, and by the provisions of applicable law. COMMON STOCK As of September 30, 1997, there were 9,396,021 shares of Common Stock outstanding which were held of record by 90 stockholders, on a pro forma basis to reflect the conversion of all outstanding shares of Preferred Stock which will occur upon the closing of this offering. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and non-assessable, and the shares of Common Stock to be issued upon the closing of this offering will be fully paid and non-assessable. PREFERRED STOCK Effective upon the closing of this offering, the Company will be authorized to issue 5,000,000 shares of undesignated Preferred Stock, none of which will be outstanding. The Board of Directors will have the authority, without further action by the stockholders, to issue the undesignated Preferred Stock in one or more series, to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of undesignated Preferred Stock and to fix the number of shares constituting any series and the designation of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of and the voting and other rights of the holders of Common Stock. At present, the Company has no plans to issue any of the Preferred Stock. WARRANTS As of September 30, 1997, the Company had outstanding a warrant to purchase 26,889 shares of Common Stock at $1.38 per share expiring in October 2004 and two warrants to purchase an aggregate of 6,722 shares of Common Stock at $5.50 per share expiring in October 2004. The shares underlying these warrants are entitled to registration rights. See "--Registration Rights of Certain Holders." 59 REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of 6,682,083 shares of Common Stock and warrants to purchase 33,611 shares of Common Stock (the "Registrable Securities") or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement between the Company and the holders of Registrable Securities. Subject to certain limitations in the agreement, the holders of at least a majority of the Registrable Securities may require, on two occasions beginning three months after the date of this Prospectus, that the Company use its best efforts to register the Registrable Securities for public resale. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to include their shares of Common Stock in the registration, subject to the ability of the underwriters to limit the number of shares included in the offering. The holders of at least 20% of the Registrable Securities may also require the Company to register all or a portion of their Registrable Securities on Form S-3 when use of such form becomes available to the Company, provided, among other limitations, that the proposed aggregate selling price (net of any underwriters' discounts or commissions) is at least $1.0 million. All registration expenses must be borne by the Company and all selling expenses relating to Registrable Securities must be borne by the holders of the securities being registered. CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS Certain provisions of the Company's Restated Certificate of Incorporation and Bylaws to be effective upon completion of this offering may have the effect of preventing, discouraging or delaying a change in the control of the Company and may maintain the incumbency of the Board of Directors and management. The authorization of undesignated Preferred Stock makes it possible for the Board of Directors to issue Preferred Stock with voting or other rights or preferences that could impede the success of any attempt to change control of the Company. In addition, the Company's Bylaws limit the ability of stockholders of the Company to raise matters at a meeting of stockholders without giving advance notice. The Restated Certificate of Incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. The Restated Certificate of Incorporation and the Bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be called pursuant to a resolution adopted by a majority of the Board of Directors, by the Chairman of the Board, by the President of the Company, or by stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. The Bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders of the Company, including proposed nominations of persons for election to the Board. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the Board or by a stockholder who was a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given to the Company's Secretary timely written notice, in proper form, of the stockholder's intention to bring that business before the meeting. Although the Bylaws do not give the Board the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the Bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the Company. 60 CERTAIN PROVISIONS OF DELAWARE LAW Following the consummation of the offering, the Company will be subject to the "Business Combination" provisions of the Delaware General Corporation Law. In general, such provisions prohibit a publicly held Delaware corporation form engaging in various "business combination" transactions with any "interested stockholder" for a period of three year after the date of the transaction in which the person became an "interested stockholder," unless (i) the transaction is approved by the Board of Directors prior to the date the interested stockholder obtained such status, (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding those shares owned by (a) persons who are directors and also officers an (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (iii) on or subsequent to such date the "business combination" is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" is defined to include mergers, asset sales and other transactions resulting in a financial benefit to a stockholder. In general, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is BankBoston, N.A. 61 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could materially and adversely affect market prices prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could materially and adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon the completion of this offering, the Company will have 11,696,021 shares of Common Stock outstanding, assuming no exercise of options after September 30, 1997. Of these shares, all of the 2,300,000 shares sold in this offering will be freely tradeable without restriction under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 9,396,021 shares of Common Stock held by existing stockholders were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered, or pursuant to an exemption from registration such as Rule 144, 144(k) or 701 under the Securities Act. Such restricted shares will be available for sale in the public market as follows: (i) no shares will be eligible for immediate sale on the date of this Prospectus and (ii) approximately 9,685,303 additional shares (including approximately 289,282 shares subject to outstanding vested options and outstanding warrants) will be available for sale 180 days after the date of this Prospectus upon expiration of the Lock-up Agreements, subject to certain volume and other limitations under Rule 144. The Company and its directors, executive officers and all of its stockholders have entered into the Lock-up Agreements, under which they have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, or agree to dispose of, directly or indirectly, any shares of Common Stock or options, rights or warrants to acquire shares of Common Stock, or securities exchangeable for or convertible into shares of Common Stock, owned by them for a period of 180 days following the day on which the Registration Statement becomes effective, without the prior written consent of Cowen & Company or the Company, as the case may be, except that, without such consent, the Company may issue Common Stock and grant options pursuant to the Stock Plans and issue Common Stock pursuant to the exercise of outstanding warrants, and the current stockholders of the Company who are not executive officers or directors of the Company may sell Common Stock acquired in the offering or in the open market. The Company has agreed not to release any stockholders from the terms of the Lock-up Agreements with the Company. Cowen & Company may, in its sole discretion and at any time without notice, release all or a portion of the shares subject to Lock-up Agreements. As of September 30, 1997, 441,734 shares were subject to outstanding options. All of these shares are subject to the Lock-up Agreements. In addition, 6,719,694 of the shares outstanding immediately following the completion of this offering (including up to 33,611 shares of Common Stock subject to outstanding warrants) will be entitled to registration rights with respect to such shares upon the release of the Lock-up Agreements. The number of shares sold in the public market could increase if such rights are exercised. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year (including the holding period of any prior owner, except an affiliate) is entitled to sell in "broker's transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 117,000 shares immediately after this offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public 62 information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner, except an affiliate), is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701 promulgated under the Securities Act, persons who purchase shares upon exercise of options granted prior to the effective date of this offering are entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. 63 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their representatives, Cowen & Company and UBS Securities LLC (the "Representatives"), have severally agreed to purchase from the Company the following respective number of shares at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER NAME OF SHARES ---- --------- Cowen & Company.................................................. UBS Securities LLC............................................... --------- Total.......................................................... 2,300,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may re- allow a concession not in excess of $ per share to certain other dealers. The Underwriters have informed the Company that they do not intend to confirm sales to any accounts over which they exercise discretionary authority. After the initial public offering of the shares, the offering price and other selling terms may from time to time be varied by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the Effective Date, to purchase up to 345,000 additional shares of Common Stock at the initial public offering price, less the underwriting discounts and commissions, set forth on the cover page of this Prospectus, to cover over-allotments, if any. If the Underwriters exercise such over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by each of them shown in the foregoing table bears to the total number of shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over- allotments made in connection with the sale of shares of Common Stock offered hereby. The Company and its directors, executive officers and all of its stockholders (holding in the aggregate approximately 9,396,021 shares of Common Stock) have agreed with the Company or Cowen & Company that they will not, without the prior written consent of the Company or Cowen & Company, as the case may be, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of or otherwise agree to dispose of, directly or indirectly any shares of Common Stock, 64 options, rights or warrants to acquire shares of Common Stock, or securities exchangeable for or convertible into shares of Common Stock, owned by them for a period of 180 days following the day on which the Registration Statement becomes effective, except that, without such consent, the Company may issue Common Stock and grant options pursuant to the Stock Plans and issue Common Stock pursuant to the exercise of outstanding warrants, and the current stockholders of the Company who are not executive officers or directors of the Company may sell Common Stock acquired in the offering or in the open market. The Company has agreed not to release any stockholders from the terms of Lock- up Agreements with the Company. See "Shares Eligible for Future Sale." In addition, the Company has agreed that it will not, without the prior written consent of Cowen & Company, offer, sell or otherwise dispose of any shares of Common Stock options, rights or warrants to acquire shares of Common Stock, or securities exchangeable for or convertible into shares of Common Stock during such 180-day period except in certain limited circumstances. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock has been determined by negotiation among the Company and the Representatives. Among the factors considered in determining the initial public offering price were prevailing market and economic conditions, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The Representatives have advised the Company that certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Cooley Godward, LLP, Palo Alto, California is acting as counsel for the Underwriters in connection with certain legal matters relating to the shares of Common Stock offered hereby. As of September 30, 1997, a certain investment partnership of Wilson Sonsini Goodrich & Rosati, Professional Corporation beneficially owned an aggregate of 18,168 shares of the Company's Common Stock. EXPERTS The financial statements of the Company as of December 31, 1995 and 1996 and for each of the two years in the period ended December 31, 1996 and the period from May 17, 1994 (date of 65 inception) to December 31, 1994 and for the cumulative period from May 17, 1994 to December 31, 1996, included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), in Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and Common Stock offered hereby, reference is made to the Registration Statement and such exhibits and schedules filed therewith, which may be inspected without charge at, or copies of such material may be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement and such exhibits and schedules are also available on the Commissions's Web site (http://www.sec.gov). Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 66 SYMPHONIX DEVICES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants.......................................... F-2 Balance Sheets............................................................. F-3 Statements of Operations................................................... F-4 Statements of Stockholders' Equity......................................... F-5 Statements of Cash Flows................................................... F-7 Notes to Financial Statements.............................................. F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Symphonix Devices, Inc. We have audited the accompanying balance sheets of Symphonix Devices, Inc. (a company in the development stage) as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity and cash flows for the years then ended, and the period from May 17, 1994 (date of inception) to December 31, 1994 and for the cumulative period from May 17, 1994 (date of inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial position of Symphonix Devices, Inc. (a company in the development stage) as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended, and for the period from May 17, 1994 (date of inception) to December 31, 1994, and for the cumulative period from May 17, 1994 (date of inception) to December 31, 1996, in conformity with generally accepted accounting principles. San Jose, California January 17, 1997, except for Note 11 as to which the date is November 7, 1997 - ------------------------------------------------------------------------------- To the Board of Directors and Stockholders Symphonix Devices, Inc. The financial statements included herein have been adjusted to give effect to the one-for-1,376 reverse stock split of the Company's outstanding Common Stock and the reincorporation of the Company in Delaware as described more fully in Note 11 to the financial statements. The above report is in the form that will be signed by Coopers & Lybrand L.L.P. upon the effectiveness of such split and reincorporation assuming that, from November 13, 1997 to the effective date of such split and reincorporation, no other events shall have occurred that would affect the accompanying financial statements or notes thereto. COOPERS & LYBRAND L.L.P. San Jose, California November 13, 1997 F-2 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) BALANCE SHEETS
PRO FORMA DECEMBER 31, SEPTEMBER 30, ------------------------- SEPTEMBER 30, 1997 1995 1996 1997 (SEE NOTE 10) ----------- ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) ASSETS ------ Current assets: Cash and cash equivalents.......... $ 2,566,199 $ 6,539,156 $ 4,980,136 Short-term investments.......... 4,237,029 4,570,723 6,547,994 Prepaid expenses and other current assets. 54,097 76,694 314,014 ----------- ------------ ------------ Total current assets............. 6,857,325 11,186,573 11,842,144 Property and equipment, net.................... 769,205 757,111 694,290 Other assets............ 58,684 7,720 20,922 ----------- ------------ ------------ Total assets........ $ 7,685,214 $ 11,951,404 $ 12,557,356 =========== ============ ============ LIABILITIES ----------- Current liabilities: Accounts payable...... $ 68,796 $ 42,487 $ 204,278 Accrued compensation.. 424,572 675,429 603,385 Other accrued liabilities.......... 15,189 115,002 371,520 Current portion of capital lease obliga- tion................. 160,506 284,644 317,697 ----------- ------------ ------------ Total current liabilities........ 669,063 1,117,562 1,496,880 Capital lease obligation, less current portion........ 422,899 595,572 405,886 ----------- ------------ ------------ Total liabilities... 1,091,962 1,713,134 1,902,766 ----------- ------------ ------------ Commitments (Note 6) STOCKHOLDERS' EQUITY -------------------- Convertible preferred stock, $.001 par value: Authorized: 7,000,000 shares in 1995, 9,000,000 shares in 1996 and 9,750,000 shares at September 30, 1997............. Issued and outstanding: 6,841,500 shares in 1995, 8,444,631 shares in 1996, 9,194,631 shares at September 30, 1997, no shares pro forma (Liquidation value: $20,721,553 at December 31, 1996)... 6,842 8,445 9,195 Common stock, $.001 par value: Authorized: 20,000,000 shares in 1995, 1996 and September 30, 1997................. Issued and outstanding: 1,980,142 shares in 1995, 2,384,329 shares in 1996, 2,713,938 shares at September 30, 1997 and 9,396,021 at September 30, 1997 pro forma............ 1,980 2,384 2,714 $ 9,396 Notes receivable from stockholders........... (14,800) (139,200) (371,199) (371,199) Deferred compensation... (300,813) (300,813) Unrealized gains on short-term investments. 1,349 1,349 Additional paid-in capital................ 11,003,265 20,879,232 27,450,911 27,453,424 Deficit accumulated during the development stage.................. (4,404,035) (10,512,591) (16,137,567) (16,137,567) ----------- ------------ ------------ ------------ Total stockholders' equity............. 6,593,252 10,238,270 10,654,590 $ 10,654,590 ----------- ------------ ------------ ============ Total liabilities and stockholders' equity........... $ 7,685,214 $ 11,951,404 $ 12,557,356 =========== ============ ============
The accompanying notes are an integral part of these financial statements. F-3 SYMPHONIX DEVICES INC. (A COMPANY IN THE DEVELOPMENT STAGE) STATEMENTS OF OPERATIONS
PERIOD FROM CUMULATIVE CUMULATIVE MAY 17, 1994 PERIOD FROM PERIOD FROM (DATE OF MAY 17, 1994 MAY 17, 1994 INCEPTION) (DATE OF NINE MONTHS ENDED (DATE OF TO YEAR ENDED DECEMBER 31, INCEPTION) SEPTEMBER 30, INCEPTION) DECEMBER 31, ------------------------ TO DECEMBER ------------------------ TO SEPTEMBER 1994 1995 1996 31, 1996 1996 1997 30, 1997 ------------ ----------- ----------- ------------ ----------- ----------- ------------ (UNAUDITED) (UNAUDITED) Costs and expenses: Research and development.......... $ 706,607 $ 3,306,994 $ 5,399,056 $ 9,412,657 $ 3,801,024 $ 4,643,249 $ 14,055,906 General and administrative....... 140,961 624,685 1,047,076 1,812,722 829,819 1,330,321 3,143,043 --------- ----------- ----------- ------------ ----------- ----------- ------------ Operating loss...... (847,568) (3,931,679) (6,446,132) (11,225,379) (4,630,843) (5,973,570) (17,198,949) Interest income......... 95,344 340,818 423,689 859,851 288,231 428,844 1,288,695 Interest expense........ (60,950) (86,113) (147,063) (55,302) (80,250) (227,313) --------- ----------- ----------- ------------ ----------- ----------- ------------ Net loss............ $(752,224) $(3,651,811) $(6,108,556) $(10,512,591) $(4,397,914) $(5,624,976) $(16,137,567) ========= =========== =========== ============ =========== =========== ============ Net loss per share...... $ (0.29) $ (1.30) $ (2.01) $ (3.66) $ (1.49) $ (1.66) $ (5.38) ========= =========== =========== ============ =========== =========== ============ Shares used in computing net loss per share..... 2,622,167 2,812,992 3,041,481 2,873,253 2,955,684 3,397,726 2,996,950 ========= =========== =========== ============ =========== =========== ============ Pro forma net loss per share.................. $ (0.12) $ (0.50) $ (0.71) $ (1.37) $ (0.53) $ (0.59) $ (1.98) ========= =========== =========== ============ =========== =========== ============ Shares used in computing pro forma net loss per share.................. 8,546,048 9,532,502 =========== ===========
F-4 SYMPHONIX DEVICES INC. (A COMPANY IN THE DEVELOPMENT STAGE) STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM MAY 17, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
DEFICIT NOTES UNREALIZED ACCUMULATED PREFERRED STOCK COMMON STOCK RECEIVABLE GAINS (LOSSES) ADDITIONAL DURING THE TOTAL ---------------- ---------------- FROM DEFERRED ON SHORT-TERM PAID-IN DEVELOPMENT STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION INVESTMENTS CAPITAL STAGE EQUITY --------- ------ --------- ------ ------------ ------------ -------------- ---------- ----------- ------------- Common stock issued in July 1994 to founder at $.03 per share in exchange for promissory note........... 1,075,581 $1,076 $(29,600) $28,524 $ -- Common stock issued in July 1994 to founder at $.03 per share in exchange for services and cash........... 679,501 679 18,021 18,700 Common stock issued in December 1994 in connection with stock option exercises...... 145,348 145 19,855 20,000 Partial repayment on promissory note from stockholder.... 14,800 14,800 Series A preferred stock issued in July 1994 to investors at $1.00 per share, net of issuance costs of $27,089..... 5,270,000 $5,270 5,237,641 5,242,911 Series A preferred stock issued in July 1994 at $1.00 per share in exchange for services....... 24,000 24 23,976 24,000 Net loss........ $ (752,224) (752,224) --------- ------ --------- ------ -------- --- --- ---------- ---------- ---------- Balances, December 31, 1994........... 5,294,000 5,294 1,900,430 1,900 (14,800) 5,328,017 (752,224) 4,568,187 Series A preferred stock issued in January 1995 at $1.00 per share in exchange for services....... 30,000 30 29,970 30,000 Series A preferred stock issued in January 1995 to investors at $1.00 per share, net of issuance costs of $470........ 139,000 139 138,391 138,530 Series B preferred stock issued in June 1995 to investors at $4.00 per share, net of issuance costs of $16,622..... 1,378,500 1,379 5,495,999 5,497,378 Common stock issued in January and December 1995 in connection with stock option exercises...... 79,712 80 10,888 10,968 Net loss........ (3,651,811) (3,651,811) --------- ------ --------- ------ -------- --- --- ---------- ---------- ---------- Balances, December 31, 1995........... 6,841,500 6,842 1,980,142 1,980 (14,800) 11,003,265 (4,404,035) 6,593,252
F-5 SYMPHONIX DEVICES INC. (A COMPANY IN THE DEVELOPMENT STAGE) STATEMENT OF STOCKHOLDERS' EQUITY, CONTINUED FOR THE PERIOD FROM MAY 17, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
DEFICIT NOTES UNREALIZED ACCUMULATED PREFERRED STOCK COMMON STOCK RECEIVABLE GAINS ON ADDITIONAL DURING THE TOTAL ---------------- ---------------- FROM DEFERRED SHORT-TERM PAID-IN DEVELOPMENT STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION INVESTMENTS CAPITAL STAGE EQUITY --------- ------ --------- ------ ------------ ------------ ----------- ----------- ------------ ------------- Balances, December 31, 1995............. 6,841,500 $6,842 1,980,142 $1,980 $ (14,800) $11,003,265 $ (4,404,035) $ 6,593,252 Series C preferred stock issued in June 1996 to investors at $5.35 per share, net of issuance costs of $55,864......... 1,162,451 1,162 6,162,087 6,163,249 Series D preferred stock issued in December 1996 to investors at $8.00 per share, net of issuance costs $5,865.... 440,680 441 3,519,134 3,519,575 Common stock issued in connection with stock option exercise in exchange for $70,750 in cash and $124,400 of notes receivable from stockholders, net of repurchase of 72,674 shares... 404,187 404 (124,400) 194,746 70,750 Net loss........ (6,108,556) (6,108,556) --------- ------ --------- ------ --------- ----------- ------------ ----------- Balances, December 31, 1996............. 8,444,631 8,445 2,384,329 2,384 (139,200) 20,879,232 (10,512,591) 10,238,270 Series D preferred stock issued in June 1997 to investors at $8.00 per share, net of issuance costs $10,100... 750,000 750 5,989,150 5,989,900 Common stock issued in connection with stock option exercise in exchange for $10,482 in cash and $231,999 of notes receivable from stockholders.... 329,609 330 (231,999) 260,179 28,510 Deferred compensation related to grant of stock options......... $(322,350) 322,350 Amortization of deferred compensation.... 21,537 21,537 Unrealized gains on short-term investments..... $1,349 1,349 Net loss........ (5,624,976) (5,624,976) --------- ------ --------- ------ --------- --------- ------ ----------- ------------ ----------- Balances, September 30, 1997 (unaudited). 9,194,631 $9,195 2,713,938 $2,714 $(371,199) $(300,813) $1,349 $27,450,911 $(16,137,567) $10,654,590 ========= ====== ========= ====== ========= ========= ====== =========== ============ ===========
The accompanying notes are an integral part of these financial statements. F-6 SYMPHONIX DEVICES INC. (A COMPANY IN THE DEVELOPMENT STAGE) STATEMENTS OF CASH FLOWS
CUMULATIVE PERIOD FROM PERIOD FROM MAY 17, MAY 17, CUMULATIVE 1994 (DATE 1994 PERIOD FROM OF (DATE OF MAY 17, INCEPTION) YEAR ENDED INCEPTION) NINE MONTHS ENDED 1994 (DATE OF TO DECEMBER 31, TO SEPTEMBER 30, INCEPTION) TO DECEMBER 31, ------------------------- DECEMBER 31, ------------------------ SEPTEMBER 30, 1994 1995 1996 1996 1996 1997 1997 ------------ ------------ ----------- ------------ ----------- ----------- ------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss.............. $ (752,224) $ (3,651,811) $(6,108,556) $(10,512,591) $(4,397,914) $(5,624,976) $(16,137,567) Adjustment to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation........ 21,537 21,537 Depreciation and amortization........ 17,523 198,891 420,814 637,228 280,777 363,731 1,000,959 Preferred and common shares issued for services............ 62,600 30,000 92,600 92,600 Changes in operating assets and liabilities: Prepaid expenses and other current assets............ (56,473) 2,376 (22,597) (76,694) 9,506 (237,320) (314,014) Accounts payable.. 24,483 44,313 (26,309) 42,487 45,883 161,791 204,278 Accrued compensation...... 44,137 380,435 250,857 675,429 22,409 (72,044) 603,385 Other accrued liabilities....... 141,338 (126,149) 99,813 115,002 94,768 256,518 371,520 ------------ ------------ ----------- ------------ ----------- ----------- ------------ Net cash used in operating activities....... (518,616) (3,121,945) (5,385,978) (9,026,539) (3,944,571) (5,130,763) (14,157,302) ------------ ------------ ----------- ------------ ----------- ----------- ------------ Cash flows from investing activities: Purchases of short- term investments...... (20,104,675) (12,784,507) (8,223,266) (41,112,448) (6,638,150) (8,001,895) (49,114,343) Sales of short-term investments........... 15,840,978 12,811,175 7,889,572 36,541,725 4,700,348 6,025,973 42,567,698 Purchases of property and equipment......... (294,492) (691,127) (408,720) (1,394,339) (394,233) (300,910) (1,695,249) Change in other assets................ (24,643) (34,041) 50,964 (7,720) 43,436 (13,202) (20,922) ------------ ------------ ----------- ------------ ----------- ----------- ------------ Net cash used in investing activities....... (4,582,832) (698,500) (691,450) (5,972,782) (2,288,599) (2,290,034) (8,262,816) ------------ ------------ ----------- ------------ ----------- ----------- ------------ Cash flows from financing activities: Proceeds from capital leases................ 134,968 552,938 518,254 1,206,160 340,196 63,021 1,269,181 Payments on capital lease obligations..... (2,970) (101,531) (221,443) (325,944) (11,320) (219,654) (545,598) Payments received on notes receivable from stockholders.......... 14,800 14,800 14,800 Proceeds from issuance of preferred stock, net of issuance costs. 5,242,911 5,635,908 9,682,824 20,561,643 6,164,759 5,989,900 26,551,543 Proceeds from issuance of common stock....... 100 10,968 70,750 81,818 40,406 28,510 110,328 ------------ ------------ ----------- ------------ ----------- ----------- ------------ Net cash provided by financing activities....... 5,389,809 6,098,283 10,050,385 21,538,477 6,534,041 5,861,777 27,400,254 ------------ ------------ ----------- ------------ ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents............ 288,361 2,277,838 3,972,957 6,539,156 300,871 (1,559,020) 4,980,136 Cash and cash equivalents, beginning of period.............. 288,361 2,566,199 2,566,199 6,539,156 ------------ ------------ ----------- ------------ ----------- ----------- ------------ Cash and cash equivalents, end of period................. $ 288,361 $ 2,566,199 $ 6,539,156 $ 6,539,156 $ 2,867,070 $ 4,980,136 $ 4,980,136 ============ ============ =========== ============ =========== =========== ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest... $ -- $ 60,950 $ 86,113 $ 147,063 $ 55,302 $ 80,250 $ 227,313 ============ ============ =========== ============ =========== =========== ============ Common stock issued in exchange for promissory note....... $ 29,600 $ -- $ 124,400 $ 154,000 $ -- $ 231,999 $ 385,999 ============ ============ =========== ============ =========== =========== ============ Preferred stock issued in exchange for services.............. $ 24,000 $ 30,000 $ -- $ 54,000 $ -- $ -- $ 54,000 ============ ============ =========== ============ =========== =========== ============ Common stock issued in exchange for services. $ 38,600 $ -- $ -- $ 38,600 $ -- $ -- $ 38,600 ============ ============ =========== ============ =========== =========== ============ Unrealized gains (losses) on short-term investments........... $ -- $ -- $ -- $ -- $ -- $ 1,349 $ 1,349 ============ ============ =========== ============ =========== =========== ============
The accompanying notes are an integral part of these financial statements. F-7 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY: Symphonix Devices, Inc. (a company in the development stage, referred to hereafter as the "Company") was incorporated on May 17, 1994 to develop and manufacture implantable and semi-implantable hearing devices. Since its inception, the Company has been primarily engaged in developing its initial product technology, raising capital and recruiting personnel. In the course of its development activities, the Company has sustained losses and expects such losses to continue through at least 1999. The Company plans to continue its operations with proceeds from the sale of capital stock, such as the initial public offering contemplated by the Prospectus, of which these financial statements are a part, and with revenues from product sales. If the offering contemplated herein is not consummated, the Company will have to seek other sources of capital or adjust its operating plans. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Short-Term Investments: All short-term investments are classified as available-for-sale and therefore are carried at fair market value. Unrealized gains and losses on such securities, when material, are reported as a separate component of stockholders' equity. Realized gains and losses on sales of all such securities are reported in earnings and computed using the specific identification cost method. Property and Equipment: Property and equipment are stated at cost and are depreciated on a straight- line basis over the shorter of the estimated useful lives of three to five years or the length of the lease for leasehold improvements and assets acquired under capital leases. Research and Development: Research and development costs are charged to operations as incurred. Concentration of Credit Risk and Other Risks and Uncertainties: The Company's cash and cash equivalents are maintained at two financial institutions. The Company's products require approvals from the Food and Drug Administration and international regulatory agencies prior to commercialized sales. There can be no assurance that the Company's products will receive any of these required approvals. If the Company was denied such approval or such approvals were delayed, it would have a materially adverse impact on the Company. Income Taxes: The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases F-8 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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 amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Computation of Historical Net Loss Per Share: Net loss per share, on an historical basis, is computed using the weighted average number of shares of Common Stock outstanding. Common equivalent shares from stock options and Preferred Stock are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, Common and Common equivalent shares issued at prices below the anticipated public offering price during the 12 months immediately preceding the initial filing date have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the anticipated initial public offering price). Interim Financial Information (unaudited): The financial statements and related notes as of September 30, 1997 and for the nine months ended September 30, 1996 and 1997 and for the cumulative period from May 17, 1994 (date of inception) to September 30, 1997 have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments consisting of only recurring adjustments necessary for a fair presentation of the financial position and results of operations in accordance with generally accepted accounting principles. Results for the interim period are not necessarily indicative of results to be expected for the full fiscal year. Recent Accounting Pronouncements: In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation and disclosure requirements for earnings per share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 and is effective for the Company's 1997 fiscal year. Early application is not permitted. SFAS No. 128 will not have a material effect on the Company's net loss per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 1998, has not been determined. F-9 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue- producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998. The Company operates in one business segment; namely, the design, manufacture, and sale of implantable and semi-implantable hearing management devices. 3. SHORT-TERM INVESTMENTS: Marketable securities are deemed by management to be available-for-sale and at December 31, 1995 and 1996 comprise:
DECEMBER 31, 1995 DECEMBER 31, 1996 ------------------------------ ------------------------------ ACCRUED ESTIMATED ACCRUED ESTIMATED COST BASIS INTEREST FAIR VALUE COST BASIS INTEREST FAIR VALUE ---------- -------- ---------- ---------- -------- ---------- Municipal bonds......... $ -- $ -- $ -- $ 499,200 $ 8,229 $ 507,429 Commercial paper........ 998,274 -- 998,274 1,000,512 33,753 1,034,265 Medium term notes....... 2,199,768 28,794 2,228,562 1,999,496 27,324 2,026,820 U.S. Government agen- cies................... 999,357 10,836 1,010,193 1,000,000 2,209 1,002,209 ---------- ------- ---------- ---------- ------- ---------- $4,197,399 $39,630 $4,237,029 $4,499,208 $71,515 $4,570,723 ========== ======= ========== ========== ======= ==========
At December 31, 1995 and 1996, scheduled maturities for all of the available-for-sale securities were less than one year. There were no realized gains or losses recognized in 1995 and 1996. 4. PROPERTY AND EQUIPMENT: Property and equipment include amounts for assets acquired under capital leases of $687,906 and $1,206,160, with related accumulated amortization of $159,064 and $510,734 at December 31, 1995 and 1996, respectively. Property and equipment consist of the following:
DECEMBER 31, --------------------- 1995 1996 --------- ---------- Furniture and fixtures................................ $ 128,274 $ 123,598 Machinery and equipment............................... 665,158 984,285 Leasehold improvements................................ 192,187 223,426 Software.............................................. -- 63,030 --------- ---------- 985,619 1,394,339 Less accumulated depreciation and amortization........ (216,414) (637,228) --------- ---------- $ 769,205 $ 757,111 ========= ==========
F-10 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. CAPITAL LEASE OBLIGATIONS: Capital Leases: The Company has capital lease obligations under seven lease lines drawn from a $1,250,000 equipment lease line of credit that expires between 1998 and 2001. Under the terms of the lease line of credit, the Company is responsible for property taxes and insurance. At December 31, 1996, the Company had approximately $64,812 available under the lease line of credit. At December 31, 1996, the future minimum payments under capital leases are as follows: 1997............................................................. $ 382,699 1998............................................................. 370,265 1999............................................................. 236,400 2000............................................................. 77,707 2001............................................................. 528 ---------- Minimum lease payments........................................... 1,067,599 Less amount representing interest................................ 187,383 ---------- Principal amount of minimum lease payments....................... 880,216 Less current portion............................................. 284,644 ---------- $ 595,572 ==========
6. COMMITMENTS: Operating Lease: The Company rents its facilities under an operating lease which expires in August 1998. Under the terms of the lease, the Company is responsible for taxes, insurance and maintenance expenses. Subsequent to year end, the Company exercised an option to extend the lease on its existing facilities and entered into a lease on a new facility (See Note 11). Rent expense for the periods ended December 31, 1994, 1995, 1996 and the period from May 17, 1994 (date of inception) to September 30, 1997 was $45,532, $117,243, $118,344 and $384,797 (unaudited), respectively. F-11 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. STOCKHOLDERS' EQUITY: Convertible Preferred Stock: At December 31, 1996 and September 30, 1997, the amounts, terms and liquidation value of Series A, Series B, Series C and Series D convertible preferred stock were:
SHARES OF COMMON STOCK SHARES RESERVED PREFERENTIAL SHARES ISSUED AND FOR LIQUIDATION SERIES AMOUNT AUTHORIZED OUTSTANDING CONVERSION VALUE - ------ ----------- ---------- ----------- ---------- ------------ A....................... $ 5,435,441 5,500,000 5,463,000 5,500,000 $ 5,463,000 B....................... 5,497,378 1,500,000 1,378,500 1,500,000 5,514,000 C....................... 6,163,249 1,500,000 1,162,451 1,500,000 6,219,113 D....................... 3,519,575 500,000 440,680 500,000 3,525,440 ----------- --------- --------- --------- ----------- Balances, December 31, 1996................... 20,615,643 9,000,000 8,444,631 9,000,000 20,721,553 D....................... 5,989,900 750,000 750,000 750,000 6,000,000 ----------- --------- --------- --------- ----------- Balances, September 30, 1997 (unaudited)....... $26,605,543 9,750,000 9,194,631 9,750,000 $26,721,553 =========== ========= ========= ========= ===========
Under the Company's restated Articles of Incorporation, the Company's preferred stock is issuable in series and the Company's Board of Directors is authorized to determine the rights, preferences and terms of each series. Dividends: The holders of Series A, Series B, Series C and Series D preferred stock are entitled to receive dividends, out of any assets legally available, prior and in preference to any declaration or payment of any dividend on the common stock of the Company, at the rate of $0.10, $0.40, $0.535 and $0.80 per share per year, respectively, or if greater (as determined on a per year basis and on an as converted basis for the preferred stock), an amount equal to that paid on any other outstanding shares of the Company. Such dividends are payable when, as and if declared by the Board of Directors, and are not cumulative. No dividends have been declared to date. Liquidation: In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A, Series B, Series C and Series D preferred stock are entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common stock, an amount per share equal to the sum of $1.00, $4.00, $5.35 and $8.00 respectively, for each outstanding Series A, Series B, Series C and Series D preferred stock (as adjusted for any stock dividends, combinations or splits) plus any declared but unpaid dividends on such shares. If upon the occurrence of such event, the assets and funds distributed among the holders of the preferred stock are insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of the Company legally available for distribution are to be distributed first ratably among the holders of the Series C and Series D preferred stock in proportion to the full preferential amount each such holder is otherwise entitled to receive. Then, such assets and funds shall be distributed ratably among the holders of F-12 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Series A and Series B preferred stock in proportion to the full preferential amount each such holder is otherwise entitled to receive. After payment has been made to the holders of Series A, Series B, Series C and Series D preferred stock, any remaining assets and funds are to be distributed among the holders of common stock pro rata based on the number of common stock held by each stockholder. Mergers: A merger, reorganization, or sale of all or substantially all of the assets of the Company, in which the existing stockholders of the Company prior to the transaction possess less than 50% of the voting power of the surviving entity (or its parent) immediately after the transaction, shall be deemed to be a liquidation, dissolution or winding up of the Company. Voting: Each share of preferred stock is entitled to voting rights equal to the number of common shares into which each preferred share could be converted into at the record date for a vote or consent of stockholders, except as otherwise required by law, and has voting rights and powers equal to the voting rights and powers of the common stock. Conversion and Registration: Each share of preferred stock, at the option of the holder, is convertible into the number of fully paid and nonassessable shares of common stock which results from dividing the conversion price per share in effect for the preferred stock at the time of conversion into the per share conversion value of such stock. The initial conversion price per share and initial per share conversion value of Series A, Series B, Series C and Series D preferred stock is $1.38, $5.50, $7.36 and $11.01, respectively. The initial conversion price of Series A, Series B, Series C and Series D preferred stock is subject to adjustment from time to time, as described in the Company's Restated Articles of Incorporation. In the event of a conversion of the Series C Preferred Stock in connection with this initial public offering at a price lower than $11.70 per share of Common Stock, then the Conversion Price for the Series C Preferred Stock shall be reduced to $6.90. In the event of a conversion of the Series D Preferred Stock in connection with this initial public offering at a price lower than $11.00 per share of Common Stock, then the Conversion Price for the Series D Preferred Stock shall be reduced to the initial public offering price. Conversion is automatic at the then effective conversion rate immediately upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale of common stock in which the public offering price equals or exceeds $15.14 per share (adjusted to reflect subsequent share dividends, share splits or recapitalization) and the aggregate proceeds raised equals or exceeds $17,000,000. The Company has reserved 9,000,000 shares of common stock upon conversion of the preferred stock (9,750,000 shares as of September 30, 1997). Negotiation Rights: In connection with the Series D Preferred Stock issuances, the Company granted one of the investors first negotiation rights, whereby the Company agreed not to (i) transfer, dispose of, sell, F-13 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) lease or license to any third party certain defined intellectual property rights that are or may be used or may have application in the field of implantable or semi-implantable hearing aid devices or (ii) transfer or dispose of all or substantially all of the assets or voting securities of the Company to any third party until it provides that investor the opportunity to consummate a similar transaction. The first negotiation rights survive from a period of 18 months from the date of the Series D Preferred Stock agreement or 12 months from the effective date of the Company's initial public offering, whichever first occurs. However, the first negotiation rights will terminate if the investor, either directly or through an affiliate, does not participate as an investor in the Company's initial public offering. Warrants: The Company has issued warrants in connection with obtaining its equipment lease line of credit. The Company issued to the leasing company warrants to purchase up to 37,000 of the Company's Series A preferred stock at $1.00 per share and up to 9,250 of the Company's Series B preferred stock at $4.00 per share. The warrants to purchase the Company's Series A and Series B preferred stock are exercisable until October 2004. Common Stock: The Company has 2,384,329 shares of its common stock outstanding at December 31, 1996. Such shares of common stock were issued to the founders and other key persons under purchase agreements. Under these agreements, any unvested shares are subject to repurchase by the Company for a period of 90 days after termination of services to the Company. Shares generally vest 1/48 per month at the end of each full month. At December 31, 1996, approximately 779,034 shares of common stock are subject to repurchase. Notes Receivable: In 1994 and 1996, the Company issued 1,075,581 and 207,122 shares, respectively, of its common stock to one of the founders and other key persons in exchange for promissory notes of $29,600 and $124,400, respectively. The 1994 promissory notes bear annual interest of 5.36%, payable in the year 1999. A principal payment of $14,800 was made in 1994. The 1996 promissory notes bear annual interest ranging from 6.36% to 6.84%, payable in the year 2001. The related shares are pledged as collateral for the notes. 1994 Stock Option Plan: The 1994 Stock Option Plan (the "1994 Plan") provides for grants of incentive stock options to employees (including officers and employee directors) and nonstatutory stock options to employees (including officers and employee directors) and consultants of the Company. The 1994 Plan is administered by a committee appointed by the Board of Directors which identifies optionees and determines the terms of options granted, including the exercise price, number of shares subject to the option and the exercisability thereof. The terms of options granted under the 1994 Plan generally may not exceed ten years. The term of all incentive stock options granted to an optionee who, at the time of grant, owns stock F-14 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) representing more than 10% of the voting power of all classes of stock of the Company or a parent or subsidiary of the Company (a "Ten Percent Stockholder"), may not exceed five years, however. Generally, options granted under the 1994 Plan vest and become exercisable starting one year after the date of grant, with 25% of the shares subject to the option becoming exercisable at that time and an additional 1/48th of such shares becoming exercisable each month thereafter. Holders of options granted under the 1994 Plan may exercise their unvested options prior to complete vesting of shares, subject to such holder's entering a restricted stock purchase agreement granting the Company an option to repurchase, in the event of a termination of the optionee's employment or consulting relationship, any unvested shares at a price per share equal to the original exercise price per share for the option. The exercise price of incentive stock options granted under the 1994 Plan must be at least equal to the fair market value of the shares on the date of grant. The exercise price of nonstatutory stock options granted under the 1994 Plan is determined by the Board of Directors. The exercise price of any incentive stock option granted to a Ten Percent Stockholder must equal at least 110% of the fair market value of the common stock on the date of grant. Activity under the 1994 Plan is as follows:
OUTSTANDING OPTIONS ------------------------------- SHARES NUMBER AVAILABLE OF EXERCISE AGGREGATE FOR GRANT SHARES PRICE PRICE --------- -------- ----------- --------- Options reserved for 1994 Plan at inception........................... 970,203 Options granted.................... (439,676) 439,676 $0.14 $ 61,555 Options exercised.................. (145,348) $0.14 (20,349) -------- -------- -------- Balance, December 31, 1994........... 530,527 294,328 $0.14 41,206 Options granted.................... (486,903) 486,903 $0.14-$0.55 144,890 Options exercised.................. (79,712) $0.14 (11,160) -------- -------- -------- Balance, December 31, 1995........... 43,624 701,519 $0.14-$0.55 174,936 Additional options reserved........ 654,070 Options granted.................... (571,616) 571,616 $0.55-$0.83 419,938 Options exercised.................. (476,861) $0.14-$0.83 (195,796) Options canceled................... 211,592 (211,592) $0.14-$0.55 (59,717) Repurchase of common shares........ 72,674 -------- -------- -------- Balance, December 31, 1996........... 410,344 584,682 $0.14-$0.83 339,361 Options granted.................... (192,570) 192,570 $1.10 211,827 Options exercised.................. (329,609) $0.14-$1.10 (260,982) Options canceled................... 5,909 (5,909) $0.14-$1.10 (2,116) -------- -------- -------- Balance, September 30, 1997 (unau- dited).............................. 223,683 441,734 $0.14-$1.10 $288,090 ======== ======== ========
For the years ended December 31, 1995 and 1996, the weighted average fair value of options granted was $0.30 and $0.70 per share, respectively. The difference between the exercise price and the deemed fair market value of the Company's common stock at the date of issue of certain stock options, totaling $322,350, has been recorded as deferred compensation as a component of stockholders' equity. Of this amount, $21,537 has been recognized as an expense through September 30, 1997. The remaining $300,813 will be recognized as an expense as the shares and options vest over a period of up to four years. F-15 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The options outstanding and currently exercisable by exercise price at December 31, 1996 are as follows:
OPTIONS CURRENTLY OPTIONS OUTSTANDING EXERCISABLE - ------------------------------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER AVERAGE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - -------- ----------- ---------------- ---------------- ----------- -------------- $0.14 159,819 8.00 $0.14 63,009 $0.14 $0.55 68,354 8.95 $0.55 11,010 $0.55 $0.73 89,928 9.59 $0.73 66,009 $0.73 $0.80 250,600 4.59 $0.80 125,300 $0.80 $0.83 15,981 9.74 $0.83 1,661 $0.83 ------- ------- 584,682 6.94 $0.58 266,989 $0.62 ======= =======
As of December 31, 1995, options to purchase 114,752 shares were exercisable at an average weighted exercise price of $0.14 per share. The Company has elected to continue to follow the provisions of APB No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes and has adopted the disclosure-only provisions of SFAS No. 123 ("SFAS No. 123"). Had compensation cost for the Company's stock option plans been determined based on the fair market value at the grant date for awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the Company's net loss for 1995 and 1996 would have been increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, --------------------- 1995 1996 ---------- ---------- Net loss--as reported................................. $3,651,811 $6,108,556 ========== ========== Net loss--pro forma................................... $3,656,311 $6,126,556 ========== ========== Net loss per share--as reported....................... $ 1.30 $ 2.01 ========== ========== Net loss per share--pro forma......................... $ 1.30 $ 2.01 ========== ==========
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. In accordance with the provisions of SFAS No. 123, the fair value of each option is estimated using the following assumptions used for grants during 1995 and 1996; dividend yield of 0%, volatility of 0%, weighted risk-free interest rate of 5.84% at the date of grant and an expected term of 5.4 years. F-16 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. INCOME TAXES: The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 1996 and 1995 are presented below:
1995 1996 ----------- ----------- Depreciation..................................... $ 162,469 $ 103,164 Capitalized start-up costs....................... -- 735,047 Net operating loss carryforward.................. 1,499,827 3,293,903 Research and development credits................. 108,453 445,933 Other............................................ 116,470 35,991 Valuation allowance.............................. (1,887,219) (4,614,038) ----------- ----------- $ -- $ -- =========== ===========
Due to the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss and other deferred tax assets. At December 31, 1996, the Company has approximately $8,205,285 for federal and $8,212,855 for state net operating loss carryforwards which expire in 2011 and 2001, respectively, if not utilized. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be restricted. 9. EMPLOYEE BENEFIT PLAN: During 1996, the Company established a Retirement Savings and Investment Plan (the "Plan") under which employees may defer a portion of their salary up to the maximum allowed under IRS rules. The Company has the discretion to make contributions to the Plan. As of December 31, 1996, no Company contributions have been made to the Plan. 10. UNAUDITED PRO FORMA INFORMATION: Upon the closing of the Company's initial public offering, all outstanding preferred stock will be converted automatically into common stock. The pro forma effect of the conversion has been presented as a separate column in the Company's balance sheet, assuming the conversion had occurred as of September 30, 1997. Pro forma net loss per share has been presented to depict what the net loss per share would have been had the Common Stock issuable upon the conversion of the outstanding Preferred Stock been outstanding during such periods. 11. SUBSEQUENT EVENTS: In February 1997, the stockholders approved the assignment of technology relating to and including two patent applications to VibRx in consideration for repayment of approximately $10,000 of related patent expenses and issuance of common stock equal to 20% of all VibRx's outstanding shares at such time as VibRx completes an initial financing with aggregate proceeds of at least $500,000. VibRx was formed and is controlled by the Company's President and Chief Executive Officer. F-17 SYMPHONIX DEVICES, INC. (A COMPANY IN THE DEVELOPMENT STAGE) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In April 1997, the Company exercised an option to extend the lease on its existing facilities through August 1998 and in October 1997, entered into a lease on a new facility for a five year period commending in January 1998 and ending in December 2002. Future minimum lease payments under these operating leases as of September 30, 1997 are as follows: 1997.......................................................... $ 70,390 1998.......................................................... 755,468 1999.......................................................... 655,950 2000.......................................................... 664,663 2001.......................................................... 634,704 Thereafter.................................................... 666,432 ---------- $3,447,607 ==========
In October 1997, the Company granted 166,061 options to employees below the deemed fair market value. The difference between the exercise price and the deemed fair market value of the options, totaling approximately $1.0 million, will be recorded as deferred compensation and will be recognized as an expense as the options vest over a period of up to four years. In November 1997, the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell its Common Stock in an initial public offering. The Board of Directors also has authorized the reincorporation of the Company in Delaware prior to the effectiveness of this offering and the associated exchange of shares of each class and series of shares of the predecessor company for one share of identical class and series of stock of the Delaware successor company having a par value of $0.001 per share for both Common Stock and Preferred Stock. The accompanying financial statements have been adjusted retroactively to give effect to the reincorporation. In November 1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan and has reserved 75,000 shares of common stock for issuance under this plan. The Company anticipates that the plan will be approved by the stockholders prior to the closing of this offering. In November, 1997, the Company's Board of Directors approved, subject to stockholder approval, a one-for 1.376 reverse split of the Company's Common Stock and a corresponding change in the Preferred Stock conversion ratios. All common stock and per share amounts in these financial statements have been adjusted retroactively to give effect to the split. In addition, the Company's Board of Directors approved an Amended and Restated Certificate of Incorporation which eliminates the existing convertible preferred stock and changes the number of authorized preferred stock to 5,000,000 shares, $0.001 par value, and increases the shares of common stock authorized to 50,000,000 shares, which Certificate is to be filed following the effectiveness of the initial public offering. F-18 The Company's implantable hearing devices have not been approved for marketing by the United States Food and Drug Administration or any international regula- tory authorities. [ILLUSTRATION OF LASER DOPPLER VIBROMETRY] Laser Doppler Vibrometry is used to map the movement of the ear's vibratory structures for optimization of transducer design and performance. [PICTURE OF FLOATING MASS TRANSDUCER] Leveraging the Company's core FMT technology [Symphonix Logo Appears Here] Selective signal processing and FMT modification are designed to allow for management of different types of hearing impairments. [ILLUSTRATION OF AUDIOGRAM] The Vibrant HF soundbridge is under development and designed to provide hearing management for users with noise induced hearing loss at high frequencies but relatively normal hearing at lower frequencies. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, sales person, or other person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters or by any other person. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy a security other than the shares of Common Stock offered hereby, nor does it constitute an offer to sell or solicitation of an offer to buy any of the securities offered hereby, to any person in any jurisdiction in which it is unlawful to make such offer or solicitation to such person. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that information contained herein is correct as of any date subsequent to the date hereof. -------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Special Note Regarding Forward-Looking Statements......................... 17 Use of Proceeds........................................................... 18 Dividend Policy........................................................... 18 Capitalization............................................................ 19 Dilution.................................................................. 20 Selected Financial Information............................................ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 22 Business.................................................................. 25 Management................................................................ 48 Certain Transactions...................................................... 55 Principal Stockholders.................................................... 57 Description of Capital Stock.............................................. 59 Shares Eligible for Future Sale........................................... 62 Underwriting.............................................................. 64 Legal Matters............................................................. 65 Experts................................................................... 65 Additional Information.................................................... 66 Index to Financial Statements............................................. F-1
-------------------- Until , 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,300,000 Shares [LOGO OF SYMPHONIX] Common Stock -------------------- PROSPECTUS -------------------- COWEN & COMPANY UBS SECURITIES , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee............................................. $ 10,420 NASD filing fee.................................................. 3,939 Nasdaq National Market Listing Fee............................... 50,000 Printing and engraving costs..................................... 150,000 Legal fees and expenses.......................................... 225,000 Accounting fees and expenses..................................... 175,000 Blue Sky fees and expenses....................................... 10,000 Director and Officer Liability Insurance......................... 150,000 Transfer Agent and Registrar fees................................ 10,000 Miscellaneous expenses........................................... 15,641 -------- Total.......................................................... $800,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law allows for the indemnification of officers, directors and any corporate agents in the terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. The Registrant's Restated Certificate of Incorporation to be filed after the closing of the offering to which this Registration Statement relates (Exhibit 3.2 hereto) and the Registrant's Bylaws to be effective upon the closing of the offering (Exhibit 3.4 hereto) provides for indemnification of the Registrant's directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The Registrant also intends to enter into agreements with its directors and executive officers that will require the Registrant among other things to indemnify them against certain liabilities that may arise by reason of their status or service as directors to the fullest extent not prohibited by Delaware law. The Underwriting Agreement provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the Underwriters, for certain liabilities, including liabilities arising under the Securities Act, and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since May 1994, the Registrant has issued and sold the following unregistered securities (such share numbers and per share prices do not reflect the one-for-1.376 reverse split of the outstanding Common Stock to be effected prior to the completion of this offering and the conversion of all outstanding shares of Preferred Stock into shares of Common Stock which will occur automatically upon the closing of this offering: (1) Since May 1994, the Company has issued and sold 3,734,437 shares of Common Stock to a total of 23 employees, employee and non-employee directors, consultants, and accredited investors for consideration paid in cash and transfer of technology at a price per share ranging from $0.02 to $0.80. (2) Since November 1994, the Company has granted stock options to purchase 2,326,576 shares of Common Stock to a total of 67 employees, consultants, non- employee directors and an employee II-1 director, at a weighted average exercise price of $0.65 per share pursuant to the 1994 Stock Option Plan. (3) In November 1994, the Company issued a warrant to purchase 37,000 shares of Series A Preferred Stock, convertible into shares of Common Stock, at an exercise price of $1.00 per share to its lessor, Lighthouse Capital Partners. (4) In May and November 1995, the Company issued warrants to purchase an aggregate of shares of Series B Preferred Stock, convertible into shares of Common Stock, at an exercise price of $4.00 per share to its lessor, Lighthouse Capital Partners. (5) In July, August and October 1994 and January 1995, the Company issued and sold 5,463,000 shares of Series A Preferred Stock to a total of 40 accredited investors, including one officer, for cash and services in the aggregate amount of $5,463,000. (6) In June 1995, the Company issued and sold 1,378,500 shares of Series B Preferred Stock to a total of 31 accredited investors, including one officer, for cash and services in the aggregate amount of $5,514,000. (7) In May and June 1996, the Company issued and sold 1,162,451 shares of Series C Preferred Stock to a total of 20 accredited for cash in the aggregate amount of $6,219,113. (8) In November and December 1996 and June 1997, the Company issued and sold 1,190,680 shares of Series D Preferred Stock to a total of 14 accredited investors, for cash in the aggregate amount of $9,525,440. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, except in the case of item (5), above, which was deemed to be exempt from such registration pursuant to Regulation D promulgated thereunder, and in the case of items (1) and (2), above, on Rule 701 promulgated thereunder, as transactions by an issuer not involving a public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Incorporation of Symphonix Devices, Inc., a California corporation, as currently in effect. 3.2* Form of Restated Certificate of Incorporation of the Registrant to be filed after the closing of the offering made under this Registration Statement. 3.3 Bylaws of the Registrant, as currently in effect. 3.4 Form of Bylaws, to be effective upon the Company's reincorporation into Delaware. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2 1994 Stock Option Plan and forms of Stock Option Agreements thereunder.
II-2
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.3 1997 Employee Stock Purchase Plan. 10.4 Restated Investors Rights Agreement dated June 11, 1997 between the Registrant and certain holders of the Registrant's securities. 10.5 Master Equipment Lease Agreement between Registrant and Lighthouse Capital Partners dated December 2, 1994. 10.6 Assignment by Registrant to VibRx, Inc. dated March 14, 1997. 10.7 Registrant's Series D Preferred Stock Purchase Agreement dated June 11, 1997. 10.8 Net Lease Agreement between Realtec Properties I, L.P., a California limited partnership, and Registrant dated July 28, 1994; letter agreements dated July 28, 1994 and August 17, 1994 and First Amendment dated April 17, 1997. 10.9 Lease between Silicon Valley Properties, L.L.C., a Delaware limited liability partnership, and Registrant dated October 27, 1997. 10.10 Form of Option Vesting Agreement between the Registrant and its officers. 10.11 License Agreement dated June 1, 1995 between Baptist Medical Center of Oklahoma, Inc. and Registrant. 11.1 Computation of net loss per share. 21.1 List of Subsidiary of the Registrant. 23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants (see page II-6). 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule
- -------- * To be filed by Amendment. (b) Financial Statement Schedules Financial schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes that: (a) It will provide to the Underwriters at the closing as specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 (c) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (d) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar volume of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (b) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide Offering thereof; (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN JOSE, STATE OF CALIFORNIA, ON THE 14TH DAY OF NOVEMBER, 1997. SYMPHONIX DEVICES, INC. /s/ Harry S. Robbins By: _________________________________ Harry S. Robbins President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harry S. Robbins and Alfred G. Merriweather, and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ Harry S. Robbins President, Chief Executive November 14, 1997 ____________________________________ Officer and Director Harry S. Robbins (Principal Executive Officer) /s/ Alfred G. Merriweather Chief Financial Officer November 14, 1997 ____________________________________ (Principal Financial and Alfred G. Merriweather Accounting Officer) /s/ Geoffrey R. Ball Director November 14, 1997 ____________________________________ Geoffrey R. Ball /s/ B.J. Cassini Director November 14, 1997 ____________________________________ B.J. Cassin /s/ Terry Gould Director November 14, 1997 ____________________________________ Terry Gould /s/ Michael J. Levinthal Director November 14, 1997 ____________________________________ Michael J. Levinthal /s/ Petri T. Vainio Director November 14, 1997 ____________________________________ Petri T. Vainio
II-5 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated January 17, 1997, except for Note 11, for which the date is November 7, 1997 on our audits of the financial statements of Symphonix Devices, Inc. We also consent to the references to our firm under the captions "Experts" and "Selected Financial Data." COOPERS & LYBRAND L.L.P. San Jose, California November 13, 1997 II-6 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------ 1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Incorporation of Symphonix Devices, Inc., a California corporation, as currently in effect. 3.2* Form of Restated Certificate of Incorporation of the Registrant to be filed after the closing of the offering made under this Registration Statement. 3.3 Bylaws of the Registrant, as currently in effect. 3.4 Form of Bylaws, to be effective upon the Company's reincorporation into Delaware. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2 1994 Stock Option Plan and forms of Stock Option Agreements thereunder. 10.3 1997 Employee Stock Purchase Plan. 10.4 Restated Investors Rights Agreement dated June 11, 1997 between the Registrant and certain holders of the Registrant's securities. 10.5 Master Equipment Lease Agreement between Registrant and Lighthouse Capital Partners dated December 2, 1994. 10.6 Assignment by Registrant to VibRx, Inc. dated March 14, 1997. 10.7 Registrant's Series D Preferred Stock Purchase Agreement dated June 11, 1997. 10.8 Net Lease Agreement between Realtec Properties I, L.P., a California limited partnership, and Registrant dated July 28, 1994; letter agreements dated July 28, 1994 and August 17, 1994 and First Amendment dated April 17, 1997. 10.9 Lease between Silicon Valley Properties, L.L.C., a Delaware limited liability partnership, and Registrant dated October 27, 1997. 10.10 Form of Option Vesting Agreement between the Registrant and its officers. 10.11 License Agreement dated June 1, 1995 between Baptist Medical Center of Oklahoma, Inc. and Registrant. 11.1 Computation of net loss per share. 21.1 List of Subsidiary of the Registrant. 23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants (see page II-6). 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule
- -------- * To be filed by Amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 2,300,000 SHARES SYMPHONIX DEVICES, INC. COMMON STOCK UNDERWRITING AGREEMENT ---------------------- [Date] COWEN & COMPANY and UBS SECURITIES LLC, As Representatives of the several Underwriters c/o Cowen & Company Financial Square New York, New York 10005 Dear Sirs: 1. INTRODUCTORY. Symphonix Devices, Inc., a Delaware corporation (the "Company"), proposes to sell, pursuant to the terms of this Agreement, to the several underwriters named in Schedule A hereto (the "Underwriters," or, each, an "Underwriter"), an aggregate of 2,300,000 shares of Common Stock, $0.01 par value (the "Common Stock"), of the Company. The aggregate of 2,300,000 shares so proposed to be sold is hereinafter referred to as the "Firm Stock". The Company also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 3 hereof, up to an additional 2,345,000 shares of Common Stock (the "Optional Stock"). The Firm Stock and the Optional Stock are hereinafter collectively referred to as the "Stock". Cowen & Company ("Cowen") and UBS Securities LLC ("UBS") are acting as representatives of the several Underwriters and in such capacity are hereinafter referred to as the "Representatives". 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the several Underwriters that: (A) A registration statement on Form S-1 (File No. 333-____) in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective with respect to the Stock, including any preeffective prospectuses included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, copies of which have heretofore been delivered to you, has been carefully prepared by the Company in conformity with the requirements of the Securities Act and has been filed with the Commission under the Securities Act; one or more amendments to such registration statement, 1. including in each case an amended preeffective prospectus, copies of which amendments have heretofore been delivered to you, have been so prepared and filed. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Stock may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Registration Statement" as used in this Agreement shall also include any registration statement relating to the Stock that is filed and declared effective pursuant to Rule 462(b) under the Securities Act. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, (A) if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Securities Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b) and (B) if prospectuses that meet the requirements of Section 10(a) of the Securities Act are delivered pursuant to Rule 434 under the Securities Act, then (i) the term "Prospectus" as used in this Agreement means the "prospectus subject to completion" (as such term is defined in Rule 434(g) under the Securities Act) as supplemented by (a) the addition of Rule 430A information or other information contained in the form of prospectus delivered pursuant to Rule 434(b)(2) under the Securities Act or (b) the information contained in the term sheets described in Rule 434(b)(3) under the Securities Act, and (ii) the date of such prospectuses shall be deemed to be the date of the term sheets. The term "Preeffective Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. (B) The Commission has not issued or threatened to issue any order preventing or suspending the use of any Preeffective Prospectus, and, at its date of issue, each Preeffective Prospectus conformed in all material respects with the requirements of the Securities Act and did not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and, when the Registration Statement becomes effective and at all times subsequent thereto up to and including each of the Closing Dates (as hereinafter defined), the Registration Statement and the Prospectus and any amendments or supplements thereto contained and will contain all material statements and information required to be included therein by the Securities Act and conformed and will conform in all material respects to the requirements of the Securities Act and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, included or will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing representations, warranties and agreements shall not apply to information contained in or omitted from any Preeffective Prospectus or the Registration Statement or the Prospectus or any such amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to 2. the Company by or on behalf of any Underwriter, directly or through you, specifically for use in the preparation thereof; there is no franchise, lease, contract, agreement or document required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed therein as required; and all descriptions of any such franchises, leases, contracts, agreements or documents contained in the Registration Statement are accurate and complete descriptions of such documents in all material respects. (C) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as set forth or contemplated in the Prospectus, the Company has incurred any liabilities or obligations, direct or contingent, nor entered into any transactions not in the ordinary course of business, and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company or any change in the capital stock, short-term or long-term debt of the Company. (D) The financial statements, together with the related notes and schedules, set forth in the Prospectus and elsewhere in the Registration Statement fairly present, on the basis stated in the Registration Statement, the financial position and the results of operations and changes in financial position of the Company at the respective dates or for the respective periods therein specified. Such statements and related notes and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis except as may be set forth in the Prospectus. The summary and selected financial and statistical data set forth in the Prospectus under the captions "Summary Financial Data" and "Selected Financial Data" fairly present, on the basis stated in the Registration Statement, the information set forth therein. (E) Coopers & Lybrand L.L.P., who have expressed their opinions on the audited financial statements and related schedules included in the Registration Statement and the Prospectus are independent public accountants as required by the Securities Act and the Rules and Regulations. (F) The Company has been duly organized and is validly existing and in good standing as a corporation under the laws of the State of Delaware, with power and authority (corporate and other) to own or lease its properties and to conduct its business as described in the Prospectus; the Company is in possession of and operating in compliance with all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders required for the conduct of its business, all of which are valid and in full force and effect; and the Company is duly qualified to do business and in good standing as a foreign corporation in all other jurisdictions where its ownership or leasing of properties or the conduct of its business requires such qualification. The Company has all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public regulatory or governmental agencies and bodies to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not 3. adequately disclosed in the Registration Statement and the Prospectus. The Company does not own or control, directly or indirectly, any corporations, associations or other entities. (G) The Company's authorized and outstanding capital stock is on the date hereof, and will be on the Closing Date, as set forth under the heading "Capitalization" in the Prospectus; the outstanding shares of common stock of the Company conform to the description thereof in the Prospectus and have been duly authorized and validly issued and are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws and were not issued in violation of or subject to any preemptive rights or similar rights to subscribe for or purchase securities and conform to the description thereof contained in the Prospectus. Except as disclosed in and or contemplated by the Prospectus and the financial statements of the Company and related notes thereto included in the Prospectus, the Company does not have outstanding any options or warrants to purchase, or any preemptive rights or other rights to subscribe for or to purchase any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations, except for options granted subsequent to the date of information provided in the Prospectus pursuant to the Company's employee and stock option plans as disclosed in the Prospectus. The description of the Company's stock option and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, as set forth in the Prospectus, accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (H) The Stock to be issued and sold by the Company to the Underwriters hereunder has been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof in the Prospectus. (I) Except as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its affiliates is a party or of which any property of the Company or any affiliate is subject, which, if determined adversely to the Company or any such affiliate, might individually or in the aggregate (i) prevent or adversely affect the transactions contemplated by this Agreement, (ii) suspend the effectiveness of the Registration Statement, (iii) prevent or suspend the use of the Preeffective Prospectus in any jurisdiction or (iv) result in a material adverse change in the condition (financial or otherwise), properties, business, management prospects, net worth or results of operations of the Company and there is no valid basis for any such legal or governmental proceeding; and to the best of the Company's knowledge no such proceedings are threatened or contemplated against the Company or any or affiliate by governmental authorities or others. The Company is not a party nor subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body or other governmental agency or body. The description of the Company's litigation under the heading "Legal Proceedings" in the Prospectus is true and correct and complies with the Rules and Regulations. (J) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated (A) will not result in any violation of the provisions of 4. the certificate of incorporation, by-laws or other organizational documents of the Company, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties or assets, (B) will not conflict with or result in a breach or violation of any of the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which it or any of its properties is or may be bound, the Certificate of Incorporation, By-laws or other organizational documents of the Company, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties or will result in the creation of a lien. (K) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or under the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Stock by the Underwriters. (L) The Company has the full corporate power and authority to enter into this Agreement and to perform its obligations hereunder (including to issue, sell and deliver the Stock), and this Agreement has been duly and validly authorized, executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying such laws. (M) The Company is in all material respects in compliance with, and conducts its business in conformity with, all applicable federal, state, local and foreign laws, rules and regulations or any court or governmental agency or body; to the knowledge of the Company, otherwise than as set forth in the Registration Statement and the Prospectus, no prospective change in any of such federal or state laws, rules or regulations has been adopted which, when made effective, would have a material adverse effect on the operations of the Company. (N) The Company has filed all necessary federal, state, local and foreign income, payroll, franchise and other tax returns and has paid all taxes shown as due thereon or with respect to any of its properties, and there is no tax deficiency that has been, or to the knowledge of the Company is likely to be, asserted against the Company or any of its properties or assets that would adversely affect the financial position, business or operations of the Company. (O) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement or otherwise, except for persons and entities who have expressly waived such right or who have been given proper notice and have failed to exercise such right within the time or times required under the terms and conditions of such right. 5. (P) Neither the Company nor any of its officers, directors or affiliates has taken or will take, directly or indirectly, any action designed or intended to stabilize or manipulate the price of any security of the Company, or which caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company. (Q) The Company has provided you with all financial statements since January, 1998 to the date hereof that are available to the officers of the Company, including financial statements for the months of December 31, 1997 and January 31, 1998. (R) The Company owns or possesses the right to use all patents, trademarks (including "Symphonix" and "Vibrant"), trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by it or necessary for the conduct of its business, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company with respect to the foregoing. The Company's business as now conducted and as proposed to be conducted does not and will not infringe or conflict with in any material respect patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right of any person. Except as described in the Prospectus, no claim has been made against the Company alleging the infringement by the Company of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person. (S) The Company has performed all material obligations required to be performed by it under all contracts required by Item 601(b)(10) of Regulation S- K under the Securities Act to be filed as exhibits to the Registration Statement, and neither the Company nor any other party to such contract is in default under or in breach of any such obligations. The Company has not received any notice of any such default or breach. (T) The Company is not involved in any labor dispute nor is any such dispute threatened. The Company is not aware that (A) any executive, key employee or significant group of employees of the Company plans to terminate employment with the Company or (B) any such executive or key employee is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreement that would be violated by the present or proposed business activities of the Company. The Company does not have or expect to have any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company makes or ever has made a contribution and in which any employee of the Company is or has ever been a participant. With respect to such plans, the Company is in compliance in all material respects with all applicable provisions of ERISA. (U) The Company has obtained the written agreement described in Section 8(j) of this Agreement from each of its officers, directors and holders of Common Stock listed on Schedule C hereto. 6. (V) The Company has, and the Company as of the Closing Date will have, good and marketable title in fee simple to all real property and good and marketable title to all personal property owned or proposed to be owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as would not have a material adverse effect on the Company; and any real property and buildings held under lease by the Company or proposed to be held after giving effect to the transactions described in the Prospectus are, or will be as of [each of] the Closing Date[s], held by it under valid, subsisting and enforceable leases with such exceptions as would not have a material adverse effect on the Company, in each case except as described in or contemplated by the Prospectus. (W) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which it is engaged or propose to engage after giving effect to the transactions described in the Prospectus; and the Company does not have any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company, except as described in or contemplated by the Prospectus. (X) Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any of the transactions contemplated by this Agreement. (Y) The Company has complied with all provisions of Section 517.075 Florida Statutes (Chapter 92-198; Laws of Florida). (Z) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (AA) To the Company's knowledge, neither the Company nor any employee or agent of the Company has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (AB) The Company is not, nor after application of the net proceeds of this offering as described under the caption "Use of Proceeds" in the Prospectus, will it become, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. 7. (AC) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company as to the matters covered thereby; and (AD) The Company has filed with the United States Food and Drug Administration the "FDA"), and all applicable state and local regulatory bodies, for and received approval of, all material registrations, applications,licenses, requests for exemptions,permits and other regulatory authorizations necessary to conduct the Company's business as it is described in the Registration Statement and Prospectus based on all available information provided to the Company through the date hereof by applicable regulatory authorities; the Company is in compliance with all such registrations, applications, licenses, requests for exemptions, permits and other regulatory authorizations, and all applicable FDA, state and local rules, regulations, guidelines and policies, except where the failure so to comply would not have a material adverse effect on the business or condition (financial or otherwise) of the Company; and the Company has no reason to believe that any party granting any such registration, application, license, request for exemption, permit or other authorization intends to limit, suspend or revoke the same and knows of no basis for any such limitation, suspension or revocation. 3. PURCHASE BY, AND SALE AND DELIVERY TO, UNDERWRITERS--CLOSING DATES. The Company agrees to sell to the Underwriters the Firm Stock, and on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase the Firm Stock from the Company, the number of shares of Firm Stock to be purchased by each Underwriter being set opposite its name in Schedule A, subject to adjustment in accordance with Section 12 hereof. The purchase price per share to be paid by the Underwriters to the Company will be the price per share set forth in the table on the cover page of the Prospectus under the heading "Proceeds to the Company" (the "Purchase Price"). The Company will deliver the Firm Stock to the Representatives for the respective accounts of the several Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company given at or prior to 9:00 a.m., San Francisco Time, on the second full business day preceding the First Closing Date (as defined below) or, if no such direction is received, in the names of the respective Underwriters or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine, against payment of the aggregate Purchase Price therefor by certified or official bank check or checks in immediately available funds (same day funds), payable to the order of the Company, all at the offices of Wilson, Sonsini, Goodrich & Rosati, PC 650 Page Mill Road, Palo Alto, California 94306-2155. The time and date of the delivery and closing shall be at 7:00 A.M., San Francisco Time, on _______________, 1997, in accordance with Rule 15c6-1 of the Exchange Act. The time and date of such payment and delivery are herein referred to as the "First Closing Date". The First Closing Date and the location of delivery of, and the form and form 8. of payment for, the Firm Stock may be varied by agreement between the Company and Cowen. The First Closing Date may be postponed pursuant to the provisions of Section 12. The Company shall make the certificates for the Stock available to the Representatives for examination on behalf of the Underwriters not later than 10:00 A.M., New York Time, on the business day preceding the First Closing Date at the offices of Cowen & Company, Financial Square, New York, New York 10005. It is understood that Cowen or UBS, individually and not as Representatives of the several Underwriters, may (but shall not be obligated to) make payment to the Company on behalf of any Underwriter or Underwriters, for the Stock to be purchased by such Underwriter or Underwriters. Any such payment by Cowen or UBS shall not relieve such Underwriter or Underwriters from any of its or their other obligations hereunder. The several Underwriters agree to make an initial public offering of the Firm Stock at the initial public offering price as soon after the effectiveness of the Registration Statement as in their judgment is advisable. The Representatives shall promptly advise the Company of the making of the initial public offering. For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Stock as contemplated by the Prospectus, the Company hereby grants to the Underwriters an option to purchase, severally and not jointly, up to the aggregate number of shares of Optional Stock set forth on Schedule B hereto. The price per share to be paid for the Optional Stock shall be the Purchase Price. The option granted hereby may be exercised as to all or any part of the Optional Stock at any time, and from time to time, not more than thirty (30) days subsequent to the effective date of this Agreement. No Optional Stock shall be sold and delivered unless the Firm Stock previously has been, or simultaneously is, sold and delivered. The right to purchase the Optional Stock or any portion thereof may be surrendered and terminated at any time upon notice by the Underwriters to the Company. The option granted hereby may be exercised by the Underwriters by giving written notice from Cowen to the Company setting forth the number of shares of the Optional Stock to be purchased by them and the date and time for delivery of and payment for the Optional Stock. Each date and time for delivery of and payment for the Optional Stock (which may be the First Closing Date, but not earlier) is herein called the "Option Closing Date" and shall in no event be earlier than two (2) business days nor later than ten (10) business days after written notice is given. (The Option Closing Date and the First Closing Date are herein called the "Closing Dates".) All purchases of Optional Stock from the Company shall be made on a pro rata basis. Optional Stock shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Stock set forth opposite such Underwriter's name in Schedule B hereto bears to the total number of shares of Firm Stock (subject to adjustment by the Underwriters to eliminate odd lots). Upon exercise of the option by the Underwriters, the Company agrees to sell to the Underwriters the number of shares of Optional Stock set forth in the written notice of exercise and the Underwriters agree, severally and not jointly and subject to the terms and conditions herein set forth, to purchase the number of such shares determined as aforesaid. 9. The Company will deliver the Optional Stock to the Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing given at or prior to 9:00 a.m., San Francisco Time, on the second full business day preceding the Option Closing Date or, if no such direction is received, in the names of the respective Underwriters or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine, against payment of the aggregate Purchase Price therefor by certified or official bank check or checks in Clearing House funds (next day funds), payable to the order of the Company all at the offices of Wilson, Sonsini, Goodrich and Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94306-2155. The Option Closing Date and the location of delivery of, and the form and form of payment for, the Option Stock may be varied by agreement between the Company and Cowen. The Option Closing Date may be postponed pursuant to the provisions of Section 12. 4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (A) The Company will (i) if the Company and the Representatives have determined not to proceed pursuant to Rule 430A of the of the Rules and Regulations, use its best efforts to cause the Registration Statement to become effective, (ii) if the Company and the Representatives have determined to proceed pursuant to Rule 430A of the Rules and Regulations, use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and Rule 424 of the Rules and Regulations and (iii) if the Company and the Representatives have determined to deliver Prospectuses pursuant to Rule 434 of the Rules and Regulations, to use its best efforts to comply with all the applicable provisions thereof. The Company will advise the Representatives promptly as to the time at which the Registration Statement becomes effective, will advise the Representatives promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible the lifting thereof, if issued. The Company will advise the Representatives promptly of the receipt of any comments of the Commission or any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information and will not at any time file any amendment to the Registration Statement or supplement to the Prospectus which shall not previously have been submitted to the Representatives a reasonable time prior to the proposed filing thereof or to which the Representatives shall reasonably object in writing or which is not in compliance with the Securities Act and the Rules and Regulations. (B) The Company will prepare and file with the Commission, promptly upon the request of the Representatives, any amendments or supplements to the Registration Statement or the Prospectus which in the opinion of the Representatives may be necessary to enable the several Underwriters to continue the distribution of the Stock and will use its best efforts to cause the same to become effective as promptly as possible. 10. (C) If at any time after the effective date of the Registration Statement when a prospectus relating to the Stock is required to be delivered under the Securities Act any event relating to or affecting the Company occurs as a result of which the Prospectus or any other prospectus as then in effect would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Securities Act, the Company will promptly notify the Representatives thereof and will prepare an amended or supplemented prospectus which will correct such statement or omission; and in case any Underwriter is required to deliver a prospectus relating to the Stock nine (9) months or more after the effective date of the Registration Statement, the Company upon the request of the Representatives and at the expense of such Underwriter will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act. (D) The Company will deliver to the Representatives, at or before the Closing Dates, signed copies of the Registration Statement, as originally filed with the Commission, and all amendments thereto including all financial statements and exhibits thereto, and will deliver to the Representatives such number of copies of the Registration Statement, including such financial statements but without exhibits, and all amendments thereto, as the Representatives may reasonably request. The Company will deliver or mail to or upon the order of the Representatives, from time to time until the effective date of the Registration Statement, as many copies of the Preeffective Prospectus as the Representatives may reasonably request. The Company will deliver or mail to or upon the order of the Representatives on the date of the initial public offering, and thereafter from time to time during the period when delivery of a prospectus relating to the Stock is required under the Securities Act, as many copies of the Prospectus, in final form or as thereafter amended or supplemented as the Representatives may reasonably request; provided, however, that the expense of the preparation and delivery of any prospectus required for use nine (9) months or more after the effective date of the Registration Statement shall be borne by the Underwriters required to deliver such prospectus. (E) The Company will make generally available to its shareholders as soon as practicable, but not later than fifteen (15) months after the effective date of the Registration Statement, an earning statement which will be in reasonable detail (but which need not be audited) and which will comply with Section 11(a) of the Securities Act, covering a period of at least twelve (12) months beginning after the "effective date" (as defined in Rule 158 under the Securities Act) of the Registration Statement. (F) The Company will cooperate with the Representatives to enable the Stock to be registered or qualified for offering and sale by the Underwriters and by dealers under the securities laws of such jurisdictions as the Representatives may designate and at the request of the Representatives will make such applications and furnish such consents to service of process or other documents as may be required of it as the issuer of the Stock for that purpose; provided, however, that the Company shall not be required to qualify to do business or to file a general consent (other than that arising out of the offering or sale of the Stock) to service of process in any such jurisdiction where it is not now so subject. The Company will, from time 11. to time, prepare and file such statements and reports as are or may be required of it as the issuer of the Stock to continue such qualifications in effect for so long a period as the Representatives may reasonably request for the distribution of the Stock. The Company will advise the Representatives promptly after the Company becomes aware of the suspension of the qualifications or registration of (or any such exception relating to) the Common Stock of the Company for offering, sale or trading in any jurisdiction or of any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any orders suspending such qualifications, registration or exception, the Company will, with the cooperation of the Representatives use its best efforts to obtain the withdrawal thereof. (G) The Company will furnish to its shareholders annual reports containing financial statements certified by independent public accountants and with quarterly summary financial information in reasonable detail which may be unaudited. During the period of five (5) years from the date hereof, the Company will deliver to the Representatives and, upon request, to each of the other Underwriters, as soon as they are available, copies of each annual report of the Company and each other report furnished by the Company to its shareholders and will deliver to the Representatives, (i) as soon as they are available, copies of any other reports (financial or other) which the Company shall publish or otherwise make available to any of its shareholders as such, (ii) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange and (iii) from time to time such other information concerning the Company as you may request. (H) The Company will use its best efforts to list the Stock, subject to official notice of issuance, on the Nasdaq National Market concurrently with the effectiveness of the Registration Statement. (I) The Company will maintain a transfer agent and registrar for its Common Stock. (J) Prior to filing its quarterly statements on Form 10-Q, the Company will have its independent auditors perform a limited quarterly review of its quarterly numbers. (K) The Company will not offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by the Company in accordance with the Rules and Regulations) during the 180 days following the date on which the price of the Common Stock to be purchased by the Underwriters is set, other than the Company's sale of Common Stock hereunder and the Company's issuance of Common Stock upon the exercise of warrants and stock options which are presently outstanding and described in the Prospectus. (L) Prior to filing with the Commission any reports on Form SR pursuant to Rule 463 of Rules and Regulations, the Company will furnish a copy thereof to the counsel for the 12. Underwriters and receive and consider its comments thereon, and will deliver promptly to the Representatives a signed copy of each report on Form SR filed by it with the Commission. (M) The Company will apply the net proceeds from the sale of the Stock as set forth in the description under "Use of Proceeds" in the Prospectus, which description complies in all respects with the requirements of Item 504 of Regulation S-K. (N) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Stock under the Securities Act. (O) Prior to each of the Closing Dates the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (P) Prior to each of the Closing Dates the Company will issue no press release or other communications directly or indirectly and hold no press conference with respect to the Company, the financial condition, results of operations, business, prospects, assets or liabilities of the Company, or the offering of the Stock, without your prior written consent. For a period of twelve (12) months following the first Closing Date, the Company will use its best efforts to provide to you copies of each press release or other public communications with respect to the financial condition, results of operations, business, prospects, assets or liabilities of the Company at least twenty-four (24) hours prior to the public issuance thereof or such longer advance period as may reasonably be practicable. (Q) During the period of five (5) years hereafter, the Company will furnish to the Representatives, and upon request of the Representatives, to each of the Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, or the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. 5. PAYMENT OF EXPENSES. (A) The Company will pay (directly or by reimbursement) all costs, fees and expenses incurred in connection with expenses incident to the performance of its obligations under this Agreement and in connection with the transactions contemplated hereby, including but not limited to (i) all expenses and taxes incident to the issuance and delivery of the Stock to the Representatives; (ii) all expenses incident to the registration of the Stock under the Securities Act; (iii) the costs of preparing stock certificates (including printing and engraving costs); (iv) all fees and expenses of the registrar and transfer agent of the Stock; (v) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Stock to the 13. Underwriters; (vi) fees and expenses of the Company's counsel and the Company's independent accountants; (vii) all costs and expenses incurred in connection with the preparation, printing filing, shipping and distribution of the Registration Statement, each Preeffective Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, the "Agreement Among Underwriters" between the Representatives and the Underwriters, the Master Selected Dealers' Agreement, the Underwriters' Questionnaire and the Blue Sky memoranda (including related fees and expenses of counsel to the Underwriters) and this Agreement; (viii) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with exemptions from the qualifying or registering (or obtaining qualification or registration of) all or any part of the Stock for offer and sale and determination of its eligibility for investment under the Blue Sky or other securities laws of such jurisdictions as the Representatives may designate; (ix) all fees and expenses paid or incurred in connection with filings made with the NASD; and (x) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. (B) In addition to its other obligations under Section 6(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon (i) any statement or omission or any alleged statement or omission, (ii) any act or failure to act or any alleged act or failure to act or (iii) any breach or inaccuracy in its representations and warranties, it will reimburse each Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse each Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter shall promptly return it to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Citibank, N.A., New York, New York (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter in a timely manner as provided below shall bear interest at the Prime Rate from the due date for such reimbursement. This expense reimbursement agreement will be in addition to any other liability which the Company may otherwise have. The request for reimbursement will be sent to the Company. (C) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in paragraph (b) this Section 5, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice 14. is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in paragraph (b) of this Section 5 and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of Section 6. 6. INDEMNIFICATION AND CONTRIBUTION. (A) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of the Securities Act and the respective officers, directors, partners, employees, representatives and agents of each of such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each, an "Underwriter Indemnified Party"), against any losses, claims, damages, liabilities or expenses (including the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which may be based upon the Securities Act, or any other statute or at common law, (i) on the ground or alleged ground that any Preeffective Prospectus, the Registration Statement or the Prospectus (or any Preeffective Prospectus, the Registration Statement or the Prospectus as from time to time amended or supplemented) includes or allegedly includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by any Underwriter, directly or through the Representatives, specifically for use in the preparation thereof or (ii) for any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or expense arising out of or based upon matters covered by clause (i) above (provided that the Company shall not be liable under this clause (ii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, or liability or expense resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct). The Company will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it and reasonably acceptable to the Underwriters. In the event the Company elects to assume the defense of any such suit and retain such counsel, any Underwriter Indemnified Parties, defendant or defendants in the suit, may retain additional counsel but shall bear the fees and expenses of such counsel unless (i) the Company shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include any such Underwriter Indemnified Parties, and the Company and such Underwriter Indemnified Parties at law or in equity have been advised by counsel to the Underwriters that one or more legal defenses may be available to it or them which may not be available to the Company, in which case the Company shall not be entitled to assume the defense of such suit notwithstanding its obligation to bear the fees and expenses of such counsel. This indemnity agreement is not exclusive and will be in addition to any liability which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Underwriter Indemnified Party. 15. (B) Each Underwriter severally and not jointly agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act (collectively, the "Company Indemnified Parties") against any losses, claims, damages, liabilities or expenses (including, unless the Underwriter or Underwriters elect to assume the defense, the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which arise out of or are based in whole or in part upon the Securities Act, the Exchange Act or any other federal, state, local or foreign statute or regulation, or at common law, on the ground or alleged ground that any Preeffective Prospectus, the Registration Statement or the Prospectus (or any Preeffective Prospectus, the Registration Statement or the Prospectus, as from time to time amended and supplemented) includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, but only insofar as any such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by such Underwriter, directly or through the Representatives, specifically for use in the preparation thereof; provided, however, that in no case is such Underwriter to be liable with respect to any claims made against any Company Indemnified Party, against whom the action is brought unless such Company Indemnified Party shall have notified such Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Company Indemnified Party, but failure to notify such Underwriter of such claim shall not relieve it from any liability which it may have to any Company Indemnified Party otherwise than on account of its indemnity agreement contained in this paragraph. Such Underwriter shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but, if such Underwriter elects to assume the defense, such defense shall be conducted by counsel chosen by it. In the event that any Underwriter elects to assume the defense of any such suit and retain such counsel, the Company Indemnified Parties and any other Underwriter or Underwriters or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, respectively. The Underwriter against whom indemnity may be sought shall not be liable to indemnify any person for any settlement of any such claim effected without such Underwriter's consent. This indemnity agreement is not exclusive and will be in addition to any liability which such Underwriter might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to any Company Indemnified Party. (C) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to herein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, 16. then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, defending, settling or compromising any such claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the shares of the Stock underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Underwriters' obligations to contribute are several in proportion to their respective underwriting obligations and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7. SURVIVAL OF INDEMNITIES, REPRESENTATIONS, WARRANTIES, ETC. The respective indemnities, covenants, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by them respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, the Company or any of its officers or directors or any controlling person, and shall survive delivery of and payment for the Stock. 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of the several Underwriters hereunder shall be subject to the accuracy, at and (except as otherwise stated herein) as of the date hereof and at and as of each of the Closing Dates, of the representations and warranties made herein by the Company to compliance at and as of each of the Closing Dates by the Company with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and to the following additional conditions: 17. (A) The Registration Statement shall have become effective and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or the Representatives, shall be threatened by the Commission, and any request for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Representatives. Any filings of the Prospectus, or any supplement thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and Regulations, shall have been made in the manner and within the time period required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the case may be. (B) The Representatives shall have been satisfied that there shall not have occurred any change prior to each of the Closing Dates in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company, or any change in the capital stock, short-term or long-term debt of the Company, such that (i) the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in the opinion of the Representatives, is material, or omits to state a fact which, in the opinion of the Representatives, is required to be stated therein or is necessary to make the statements therein not misleading, or (ii) it is unpracticable in the reasonable judgment of the Representatives to proceed with the public offering or purchase the Stock as contemplated hereby. (C) The Representatives shall be satisfied that no legal or governmental action, suit or proceeding affecting the Company which is material and adverse to the Company or which affects or may affect the Company's ability to perform their respective obligations under this Agreement shall have been instituted or threatened and there shall have occurred no material adverse development in any existing such action, suit or proceeding. (D) At the time of execution of this Agreement, the Representatives shall have received from Coopers & Lybrand L.L.P., independent certified public accountants, a letter, dated the date hereof, in form and substance satisfactory to the Underwriters. (E) The Representatives shall have received from Coopers & Lybrand L.L.P., independent certified public accountants, letters, dated each of the Closing Dates, to the effect that such accountants reaffirm, as of each of the Closing Dates, and as though made on each of the Closing Dates, the statements made in the letter furnished by such accountants pursuant to paragraph (d) of this Section 8. (F) The Representatives shall have received from Wilson, Sonsini, Goodrich and Rosati, counsel for the Company, opinions, dated each of the Closing Dates, to the effect set forth in Exhibit I hereto. (G) The Representatives shall have received from Cooley Godward LLP, counsel for the Underwriters, their opinions dated each of the Closing Dates with respect to the incorporation of the Company, the validity of the Stock, the Registration Statement and the Prospectus and such other related matters as it may reasonably request, and the Company shall 18. have furnished to such counsel such documents as they may request for the purpose of enabling them to pass upon such matters. (H) The Representatives shall have received a certificates, dated each of the Closing Dates, of the chief executive officer or the President and the chief financial or accounting officer of the Company to the effect that: (I) No stop order suspending the effectiveness of the Registration Statement has been issued, and, to the best of the knowledge of the signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; (II) Neither any Preeffective Prospectus, as of its date, nor the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as of the time when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (III) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as set forth or contemplated in the Prospectus, the Company has not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions not in the ordinary course of business and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company, or any change in the capital stock, short-term or long-term debt of the Company; (IV) The representations and warranties of the Company in this Agreement are true and correct at and as of each of the Closing Dates, and the Company has complied with all the agreements and performed or satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Dates; and (V) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, (i) there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company; (ii) the business and operations conducted by the Company and its subsidiaries have not sustained a loss by strike, fire, flood, accident or other calamity (whether or not insured) of such a character as to interfere materially with the conduct of the business and operations of the Company; (iii) no legal or governmental action, suit or proceeding is pending or threatened against the Company which is material to the Company, whether or not arising from transactions in the ordinary course of business, or which may materially and adversely affect the transactions contemplated by this Agreement; (iv) since such dates and except as so disclosed, the Company has not incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock (except pursuant to its stock plans), made any material change in its short-term or funded 19. debt or repurchased or otherwise acquired any of the Company's capital stock; and (v) the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to the Closing Date. (I) The Company shall have furnished to the Representatives such additional certificates as the Representatives may have reasonably requested as to the accuracy, at and as of each of the Closing Dates, of the representations and warranties made herein by it them and as to compliance at and as of each of the Closing Dates by it with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and as to satisfaction of the other conditions to the obligations of the Underwriters hereunder. (J) Cowen shall have received the written agreements, substantially in the form of Exhibit II hereto, of the officers, directors and holders of Common Stock listed in Schedule C that each will not offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by such officer, director or holder in accordance with the Rules and Regulations) during the 180 days following the effective date of the final Prospectus. The Nasdaq National Market shall have approved the stock for listing, subject only to official notice of issuance. All opinions, certificates, letters and other documents will be in compliance with the provisions hereunder only if they are satisfactory in form and substance to the Representatives. The Company will furnish to the Representatives conformed copies of such opinions, certificates, letters and other documents as the Representatives shall reasonably request. If any of the conditions hereinabove provided for in this Section shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to each of the Closing Dates, but Cowen, on behalf of the Representatives, shall be entitled to waive any of such conditions. 9. EFFECTIVE DATE. This Agreement shall become effective immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other provisions, at 11:00 a.m. New York City time on the first full business day following the effectiveness of the Registration Statement or at such earlier time after the Registration Statement becomes effective as the Representatives may determine on and by notice to the Company or by release of any of the Stock for sale to the public. For the purposes of this Section 9, the Stock shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Stock or upon the release by you of telegrams (i) advising Underwriters that the shares of Stock are released for public offering or (ii) offering the Stock for sale to securities dealers, whichever may occur first. 20. 10. TERMINATION. This Agreement (except for the provisions of Section 5) may be terminated by the Company at any time before it becomes effective in accordance with Section 9 by notice to the Representatives and may be terminated by the Representatives at any time before it becomes effective in accordance with Section 9 by notice to the Company. In the event of any termination of this Agreement under this or any other provision of this Agreement, there shall be no liability of any party to this Agreement to any other party, other than as provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to the liability of defaulting Underwriters. This Agreement may be terminated after it becomes effective by the Representatives by notice to the Company (i) if at or prior to the First Closing Date trading in securities on of the Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on any such exchange or market, or a banking moratorium shall have been declared by New York or United States authorities; (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) if at or prior to the First Closing Date there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power or of any other insurrection or armed conflict involving the United States or (B) any change in financial markets or any calamity or crisis which, in the judgment of the Representatives, makes it impractical or inadvisable to offer or sell the Stock on the terms contemplated by the Prospectus; (iv) if there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or the transactions contemplated by this Agreement, which, in the judgment of the Representatives, makes it impracticable or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus; (v) if there shall be any litigation or proceeding, pending or threatened, which, in the judgment of the Representatives, makes it impracticable or inadvisable to offer or deliver the on the terms contemplated by the Prospectus; or (vi) if there shall have occurred any of the events specified in the immediately preceding clauses (i) - (v) together with any other such event that makes it, in the judgment of the Representatives, impractical or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus. 11. REIMBURSEMENT OF UNDERWRITERS. Notwithstanding any other provisions hereof, if this Agreement shall not become effective by reason of any election of the Company pursuant to the first paragraph of Section 10 or shall be terminated by the Representatives under Section 8 or Section 10, the Company will bear and pay the expenses specified in Section 5 hereof and, in addition to its obligations pursuant to Section 6 hereof, the Company will reimburse the reasonable out-of-pocket expenses of the several Underwriters (including reasonable fees and disbursements of counsel for the Underwriters) incurred in connection with this Agreement and the proposed purchase of the Stock, and promptly upon demand the Company will pay such amounts to you as Representatives. 12. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall default in its or their obligations to purchase shares of Stock hereunder and the aggregate number of shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of shares underwritten, the other Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to 21. purchase the shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or Underwriters shall so default and the aggregate number of shares with respect to which such default or defaults occur is more than ten percent (10%) of the total number of shares underwritten and arrangements satisfactory to the Representatives and the Company for the purchase of such shares by other persons are not made within forty-eight (48) hours after such default, this Agreement shall terminate. If the remaining Underwriters or substituted Underwriters are required hereby or agree to take up all or part of the shares of Stock of a defaulting Underwriter or Underwriters as provided in this Section 12, (i) the Company shall have the right to postpone the Closing Date[s] for a period of not more than five (5) full business days in order that the Company may effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective numbers of shares to be purchased by the remaining Underwriters or substituted Underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting Underwriter of its liability to the Company or the other Underwriters for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of any non-defaulting Underwriter or the Company, except for expenses to be paid or reimbursed pursuant to Section 5 and except for the provisions of Section 6. 13. NOTICES. All communications hereunder shall be in writing and, if sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed to you, as their Representatives c/o Cowen & Company at Financial Square, New York, New York 10005 except that notices given to an Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at the address furnished by the Representatives or, if sent to the Company, shall be mailed, delivered or telegraphed and confirmed c/o Harry Robbins, Symphonix Devices, Inc., 3047 Orchard Parkway, San Jose, CA 95134. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the several Underwriters, the Company and their respective successors and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the representations, warranties, covenants, agreements and indemnities of the Company contained in this Agreement shall also be for the benefit of the person or persons, if any, who control any Underwriter or Underwriters within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and the indemnities of the several Underwriters shall also be for the benefit of each director of the Company, each of its officers who has signed the Registration Statement and the person or persons, if any, who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. 22. 15. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 16. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement, you will act for and on behalf of the several Underwriters, and any action taken under this Agreement by Cowen, as Representative, will be binding on all the Underwriters. 17. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 18. GENERAL. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and the Representatives. 19. COUNTERPARTS. This Agreement may be signed in two (2) or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 23. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, SYMPHONIX DEVICES, INC. By:_____________________________________ President Accepted and delivered in ____________, California as of the date first above written. COWEN & COMPANY UBS SECURITIES LLC Acting on its own behalf and as Representatives of several Underwriters referred to in the foregoing Agreement. By: COWEN & COMPANY By: Cowen Incorporated, its general partner By:______________________________ John P. Dunphy Managing Director - Syndicate 24. SCHEDULE A
Number Number of of Firm Optional Shares Shares to be to be Name Purchased Purchased --------- --------- Cowen & Company..... UBS Securities LLC.. --------- ------- Total 2,300,000 345,000 ========= =======
-25- SCHEDULE C -26- EXHIBIT I [FORM OF OPINION OF ISSUER'S COUNSEL] [Date] Cowen & Company UBS Securities LLC As representatives of the several Underwriters named in Schedule A c/o Cowen & Company Financial Square New York, New York 10005 Re: Symphonix Devices, Inc. 2,300,000 Shares of Common Stock Dear Sirs: We have acted as counsel for Symphonix Devices, Inc., a Delaware corporation (the "Company"), in connection with the sale by the Company and purchase of 2,300,000 shares of Common Stock, par value $0.01 per share, of the Company (the "Shares") by the several Underwriters listed in Schedule A to the Underwriting Agreement, dated ____, 1997 among the Company, Cowen & Company and UBS Securities LLC, as representatives of the several Underwriters named therein (the "Underwriting Agreement"). This opinion is being furnished pursuant to Section 8(f) of the Underwriting Agreement. All defined terms not defined herein shall have the meanings ascribed to them in the Underwriting Agreement. We are of the opinion that: 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership or lease of property or the conduct of its business requires such qualification, and has all power and authority necessary to own or hold its properties and conduct the business in which it is engaged; -27- 2. The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and all of the Shares to be issued and sold by the Company to the Underwriters pursuant to the Underwriting Agreement have been duly and validly authorized and, when issued and delivered against payment therefor as provided for in the Underwriting Agreement, shall be duly and validly issued, fully paid and non- assessable; 3. There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the Shares pursuant to the Company's Certificate of Incorporation or By-Laws or any agreement or other instrument; 4. There are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is the subject which, if determined adversely to the Company, could have a material adverse effect on the Company; and, to the best of our knowledge, no such proceedings are threatened or contemplated by governmental authorities or other third parties; 5. The Company owns or possesses all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by it or necessary for the conduct of its business, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company with respect to the foregoing. The Company's business as now conducted and as proposed to be conducted does not and will not infringe or conflict with any patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right of any person; 6. The Company has, and the Company as of the Closing Dates will have, good and marketable title in fee simple to all real property and good and marketable title to all personal property owned or proposed to be owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects; and any real property and buildings held under lease by the Company or proposed to be held after giving effect to the transactions described in the Prospectus are, or will be as of the Closing Dates, held by it under valid, subsisting and enforceable leases with such exceptions as would not have a material adverse effect on the Company considered as a whole; 7. The Company has full corporate power and authority to enter into the Underwriting Agreement and to perform its obligations thereunder (including to issue, sell and deliver the Shares), and the Underwriting Agreement has been duly and validly authorized, executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that rights to indemnification and contribution thereunder may be limited by federal or state securities laws or the public policy underlying such laws; 8. The execution, delivery and performance of the Underwriting Agreement and the consummation of the transactions therein contemplated will not result in a breach or violation -28- of any of the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which the Company is a party or by which it or any of its properties is or may be bound, the Certificate of Incorporation, By-laws or other organizational documents of the Company, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties or result in the creation of a lien; 9. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by the Underwriting Agreement, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or under the Securities Act or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters; 10. The Company is in compliance with, and conducts its business in conformity with, all applicable federal, state, local and foreign laws, rules and regulations, including, but not limited to, those of any governmental agency, court or tribunal; to the best of our knowledge, no prospective change in any of such federal, state, local or foreign laws, rules or regulations has been adopted which, when made effective, would have a material adverse effect on the operations of the Company. The Company is in compliance with all applicable federal, state, local and foreign laws and regulations relating to the protection of human health or the environment or imposing liability or requiring standards of conduct concerning any Hazardous Materials; 11. The Registration Statement was declared effective under the Securities Act as of __________, 1997, the Prospectus was filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations on __________, 1997 and no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose is pending or, to the best of our knowledge, threatened by the Commission; 12. The Registration Statement and the Prospectus and any amendments or supplements thereto comply as to form in all respects with the requirements of the Securities Act and the Rules and Regulations and the documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, complied as to form in all respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the Rules and Regulations; and any amendment or supplement to any such incorporated document, when they became effective or were filed with the Commission, as the case may be, complied as to form in all respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the Rules and Regulations; 13. To the best of our knowledge, there are no contracts or other documents which are required by the Securities Act or by the Rules and Regulations to be described in the Prospectus or filed as exhibits to the Registration Statement which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations; -29- 14. Other than as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to this Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; 15. The descriptions in the Registration Statement and Prospectus of statutes, rules, regulations, legal or governmental proceedings, contracts and other documents are accurate and such descriptions fairly present the information required to be disclosed; and to the best of our knowledge, there are no legal or governmental proceedings, statutes, ruler or regulations, or any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required; 16. The statements under the captions "Risk Factors"; and "Business-Government Regulation", to the extent they reflect matters of federal law arising under the laws of the United States or legal conclusions relating to such law, accurately summarize and fairly present the legal and regulatory matters described therein; 17. The Company has complied with all provisions of Section 517.075 of the Florida Statutes (Chapter 92 - l98; Laws of Florida); 18. The Company is not, nor will it be immediately after receiving the proceeds from the sale of the Shares, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended; The foregoing opinion is limited to matters governed by the Federal laws of the United States of America, the general corporate law of the States of Delaware and New York and the laws of the State of California. We have acted as counsel to the Company on a regular basis, have acted as counsel to the Company in connection with previous financing transactions and have acted as counsel to the Company in connection with the preparation and filing of the Registration Statement and the Prospectus, and based on the foregoing, no facts have come to our attention which lead us to believe that (i) the Registration Statement or any amendment thereto, as of the Effective Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus contains any untrue statement of a material fact or omits to state a material fact Required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or (ii) any document incorporated by reference in the Prospectus or any amendment or supplement to any such incorporated document made by the Company, when they became effective or were filed with the Commission, as the case may be, contained, in the case of a registration statement which -30- became effective under the Securities Act, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or, in the case of documents filed under the Exchange Act with the Commission, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Very truly yours, -31- Text of forms of legal opinion for FDA opinion and patent opinion to come -32- SCHEDULE A [Underwriters] -33- [Date] Cowen & Company UBS Securities, Inc. As representatives of the several Underwriters c/o Cowen & Company Financial Square New York, New York 10005 Re: Symphonix Devices, Inc. ____ Shares of Common Stock Dear Sirs: In order to induce Cowen & Company ("Cowen") and UBS Securities, LLC (together with Cowen, the "Representatives"), to enter in to a certain underwriting agreement with Symphonix Devices, Inc., a Delaware corporation (the "Company"), with respect to the public offering of shares of the Company's Common Stock, par value $0.01 per share ("Common Stock"), the undersigned hereby agrees that for a period of one hundred eighty (180) days following the date of the final prospectus filed by the Company with the Securities and Exchange Commission in connection with such public offering, the undersigned will not, without the prior written consent of Cowen, directly or indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell, grant an option to purchase or otherwise dispose of, other than by operation of law, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated under the Securities Act of 1933, as the same may be amended or supplemented from time to time (such shares, the "Beneficially Owned Shares")). Anything contained herein to the contrary notwithstanding, any person to whom shares of Common Stock or Beneficially Owned Shares are transferred from the undersigned shall be bound by the terms of this Agreement. -34- In addition, the undersigned hereby waives, from the date hereof until the expiration of the one-year period following the date of the Company's final Prospectus, any and all rights, if any, to request or demand registration pursuant to the Securities Act of any shares of Common Stock that are registered in the name of the undersigned or that are Beneficially Owned Shares. In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Common Stock with respect to any shares of Common Stock or Beneficially Owned Shares. [Signatory] By:_________________________ Name: Title: -35- EX-3.1 3 RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF SYMPHONIX DEVICES, INC. Alfred G. Merriweather and J. Casey McGlynn certify that: 1. They are the Vice President and the Secretary, respectively, of Symphonix Devices, Inc., a California corporation. 2. The articles of incorporation of this corporation are hereby amended and restated to read as follows: "I. The name of this corporation is Symphonix Devices, Inc. (the "Corporation"). II. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. The Corporation is authorized to issue two (2) classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is twenty-nine million seven hundred fifty thousand (29,750,000) shares, twenty million (20,000,000) shares of which shall be Common Stock (the "Common Stock") and nine million seven hundred fifty thousand (9,750,000) shares of which shall be Preferred Stock (the "Preferred Stock"). IV. The rights, preferences, privileges, restrictions and other matters relating to the nine million seven hundred fifty thousand (9750,000) shares of Preferred Stock are as follows: 1. Designation. Five million five hundred thousand (5,500,000) shares of ----------- Preferred Stock are hereby designated "Series A Preferred Stock", one million five hundred thousand (1,500,000) shares of Preferred Stock are hereby designated "Series B Preferred Stock," one million five hundred thousand (1,500,000) shares of Preferred Stock are hereby designated "Series C Preferred Stock" and one million two hundred fifty thousand (1,250,000) shares of Preferred Stock are hereby designated "Series D Preferred Stock." 2. Dividends. The holders of shares of Series A Preferred Stock, Series --------- B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of $0.10, $0.40, $0.535 and $0.80 per share per annum, respectively, or if greater (as determined on a per annum basis and an as- converted basis for the Preferred Stock), an amount equal to that paid on any other outstanding shares of the Corporation whenever funds are legally available therefor, payable when, as and if declared by the Board of Directors. No dividend shall be declared with respect to any series of Preferred Stock unless a dividend is declared with respect to each series of outstanding Preferred Stock at a rate that is no less favorable to the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock than $0.10, $0.40, $0.535 and $0.80 per annum for each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively. Such dividends shall not be cumulative. 3. Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, an amount per share equal to $1.00, $4.00, $5.35 and $8.00 for each outstanding share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively (as adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares, hereinafter "as adjusted"), plus all declared but unpaid dividends on such shares. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the Corporation legally available for distribution shall be distributed first ratably among the holders of Series C Preferred Stock and Series D Preferred Stock until the holders of Series C Preferred Stock and Series D Preferred Stock have received payment of their full aforesaid preferential amounts; provided, however, that if the assets and funds thus distributed among the holders of the Series C Preferred Stock and Series D Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then such assets shall be distributed among such holders of Series C Preferred Stock and Series D Preferred Stock in proportion to the respective amounts which would be payable on such shares of Series C Preferred Stock and Series D Preferred Stock held by them if the aforesaid preferential amounts were paid in full. Then, such assets and funds shall be distributed ratably among the holders of the Series A Preferred Stock and Series B Preferred Stock, based upon the number of shares of -2- Series A Preferred Stock and Series B Preferred Stock then held, in proportion to the respective amounts which would be payable on the shares held by them if the aforesaid preferential amounts were paid in full. (b) After the payment of the full liquidation preference set forth in Section 3(a) above, the remaining assets of the Corporation available for distribution to shareholders shall be distributed pro rata to the holders of Common Stock (based on the number of shares of Common Stock then held by each such holder). (c) A liquidation, dissolution, or winding up within the meaning of this Section 3 shall be deemed to be occasioned by, and to include, (i) any sale of all or substantially all of the assets of the Corporation and (ii) any consolidation, merger or other transaction or series of transactions pursuant to which the holders of the outstanding voting securities of the Corporation immediately prior to such consolidation, merger or other transaction or series of transactions fail to hold equity securities representing a majority of the voting power of the surviving entity immediately following such consolidation, merger or other transaction or series of transactions. (d) Any securities to be delivered to the holders of the Preferred Stock or Common Stock pursuant to this Section 3 shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (1) If traded on a national securities exchange or the Nasdaq National Market (the "NMS"), the value shall be deemed to be the average of the security's last reported sale prices on such exchange or the NMS over the thirty (30) day period ending three (3) days prior to the closing; (2) If traded over-the-counter (but not on the NMS), the value shall be deemed to be the average of the mean of the closing bid and ask prices over the thirty (30) day period ending three (3) days prior to the closing; or (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of not less than fifty percent (50%) of the outstanding Preferred Stock, voting together as a single class. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in Sections 3(d)(i)(1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of not less than fifty percent (50%) of the outstanding Preferred Stock, voting together as a single class. (e) Each holder of any outstanding shares of Preferred Stock shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the California Corporations Code, to -3- distributions made by the Corporation in connection with (i) the repurchase of shares of Common Stock issued to or held by employees, directors or consultants of or to the Corporation or any of its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of such repurchase between the Corporation and such persons and (ii) the repurchase of shares of Common Stock in connection with the exercise of the right of first refusal pursuant to agreements providing for the right of first refusal between the Corporation and any of its share holders, provided that a majority of disinterested members of the Board of Directors has approved such distributions. (f) In the event the Corporation will not, at the closing of any transaction identified in Sections 3(c)(i) or (ii) above, comply with the requirements of this Section 3, the Corporation shall forthwith either: (i) cause such closing to be postponed until such time as the requirements of this Section 3 have been complied with, or (ii) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 3(g) hereof. (g) The Corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the shareholders' meeting called to approve a transaction referenced in Sections 3(c)(i) and (ii), or twenty (20) days prior to the closing of such transaction, whichever is earlier and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 3, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein. Notwithstanding the foregoing, the provisions of this Section 3(g) may be waived, either prospectively or retrospectively, in whole or in part, or any time period in this Section 3(g) may be shortened, in either case, upon the written consent of the holders of the Preferred Stock which represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock, voting together as a single class. 4. Conversion. The holders of the Preferred Stock shall have conversion ---------- rights as follows (the "Conversion Rights"): (a) Right to Convert. ---------------- (i) Each share of Preferred Stock shall be convertible into shares of Common Stock, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock. Each share of Preferred -4- Stock shall be convertible into the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as hereinafter defined) per share in effect for each series of Preferred Stock at the time of conversion into the per share Conversion Value (as hereinafter defined) of such series. As of the date these Restated Articles of Incorporation are filed with the California Secretary of State, the Conversion Price per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be $1.00, $4.00, $5.35, and $8.00 respectively. The per share Conversion Value shall be $1.00, $4.00, $5.35 and $8.00, respectively. The Conversion Price of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be subject to adjustment from time to time as provided below. (ii) Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective applicable Conversion Price immediately upon the closing of the sale of the Corporation's Common Stock in a firm commitment, underwritten public offering registered under the Securities Act of 1933, as amended (other than a registration relating solely to a transaction under Rule 145 under such Act (or any successor thereto) or to an employee benefit plan of the Company), at a public offering price (prior to underwriter commissions and expenses) equal to or exceeding eleven dollars ($11.00) per share of Common Stock (appropriately adjusted for subdivisions and combinations of shares of Common Stock and dividends on Common Stock payable in shares of Common Stock) and the aggregate dollar amount of the offering (before deduction for underwriter commissions and expenses relating to the issuance) of which exceeds seventeen million dollars ($17,000,000). (iii) Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective applicable Conversion Price upon the vote or written consent of the holders of sixty-six and two-thirds percent (66 2/3%) of the authorized shares of Preferred Stock then outstanding, voting together as a single class. (b) Mechanics of Conversion. Before any holder of Preferred Stock ----------------------- shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates thereof, duly endorsed, at the office of the Corporation or of any transfer agent for such stock, and shall give written notice to the Corporation at such office that he elects to convert the same and shall state therein the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such -5- conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price for Diluting Issues. --------------------------------------------------- (i) Special Definitions. For purposes of this Section 4(c), the ------------------- following definitions shall apply: (1) "Option" shall mean rights, options or warrants to ------ subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) "Convertible Securities" shall mean any evidences of ---------------------- indebted ness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (3) "Additional Shares of Common Stock" shall mean all --------------------------------- shares of Common Stock issued (or, pursuant to Section 4(c) (iii), deemed to be issued) by the Corporation after the date hereof, other than: (A) shares of Common Stock issued or issuable upon conversion of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock authorized herein; (B) up to an aggregate of two million two hundred thirty-five thousand (2,235,000) shares of Common Stock issued or issuable to officers, directors, and employees of, or consultants or advisers to, the Corporation pursuant to agreements, plans or arrangements approved by the Board of Directors of the Corporation; (C) shares of Common Stock issued or issuable as a dividend or distribution on the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock or any event for which adjustment is made pursuant to Sections 4(e), 4(f) or 4(n) hereof; (D) shares of Common Stock issued or issuable by way of dividend or other distribution on shares excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (A) or (C) or this clause (D) or on shares of Common Stock so excluded; or (E) shares of Common Stock or other securities issued or issuable to licensors of technology to the Corporation under any agreement or arrangement approved by a majority of the disinterested Board of Directors of the Corporation. (ii) No Adjustment of Conversion Price. No adjustment to the --------------------------------- Conversion Price of any series of Preferred Stock shall be made in respect of the issuance of Additional Shares of -6- Common Stock unless the consideration per share for any Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price of such series of Preferred Stock in effect on the date of, and immediately prior to, the issue of such Additional Share of Common Stock. (iii) Issue of Securities Deemed Issue of Additional Shares of -------------------------------------------------------- Common Stock. In the event the Corporation at any time or from time to time - ------------ after the date hereof shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued: (1) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (2) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decreases in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (3) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (A) in the case of Convertible Securities or Options for Common Stock the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and -7- (B) in the case of Options for Convertible Securities only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of common Stock actually deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (4) no readjustment pursuant to clause (2) or (3) above shall have the effect of increasing the Conversion Price for any series of Preferred Stock to an amount which exceeds the lower of (i) such Conversion Price on the original adjustment date, or (ii) such Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (5) in the case of any Options which expire by their terms not more than thirty (30) days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional ---------------------------------------------------------- Shares of Common Stock. If the Corporation shall issue Additional Shares of - ---------------------- Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(c) (iii)) without consideration or for a consideration per share less than the Conversion Price for any series of Preferred Stock in effect on the date of and immediately prior to such issuance (excluding stock dividends, distributions, subdivisions, split-ups, or combinations which are covered by Sections 4(e) and 4(f)), then the Conversion Price for such series of Preferred Stock shall be reduced, concurrently with such issuance, to a price (calculated to the nearest tenth of a cent) equal to the quotient obtained by dividing the total computed under clause (x) below by the total computed under clause (y) below as follows: (x) an amount equal to the sum of: (1) the total number of shares of Common Stock issuable upon conversion of all of the then outstanding shares of Preferred Stock (at the applicable Conversion Prices for the Preferred Stock in effect immediately prior to such issuance) multiplied by the applicable Conversion Price for such series of Preferred Stock in effect immediately prior to such issuance, plus (2) the aggregate consideration, if any, received by the Corporation for such issuance; (y) an amount equal to the sum of -8- (1) the total number of shares of Common Stock issuable upon conversion of all of the then outstanding shares of Preferred Stock (at the applicable Conver sion Prices for the Preferred Stock in effect immediately prior to such issuance), plus (2) the Additional Shares of Common Stock issued in such issuance. Notwithstanding the foregoing, the Conversion Price of a series of Preferred Stock shall not be so reduced at such time if the amount of such reduction would be an amount less than one-tenth of a cent ($0.001), but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate one-tenth of a cent ($0.001) or more. (v) Determination of Consideration. For purposes of this Section ------------------------------ 4(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (1) Cash and Property. Such consideration shall: ----------------- (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (2) Options and Convertible Securities. The consideration ---------------------------------- per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(c)(iii), relating to Options and Convertible Securities, shall be deter mined by dividing: (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the -9- exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment to Conversion Price in the Event of a Forced or ---------------------------------------------------------- Automatic Conversion. In the event of (i) a forced conversion of the Series C - -------------------- Preferred Stock pursuant to Section 4(a)(iii) in connection with an initial public offering at a price lower than $8.50 per share of Common Stock or (ii) an automatic conversion of the Series C Preferred Stock pursuant to Section 4(a)(ii) at a price lower than $8.50 per share of Common Stock, then the Conversion Price for the Series C Preferred Stock shall be reduced to $5.0156. In the event of a forced conversion of the Series D Preferred Stock pursuant to Section 4(a)(iii) in connection with an initial public offering at a price lower than $8.00 per share of Common Stock or (ii) an automatic conversion of the Series D Preferred Stock pursuant to Section 4(a)(ii) at a price lower than $8.00 per share of Common Stock, then the Conversion Price for the Series D Preferred stock shall be reduced to the amount of such initial public offering price. The above numbers are subject to adjustment for subdivisions and combinations of shares of Common Stock and dividends on Common Stock payable in shares of Common Stock. (e) Adjustments to Conversion Price for Other Events. The ------------------------------------------------ Conversion Price shall be subject to adjustment from time to time as follows: (vi) If the number of shares of Common Stock outstanding is increased by a stock dividend or distribution payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, as of the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, distribution, subdivision or split-up (or the date of such dividend, distribution, split-up or subdivision if no record date is fixed), the Conversion Price of each series of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase of outstanding shares of Common Stock. (vii) If the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price of each series of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be decreased in proportion to such decrease in outstanding shares of Common Stock. (f) Other Distributions. In the event the Corporation shall declare a ------------------- distribution payable in securities of other persons, evidence of indebtedness issued by the Corporation or other persons, or assets, options or rights not referred to in Section 4(c) hereof, then, in each such case, provision shall be made so that the holders of the Preferred Stock shall be entitled to receive, upon -10- the conversion thereof, the consideration per share which they would have received had their Preferred Stock been converted into Common Stock on the date of such event. (g) No Impairment. The Corporation will not, through any ------------- reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (h) Certificates as to Adjustments. Upon the occurrence of each ------------------------------ adjustment or readjustment of the Conversion Price of any series of Preferred Stock pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock the Conversion Price of which has been adjusted a certificate signed by the chief executive officer or the chief financial officer of the Company setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock. (i) Notices of Record Date. In the event of any taking by the ---------------------- Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any security or right convertible into or entitling the holder thereof to receive Common Stock or other securities of the Company, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right, and the amount and character of such dividend, distribution, security or right. (j) Issue Taxes. The Corporation shall pay any and all issue and ----------- other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (k) Reservation of Stock Issuable Upon Conversion. The Corporation --------------------------------------------- shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued -11- shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these Articles. (l) Fractional Shares. No fractional share shall be issued upon the ----------------- conversion of any share or shares of Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (m) Notices. Any notice required by the provisions of this Section 4 ------- to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. (n) Adjustments. In case of any reorganization or any ----------- reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation or corporations, or the conveyance of all or substantially all of the assets of the Corporation to another corporation (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in Section 3 or in this Section 4), each share of Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property (including cash) to which a holder of the number of shares of Common Stock deliverable upon conversion of such share of Preferred Stock would have been entitled upon the record date of (or date of, if no record date is fixed) such reorganization, reclassification, consolidation, merger or conveyance; and, in any case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of such Preferred Stock, to the end that the provisions set forth herein shall thereafter be applicable, as nearly as equivalent as is practicable, in relation to any shares of stock or the securities or property (including cash) thereafter deliverable upon the conversion of the shares of Preferred Stock. 5. Voting Rights. Except as otherwise expressly provided herein or as ------------- required by law, the holder of each share of the Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted and shall have voting rights and powers equal to the voting rights and powers of the Common Stock (except as otherwise expressly provided herein or as required by law, voting together with the Common Stock as a single class) and shall be entitled to notice of any shareholders' meeting in -12- accordance with the Bylaws of the Corporation. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). 6. Covenants. So long as at least five hundred thousand (500,000) shares --------- of the Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority in interest of the then outstanding shares of Preferred Stock, voting together as a single class and on an as if converted basis: (a) Effect any sale of all or substantially all of the assets of the Corporation or any merger or consolidation of the Corporation with another corporation; (b) Take any action (other than of a ministerial nature, including the registration of a transfer on the books and records of the Corporation) to initiate a transfer of 50% or more in interest (determined on an as converted basis) of the capital stock of the Corporation in a single transaction or a series of related transactions; (c) amend or repeal any provision of, or add any provision to, the Corporation's Articles of Incorporation if such action would increase the authorized number of shares of Preferred Stock, or alter or change the rights, preferences, privileges or limitations provided for the benefit of the Preferred Stock; (d) create any series or class of stock having any preference or priority as to dividends, redemption, voting, liquidation, conversion or assets superior to or on a parity with any such preference or priority of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock; or (e) amend or repeal any provision of, or add any provision to, the Corporation's Bylaws if such action would increase the authorized number of directors of the Company to more than seven (7) directors. V. The following is applicable to the Common Stock: 1. Dividend Rights. Subject to the prior rights of holders of all --------------- classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corpora tion legally available therefor, such dividends as may be declared from time to time by the Board of Directors. -13- 2. Liquidation Rights. Upon the liquidation, dissolution or winding up ------------------ of the Corpora tion, the assets of the Corporation shall be distributed as provided in Section 3 of Article IV hereof. 3. Redemption. The Common Stock is not redeemable. ---------- 4. Voting Rights. ------------- (a) General. The holder of each share of Common Stock shall have the ------- right to one vote, and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. VI. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Any repeal or modification of this Article shall only be prospective and shall not affect the rights under this Article in effect at the time of the alleged occurrence of any action or omission to act giving rise to liability. VII. The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) for breach of duty to the Corporation and its shareholders through bylaw provisions, or through agreements with the agents, or through shareholder resolutions, or through resolutions of disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. Any repeal or modification of this Article shall only be prospective and shall not affect the rights under this Article in effect at the time of the alleged occurrence of any action or omission to act giving rise to indemnification." 3. The foregoing amendment and restatement of the articles of incorporation has been duly approved by the Board of Directors of this corporation. 4. The foregoing amendment and restatement of the articles of incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of this corporation is 5,463,000 shares of Series A Preferred Stock, 1,378,500 shares of Series B Preferred Stock, 1,162,451 shares of Series C Preferred Stock, 440,680 shares of Series D Preferred Stock and 3,315,561 shares of Common Stock. -14- The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the outstanding shares of Common Stock (voting as a separate class), more than fifty percent (50%) of the outstanding shares of Preferred Stock (voting as a separate class) and more than fifty percent (50%) of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock (voting together as a class). [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -15- We further declare under penalty of perjury that the matters set forth in the foregoing certificate are true and correct of our own knowledge. Executed at San Jose, California, on June 4, 1997. /s/ Alfred G. Merriweather ------------------------------------------- Alfred G. Merriweather, Vice President /s/ J. Casey McGlynn ------------------------------------------- J. Casey McGlynn, Secretary -16- EX-3.3 4 BYLAWS OF SYMPHONIX DEVICES, INC. EXHIBIT 3.3 BYLAWS OF SYMPHONIX DEVICES, INC. ----------------------- BYLAWS OF SYMPHONIX DEVICES, INC. ----------------------- TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES................................................... 1 1.1 PRINCIPAL OFFICE.......................................................... 1 1.2 OTHER OFFICES............................................................. 1 ARTICLE II - MEETINGS OF SHAREHOLDERS........................................... 1 2.1 PLACE OF MEETINGS......................................................... 1 2.2 ANNUAL MEETING............................................................ 1 2.3 SPECIAL MEETING........................................................... 2 2.4 NOTICE OF SHAREHOLDERS' MEETINGS.......................................... 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.............................. 3 2.6 QUORUM.................................................................... 3 2.7 ADJOURNED MEETING; NOTICE................................................. 4 2.8 VOTING.................................................................... 4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT......................... 5 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING................................................................... 6 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS.................................................................. 7 2.12 PROXIES.................................................................. 7 2.13 INSPECTORS OF ELECTION................................................... 8 ARTICLE III - DIRECTORS......................................................... 9 3.1 POWERS.................................................................... 9 3.2 NUMBER OF DIRECTORS....................................................... 9 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS.................................. 9 3.4 RESIGNATION AND VACANCIES................................................. 10 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................................. 10 3.6 REGULAR MEETINGS.......................................................... 11 3.7 SPECIAL MEETINGS; NOTICE.................................................. 11 3.8 QUORUM.................................................................... 11 3.9 WAIVER OF NOTICE.......................................................... 12
-i- TABLE OF CONTENTS (Continued)
Page --- 3.10 ADJOURNMENT............................................................. 12 3.11 NOTICE OF ADJOURNMENT................................................... 12 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING....................... 12 3.13 FEES AND COMPENSATION OF DIRECTORS...................................... 12 3.14 APPROVAL OF LOANS TO OFFICERS........................................... 13 ARTICLE IV - COMMITTEES........................................................ 13 4.1 COMMITTEES OF DIRECTORS.................................................. 13 4.2 MEETINGS AND ACTION OF COMMITTEES........................................ 14 ARTICLE V - OFFICERS........................................................... 14 5.1 OFFICERS................................................................. 14 5.2 ELECTION OF OFFICERS..................................................... 15 5.3 SUBORDINATE OFFICERS..................................................... 15 5.4 REMOVAL AND RESIGNATION OF OFFICERS...................................... 15 5.5 VACANCIES IN OFFICES..................................................... 15 5.6 CHAIRMAN OF THE BOARD.................................................... 15 5.7 PRESIDENT................................................................ 16 5.8 VICE PRESIDENTS.......................................................... 16 5.9 SECRETARY................................................................ 16 5.10 CHIEF FINANCIAL OFFICER................................................. 17 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.................................................. 17 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................................ 17 6.2 INDEMNIFICATION OF OTHERS................................................ 18 6.3 PAYMENT OF EXPENSES IN ADVANCE........................................... 18 6.4 INDEMNITY NOT EXCLUSIVE.................................................. 18 6.5 INSURANCE INDEMNIFICATION................................................ 19 6.6 CONFLICTS................................................................ 19 ARTICLE VII - RECORDS AND REPORTS.............................................. 19 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER............................. 19
-ii- TABLE OF CONTENTS (Continued)
Page ---- 7.2 MAINTENANCE AND INSPECTION OF BYLAWS.................................. 20 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS................. 20 7.4 INSPECTION BY DIRECTORS............................................... 21 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER................................. 21 7.6 FINANCIAL STATEMENTS.................................................. 21 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS........................ 22 ARTICLE VIII - GENERAL MATTERS.............................................. 22 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING................. 22 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS............................. 23 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.................... 23 8.4 CERTIFICATES FOR SHARES............................................... 23 8.5 LOST CERTIFICATES..................................................... 24 8.6 CONSTRUCTION; DEFINITIONS............................................. 24 ARTICLE IX - AMENDMENTS..................................................... 24 9.1 AMENDMENT BY SHAREHOLDERS............................................. 24 9.2 AMENDMENT BY DIRECTORS................................................ 24
-iii- BYLAWS ------ OF -- SYMPHONIX DEVICES, INC. ----------------------- ARTICLE I CORPORATE OFFICES ----------------- 1.1 PRINCIPAL OFFICE ---------------- The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES ------------- The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS ------------------------ 2.1 PLACE OF MEETINGS ----------------- Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING -------------- The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the second Tuesday of May at 10:00 a.m. However, if such day falls on a legal holi day, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING --------------- A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chair man of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS -------------------------------- All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Sec tion 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding pre ferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. -2- 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE -------------------------------------------- Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders' meeting, or (iv) by telegraphic or other written com munication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM ------ The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE ------------------------- Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. -3- When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING ------ The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sec tions 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to com mencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the -4- candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT ------------------------------------------------- The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be trans acted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Sec tion 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------------- Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. -5- If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS ----------------------------------------------------------- For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES ------- Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name -6- is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in- fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presump tively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION ---------------------- Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and -7- (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS --------- 3.1 POWERS ------ Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS ------------------- The number of directors of the corporation shall be not less than five (5)** nor more than seven (7)**. The exact number of directors shall be six (6)** until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS ---------------------------------------- Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES ------------------------- -8- Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the re moval of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the share holders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ---------------------------------------- Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all direc tors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS ---------------- Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. -9- 3.7 SPECIAL MEETINGS; NOTICE ------------------------ Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM ------ A majority of the authorized number of directors shall consti tute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Sec tion 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE ---------------- Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meet ing, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such direc tors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT ----------- -10- A majority of the directors present, whether or not consti tuting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT --------------------- Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------- Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS ---------------------------------- Directors and members of committees may receive such compen sation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS* ----------------------------- The corporation may, upon the approval of the board of direc tors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. _____________________ * This section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code. -11- ARTICLE IV COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS ----------------------- The board of directors may, by resolution adopted by a major ity of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corpora tion, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjourn ment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of -12- committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate mem bers, who shall have the right to attend all meetings of the com mittee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS -------- 5.1 OFFICERS -------- The officers of the corporation shall be a president, a secre tary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant sec retaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Sec tion 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS -------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS -------------------- The board of directors may appoint, or may empower the presi dent to appoint, such other officers as the business of the corpo ration may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS ----------------------------------- Subject to the rights, if any, of an officer under any con tract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the accep tance of the resignation shall not be necessary to make it effec tive. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. -13- 5.5 VACANCIES IN OFFICES -------------------- A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD --------------------- The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT --------- Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence or non existence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of man agement usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS --------------- In the absence or disability of the president, the vice presi dents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or com mittee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. -14- The secretary shall keep, or cause to be kept, at the princi pal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolu tion of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the cor poration, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and direc tors, whenever they request it, an account of all of his trans actions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, -------------------------------------------------- AND OTHER AGENTS ---------------- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judg ments, fines, settlements, and other amounts actually and reason ably incurred in connection with any proceeding (as defined in Sec tion 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corpora tion, (ii) who is or was serving at the request of the corporation as a director or officer of -15- another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS ------------------------- The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settle ments, and other amounts actually and reasonably incurred in con nection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE ------------------------------ Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Direc tors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an under taking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indem nification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 6.5 INSURANCE INDEMNIFICATION ------------------------- The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, offi cer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. -16- 6.6 CONFLICTS --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER -------------------------------------------- The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the trans fer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. -17- Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS ------------------------------------ The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of Cali fornia, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the cor poration is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS ----------------------------------------------------- The accounting books and records and the minutes of proceed ings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust cer tificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS ----------------------- Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER ------------------------------------- The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meet ing of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. -18- The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS -------------------- If no annual report for the fiscal year has been sent to share holders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a bal ance sheet as of the end of such fiscal year and an income state ment and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corpo ration makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corpora tion has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the cer tificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS ---------------------------------------------- The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. -19- ARTICLE VIII GENERAL MATTERS --------------- 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING ----------------------------------------------------- For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by share holders by written consent without a meeting), the board of direc tors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allot ment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS ----------------------------------------- From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED -------------------------------------------------- The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES ----------------------- A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the -20- name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice presi dent and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the share holder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certifi cate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certifi cate unless the latter is surrendered to the corporation and can celled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certifi cates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corpora tion against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS ---------- 9.1 AMENDMENT BY SHAREHOLDERS ------------------------- New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the autho rized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS ---------------------- -21- Subject to the rights of the shareholders as provided in Sec tion 9.1 of these bylaws, bylaws, other than a bylaw or an amend ment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw pro viding for a variable number of directors), may be adopted, amended or repealed by the board of directors. -22- CERTIFICATE OF ADOPTION OF BYLAWS OF SYMPHONIX DEVICES, INC. ----------------------- Adoption by Incorporator ------------------------ The undersigned person appointed in the Articles of Incorpo ration to act as the Incorporator of Symphonix Devices, Inc. hereby adopts the foregoing bylaws, comprising twenty-five (25) pages, as the Bylaws of the corporation. Executed this 17th day of May, 1994. /s/ J. Casey McGlynn ______________________________ J. Casey McGlynn, Incorporator Certificate by Secretary of Adoption by Incorporator ---------------------------------------------------- The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Symphonix Devices, Inc. and that the foregoing Bylaws, comprising twenty-five (25) pages, were adopted as the Bylaws of the corporation on May 17, 1994, by the person appointed in the Articles of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 17th day of May, 1994. /s/ J. Casey McGlynn ______________________________ J. Casey McGlynn, Secretary -23- EX-3.4 5 FORM OF BYLAWS OF SYMPHONIX DEVICES, INC. Exhibit 3.4 BYLAWS OF SYMPHONIX DEVICES, INC. (a Delaware corporation) BYLAWS OF SYMPHONIX DEVICES, INC. (a Delaware corporation) TABLE OF CONTENTS
Page ARTICLE I CORPORATE OFFICES..................................................... -1- 1.1 REGISTERED OFFICE.............................................. -1- 1.2 OTHER OFFICES.................................................. -1- ARTICLE II MEETINGS OF STOCKHOLDERS.............................................. -1- 2.1 PLACE OF MEETINGS.............................................. -1- 2.2 ANNUAL MEETING................................................. -1- 2.3 SPECIAL MEETING................................................ -1- 2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................... -2- 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS.............................. -2- 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................... -3- 2.7 QUORUM......................................................... -4- 2.8 ADJOURNED MEETING; NOTICE...................................... -4- 2.9 VOTING......................................................... -4- 2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING..................... -5- 2.11 PROXIES........................................................ -6- 2.12 ORGANIZATION................................................... -6- 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE.......................... -6- 2.14 WAIVER OF NOTICE............................................... -6- ARTICLE III DIRECTORS............................................................. -7- 3.1 POWERS......................................................... -7- 3.2 NUMBER OF DIRECTORS............................................ -7- 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS....................... -7- 3.4 RESIGNATION AND VACANCIES...................................... -8- 3.5 REMOVAL OF DIRECTORS........................................... -9-
-i- TABLE OF CONTENTS (Continued)
Page ---- 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE....................... -9- 3.7 REGULAR MEETINGS............................................... -9- 3.8 SPECIAL MEETINGS; NOTICE....................................... -9- 3.9 QUORUM........................................................ -10- 3.10 WAIVER OF NOTICE.............................................. -10- 3.11 ADJOURNMENT................................................... -10- 3.12 NOTICE OF ADJOURNMENT......................................... -10- 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. -10- 3.14 FEES AND COMPENSATION OF DIRECTORS............................ -11- 3.15 APPROVAL OF LOANS TO OFFICERS................................. -11- ARTICLE IV COMMITTEES........................................................... -11- 4.1 COMMITTEES OF DIRECTORS....................................... -11- 4.2 MEETINGS AND ACTION OF COMMITTEES............................. -12- 4.3 COMMITTEE MINUTES............................................. -12- ARTICLE V OFFICERS............................................................. -12- 5.1 OFFICERS...................................................... -12- 5.2 ELECTION OF OFFICERS.......................................... -13- 5.3 SUBORDINATE OFFICERS.......................................... -13- 5.4 REMOVAL AND RESIGNATION OF OFFICERS........................... -13- 5.5 VACANCIES IN OFFICES.......................................... -14- 5.6 CHAIRMAN OF THE BOARD......................................... -14- 5.7 PRESIDENT..................................................... -14- 5.8 VICE PRESIDENTS............................................... -14- 5.9 SECRETARY..................................................... -14- 5.10 CHIEF FINANCIAL OFFICER....................................... -15- 5.11 ASSISTANT SECRETARY........................................... -15- 5.12 ADMINISTRATIVE OFFICERS....................................... -15- 5.13 AUTHORITY AND DUTIES OF OFFICERS.............................. -16-
-ii- TABLE OF CONTENTS (Continued)
Page ---- ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS..................................................... -16- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................... -16- 6.2 INDEMNIFICATION OF OTHERS..................................... -17- 6.3 INSURANCE..................................................... -17- ARTICLE VII RECORDS AND REPORTS.................................................. -18- 7.1 MAINTENANCE AND INSPECTION OF RECORDS......................... -18- 7.2 INSPECTION BY DIRECTORS....................................... -18- 7.3 ANNUAL STATEMENT TO STOCKHOLDERS.............................. -18- 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................ -18- 7.5 CERTIFICATION AND INSPECTION OF BYLAWS........................ -19- ARTICLE VIII GENERAL MATTERS...................................................... -19- 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING........................................ -19- 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS..................... -19- 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.................................... -19- 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES............................................ -20- 8.5 SPECIAL DESIGNATION ON CERTIFICATES........................... -20- 8.6 LOST CERTIFICATES............................................. -21- 8.7 TRANSFER AGENTS AND REGISTRARS................................ -21- 8.8 CONSTRUCTION; DEFINITIONS..................................... -21- ARTICLE IX AMENDMENTS........................................................... -21-
-iii- BYLAWS ------ OF -- SYMPHONIX DEVICES, INC. ----------------------- (a Delaware corporation) ARTICLE I CORPORATE OFFICES ----------------- 1.1 REGISTERED OFFICE ----------------- The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation. 1.2 OTHER OFFICES ------------- The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ 2.1 PLACE OF MEETINGS ----------------- Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING -------------- The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the second Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING --------------- A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. No other person or persons are permitted to call a special meeting. If a special meeting is called by any person or persons other than the board of directors, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS -------------------------------- All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS --------------------------------------------------------------- Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, (a) nominations for the election of directors, and (b) business proposed to be brought before any stockholder meeting -2- may be made by the board of directors or proxy committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally if such nomination or business proposed is otherwise proper business before such meeting. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice in proper written form of their intent to make such nomination or nominations or to propose such business. To be timely, such stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. To be in proper form, a stockholder's notice to the secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. -3- 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE -------------------------------------------- Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.7 QUORUM ------ The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting in accordance with Section 2.8 of these bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 ADJOURNED MEETING; NOTICE ------------------------- When a meeting is adjourned to another time and place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 VOTING ------ -4- The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.13 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder and stockholders shall not be entitled to cumulate their votes in the election of directors or with respect to any matter submitted to a vote of the stockholders. Notwithstanding the foregoing, if the stockholders of the corporation are entitled, pursuant to Sections 2115 and 301.5 of the California Corporations Code, to cumulate their votes in the election of directors, each such stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes that such stockholder normally is entitled to cast) only if the candidates' names have been properly placed in nomination (in accordance with these bylaws) prior to commencement of the voting, and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes that (absent this provision as to cumulative voting) he or she would be entitled to cast for the election of directors with respect to his or her shares of stock multiplied by the number of directors to be elected by him, and he or she may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he or she may see fit. 2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING ------------------------------------------ For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. -5- The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. 2.11 PROXIES ------- Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, telefacsimile or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. 2.12 ORGANIZATION ------------ The president, or in the absence of the president, the chairman of the board, or, in the absence of the president and the chairman of the board, one of the corporation's vice presidents, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the president, the chairman of the board, and all of the vice presidents, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE ------------------------------------- The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.14 WAIVER OF NOTICE ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except -6- when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. ARTICLE III DIRECTORS --------- 3.1 POWERS ------ Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS ------------------- The board of directors shall not be less than five (5) nor more than nine (9) members. The exact number of directors shall be six (6) until changed, within the limits specified above by a bylaw amending this Section 3.2 duly adopted by the board of directors or the stockholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by an amendment to this bylaw, duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to the certificate of incorporation. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Upon the closing of the first sale of the corporation's common stock pursuant to a firmly underwritten registered public offering (the "IPO"), the directors shall be divided into three classes, with the term of office of the first class, which class shall initially consist of two directors, to expire at the first annual meeting of stockholders held after the IPO; the term of office of the second class, which class shall initially consist of two directors, to expire at the second annual meeting of stockholders held after the IPO; the term of office of the third class, which class shall initially consist of two directors, to expire at the third annual meeting of stockholders held after the IPO; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders held after such election. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS ---------------------------------------- Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Each director, including a director -7- elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES ------------------------- Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which -8- election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 REMOVAL OF DIRECTORS -------------------- Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, if and so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ---------------------------------------- Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting of the board, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such participating directors shall be deemed to be present in person at the meeting. 3.7 REGULAR MEETINGS ---------------- Regular meetings of the board of directors may be held without notice at such time as shall from time to time be determined by the board of directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. 3.8 SPECIAL MEETINGS; NOTICE ------------------------ Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail, telecopy or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopy or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty- eight (48) hours before the time -9- of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.9 QUORUM ------ A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.12 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the quorum for that meeting. 3.10 WAIVER OF NOTICE ---------------- Notice of a meeting need not be given to any director (i) who signs a waiver of notice, whether before or after the meeting, or (ii) who attends the meeting other than for the express purposed of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. All such waivers shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.11 ADJOURNMENT ----------- A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting of the board to another time and place. 3.12 NOTICE OF ADJOURNMENT --------------------- Notice of the time and place of holding an adjourned meeting of the board need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.8 of these bylaws, to the directors who were not present at the time of the adjournment. -10- 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------- Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board of directors. 3.14 FEES AND COMPENSATION OF DIRECTORS ---------------------------------- Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.15 APPROVAL OF LOANS TO OFFICERS ----------------------------- The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or any of its subsidiaries, including any officer or employee who is a director of the corporation or any of its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. ARTICLE IV COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS ----------------------- The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have and may exercise all the powers and authority of the board, but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted -11- by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 MEETINGS AND ACTION OF COMMITTEES --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the following provisions of Article III of these bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings; notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment) and Section 3.13 (board action by written consent without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 4.3 COMMITTEE MINUTES ----------------- Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE V OFFICERS -------- 5.1 OFFICERS -------- The Corporate Officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents (however denominated), one or more assistant secretaries, a treasurer -12- and one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. In addition to the Corporate Officers of the Company described above, there may also be such Administrative Officers of the corporation as may be designated and appointed from time to time by the president of the corporation in accordance with the provisions of Section 5.12 of these bylaws. 5.2 ELECTION OF OFFICERS -------------------- The Corporate Officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment, and shall hold their respective offices for such terms as the board of directors may from time to time determine. 5.3 SUBORDINATE OFFICERS -------------------- The board of directors may appoint, or may empower the president to appoint, such other Corporate Officers as the business of the corporation may require, each of whom shall hold office for such period, have such power and authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. The president may from time to time designate and appoint Administrative Officers of the corporation in accordance with the provisions of Section 5.12 of these bylaws. 5.4 REMOVAL AND RESIGNATION OF OFFICERS ----------------------------------- Subject to the rights, if any, of a Corporate Officer under any contract of employment, any Corporate Officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of a Corporate Officer chosen by the board of directors, by any Corporate Officer upon whom such power of removal may be conferred by the board of directors. Any Corporate Officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the Corporate Officer is a party. Any Administrative Officer designated and appointed by the president may be removed, either with or without cause, at any time by the president. Any Administrative Officer may resign at any time by giving written notice to the president or to the secretary of the corporation. -13- 5.5 VACANCIES IN OFFICES -------------------- A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD --------------------- The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise such other powers and perform such other duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT --------- Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS --------------- In the absence or disability of the president, and if there is no chairman of the board, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of the board of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. -14- The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director for a purpose reasonably related to his position as a director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.11 ASSISTANT SECRETARY ------------------- The assistant secretary, if any, or, if there is more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. 5.12 ADMINISTRATIVE OFFICERS ----------------------- In addition to the Corporate Officers of the corporation as provided in Section 5.1 of these bylaws and such subordinate Corporate Officers as may be appointed in accordance with Section 5.3 of these bylaws, there may also be such Administrative Officers of the corporation as may be designated and appointed from time to time by the president of the corporation. Administrative Officers shall perform such duties and have such powers as from time to time may be determined by the president or the board of directors in order to assist the Corporate Officers in the furtherance of their duties. In the performance of such duties and the exercise of such powers, however, such Administrative Officers shall -15- have limited authority to act on behalf of the corporation as the board of directors shall establish, including but not limited to limitations on the dollar amount and on the scope of agreements or commitments that may be made by such Administrative Officers on behalf of the corporation, which limitations may not be exceeded by such individuals or altered by the president without further approval by the board of directors. 5.13 AUTHORITY AND DUTIES OF OFFICERS -------------------------------- In addition to the foregoing powers, authority and duties, all officers of the corporation shall respectively have such authority and powers and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES ------------------------------------------------- AND OTHER AGENTS ---------------- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the Board of Directors of the corporation. The corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer -16- to repay all amounts advanced if it should ultimately be determined that the director of officer is not entitled to be indemnified under this Section 6.1 or otherwise. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 6.2 INDEMNIFICATION OF OTHERS ------------------------- The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE --------- The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. -17- ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF RECORDS ------------------------------------- The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records of its business and properties. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS ----------------------- Any director shall have the right to examine (and to make copies of) the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS -------------------------------- The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS ---------------------------------------------- The chairman of the board, if any, the president, any vice president, the chief financial officer, the secretary or any assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of the stock of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. -18- 7.5 CERTIFICATION AND INSPECTION OF BYLAWS -------------------------------------- The original or a copy of these bylaws, as amended or otherwise altered to date, certified by the secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the stockholders of the corporation, at all reasonable times during office hours. ARTICLE VII GENERAL MATTERS --------------- 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING ----------------------------------------------------- For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted and which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the applicable resolution. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS ----------------------------------------- From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED -------------------------------------------------- The board of directors, except as otherwise provided in these bylaws, may authorize and empower any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such power and authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. -19- 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES ------------------------------------------------ The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Certificates for shares shall be of such form and device as the board of directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any; a conspicuous notice of restrictions upon transfer or registration of transfer, if any; a statement as to any applicable voting trust agreement; if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.5 SPECIAL DESIGNATION ON CERTIFICATES ----------------------------------- If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or -20- restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.6 LOST CERTIFICATES ----------------- Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.7 TRANSFER AGENTS AND REGISTRARS ------------------------------ The board of directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company -- either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the board of directors may designate. 8.8 CONSTRUCTION; DEFINITIONS ------------------------- Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, as used in these bylaws, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both an entity and a natural person. ARTICLE IX AMENDMENTS ---------- The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote or by the board of directors of the corporation. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their -21- power to adopt, amend or repeal bylaws. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. -22- CERTIFICATE OF ADOPTION OF BYLAWS OF SYMPHONIX DEVICES, INC. ADOPTION BY INCORPORATOR ------------------------ The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of Symphonix Devices, Inc. hereby adopts the foregoing bylaws, comprising twenty-two (22) pages, as the Bylaws of the corporation. Effective as of ______________, 1997. ________________________________ David J. Saul, Incorporator Certificate by Secretary of Adoption by Incorporator ---------------------------------------------------- The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Symphonix Devices, Inc. and that the foregoing Bylaws, comprising twenty-two (22) pages, were adopted as the Bylaws of the corporation effective as of ______________, 1997, by the person appointed in the Certificate of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this ____ day of __________ 1997. ________________________________ J. Casey McGlynn, Secretary EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 SYMPHONIX DEVICES, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of _______________, 1997 by and between Symphonix Devices, Inc., a Delaware corporation (the "Company"), and __________________________________, ("Indemnitee"). WHEREAS, effective as of the date hereof, Symphonix Devices, Inc., a California corporation, is reincorporating into Delaware; WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, in connection with the Company's reincorporation, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Delaware law; WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. ------------------- (a) "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) or group acting in concert, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (b) "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (c) References to the "Company" shall include, in addition to Symphonix Devices, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Symphonix Devices, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (d) "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other -2- enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. (e) "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. (f) "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. (g) "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other Indemnitees under similar indemnity agreements). (h) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (i) "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. (j) "Section" refers to a section of this Agreement unless otherwise indicated. -3- (k) "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 2. Indemnification. --------------- (a) Indemnification of Expenses. Subject to the provisions of --------------------------- Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. (b) Review of Indemnification Obligations. Notwithstanding the ------------------------------------- foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder under applicable law; provided, however, that if Indemnitee has commenced or -------- ------- thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. (c) Indemnitee Rights on Unfavorable Determination; Binding Effect. -------------------------------------------------------------- If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. (d) Selection of Reviewing Party; Change in Control. If there has ----------------------------------------------- not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change -4- in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the employment of separate counsel by one or more Indemnitees has been previously authorized by the Company in writing, or (ii) an Indemnitee shall have provided to the Company a written statement that such Indemnitee has reasonably concluded that there may be a conflict of interest between such Indemnitee and the other Indemnitees with respect to the matters arising under this Agreement. (e) Mandatory Payment of Expenses. Notwithstanding any other ----------------------------- provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expense Advances. ---------------- (a) Obligation to Make Expense Advances. Upon receipt of a written ----------------------------------- undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefore by the Company hereunder under applicable law, the Company shall make Expense Advances to Indemnitee. (b) Form of Undertaking. Any obligation to repay any Expense ------------------- Advances hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured and no interest shall be charged thereon. (c) Determination of Reasonable Expense Advances. The parties agree -------------------------------------------- that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. -5- 4. Procedures for Indemnification and Expense Advances. --------------------------------------------------- (a) Timing of Payments. All payments of Expenses (including without ------------------ limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than thirty (30) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than ten (10) business days after such written demand by Indemnitee is presented to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a -------------------------------- condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) No Presumptions; Burden of Proof. For purposes of this -------------------------------- Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo ---- contendere, or its equivalent, shall not create a presumption that Indemnitee - ---------- did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder under applicable law, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the ------------------ Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. -6- (e) Selection of Counsel. In the event the Company shall be -------------------- obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently retained by or on behalf of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. The Company hereby agrees to indemnify the Indemnitee to ----- the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. (b) Nonexclusivity. The indemnification and the payment of Expense -------------- Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. -7- 6. No Duplication of Payments. The Company shall not be liable under -------------------------- this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge --------------------- that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability ------------------- insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, ---------- the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify or make Expense ---------------------------- Advances to Indemnitee with respect to Claims arising out of acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under applicable law. (b) Claims Initiated by Indemnitee. To indemnify or make Expense ------------------------------ Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the -8- case may be. (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses ------------------ incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. (d) Claims Under Section 16(b). To indemnify Indemnitee for Expenses -------------------------- and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 11. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be -------------------------------------- binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. --------------------------------------------------------------------- In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this -9- Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. Period of Limitations. No legal action shall be brought and no cause --------------------- of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two year period; provided, however, that if any shorter -------- ------- period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 15. Notice. All notices, requests, demands and other communications under ------ this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 16. Consent to Jurisdiction. The Company and Indemnitee each hereby ----------------------- irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 17. Severability. The provisions of this Agreement shall be severable in ------------ the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. -10- 18. Choice of Law. This Agreement, and all rights, remedies, liabilities, ------------- powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely in the State of Delaware without regard to principles of conflicts of laws. 19. Subrogation. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 20. Amendment and Termination. No amendment, modification, termination or ------------------------- cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 21. Integration and Entire Agreement. This Agreement sets forth the -------------------------------- entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 22. No Construction as Employment Agreement. Nothing contained in this --------------------------------------- Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. SYMPHONIX DEVICES, INC. By: _____________________ AGREED TO AND ACCEPTED Print Name: _____________________ INDEMNITEE: Title: _____________________ ______________________________ Address: 3047 Orchard Parkway (signature) San Jose, California 95134 Print Name:___________________ Address:______________________ -11- EX-10.2 7 1994 STOCK OPTION PLAN EXHIBIT 10.2 SYMPHONIX DEVICES, INC. 1994 STOCK OPTION PLAN (AS AMENDED AND RESTATED EFFECTIVE [___]) 1. Purposes of the Plan. The purposes of this Stock Option Plan are: -------------------- . to attract and retain the best available personnel for positions of substantial responsibility, . to provide additional incentive to Employees, Directors and Consultants, and . to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as shall be ------------- administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the --------------- administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. ----- (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" means a committee of Directors appointed by the Board in --------- accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. ------------ (g) "Company" means Symphonix Devices, a Delaware corporation. ------- (h) "Consultant" means any person, including an advisor, engaged by the ---------- Company or a Parent or Subsidiary to render services to such entity. (i) "Director" means a member of the Board. -------- (j) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ (m) "Fair Market Value" means, as of any date, the value of Common Stock ----------------- determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an ---------------------- incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "Nonstatutory Stock Option" means an Option not intended to qualify ------------------------- as an Incentive Stock Option. (p) "Notice of Grant" means a written or electronic notice evidencing --------------- certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (q) "Officer" means a person who is an officer of the Company within the ------- meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "Option" means a stock option granted pursuant to the Plan. ------ (s) "Option Agreement" means an agreement between the Company and an ---------------- Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "Option Exchange Program" means a program whereby outstanding Options ----------------------- are surrendered in exchange for Options with a lower exercise price. (u) "Optioned Stock" means the Common Stock subject to an Option. -------------- (v) "Optionee" means the holder of an outstanding Option granted under -------- the Plan. (w) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (x) "Plan" means this 1994 Stock Option Plan. ---- (y) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to ---------- Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (z) "Section 16(b)" means Section 16(b) of the Exchange Act. ------------- (aa) "Service Provider" means an Employee, Director or Consultant. ---------------- (bb) "Share" means a share of the Common Stock, as adjusted in accordance ----- with Section 13 of the Plan. (cc) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the ------------------------- Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 2,235,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, -------- however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Multiple Administrative Bodies. The Plan may be administered by ------------------------------ different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines -------------- it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify ---------- transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan -------------------- shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, --------------------------- and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option of the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, ---------------------------------- determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Nonstatutory Stock Options may be granted to Service ----------- Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. ----------- (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 500,000 Shares. (ii) The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iii) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limit set forth in subsection (i) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become ------------ effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option -------------- Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares to be -------------- issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, --------------------------------- the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the --------------------- acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted ----------------------------------------------- hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ------------------------------------------------- ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service ---------------------- Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the ----------------- Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out ----------------- for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Non-Transferability of Options. Unless determined otherwise by the ------------------------------ Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset ------------------------------------------------------------------------ Sale. - ---- (a) Changes in Capitalization. Subject to any required action by the ------------------------- stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution -------------------------- or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or -------------------- into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Date of Grant. The date of grant of an Option shall be, for all purposes, ------------- the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, alter, ------------------------- suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder approval -------------------- of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, ---------------------------------- suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to the exercise ---------------- of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an -------------------------- Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain ----------------------------- authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, will at --------------------- all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Stockholder Approval. The Plan shall be subject to approval by -------------------- the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws. SYMPHONIX DEVICES, INC. 1994 STOCK OPTION PLAN STOCK OPTION AGREEMENT -- EARLY EXERCISE Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Stock Option Agreement. I. NOTICE OF STOCK OPTION GRANT ---------------------------- - ----------------------- (Address) - ----------------------- You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Stock Option Agreement, as follows: Grant Number Date of Grant Vesting Commencement Date Exercise Price per Share Total Number of Shares Granted Total Exercise Price Type of Option: ____ Incentive Stock Option ____ Nonstatutory Stock Option Term/Expiration Date: Exercise and Vesting Schedule: ----------------------------- This Option is exercisable immediately, in whole or in part, conditioned upon Optionee entering into a Restricted Stock Purchase Agreement with respect to any unvested Option Shares. The Shares subject to this Option shall vest and/or be released from the Company's repurchase option, as set forth in the Restricted Stock Purchase Agreement, according to the following schedule: Termination Period: ------------------ This Option may be exercised, to the extent vested, for thirty days after termination of Optionee's employment or consulting relationship, or such longer period as may be applicable upon death or disability of Optionee as provided in the Plan, but in no event later than the Term/Expiration Date as provided above. II. AGREEMENT --------- 1. Grant of Option. Symphonix Devices, Inc. (the "Company"), hereby --------------- grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price") subject to the terms, definitions and provisions of the 1994 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an ISO as defined in Section 422 of the Code. However, if this Option is intended to be an ISO, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. This Option shall be exercisable during its term ------------------ in accordance with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. ----------------- (a) Subject to subsections 2(i)(b) through 2(i)(e) below, this Option shall be exercisable cumulatively according to the vesting schedule set out in the Notice of Grant. Alternatively, at the election of the Optionee, this option may be exercised in whole or in part at any time as to Shares which have not yet vested. For purposes of this Stock Option Agreement, Shares subject to Option shall vest based on continued employment of Optionee with the Company. Vested -2- Shares shall not be subject to the Company's repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1). (b) As a condition to exercising this Option for unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement. (c) This Option may not be exercised for a fraction of a Share. (d) In the event of Optionee's death, disability or other termination of the employment or consulting relationship, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitation contained in subsection 2(i)(e). (e) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Grant. (ii) Method of Exercise. This Option shall be exercisable by written ------------------ notice (in the form attached as Exhibit A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and, together with an executed copy of the Restricted Stock Purchase Agreement, if applicable, shall be delivered in person or by certified mail to the Secretary of the Company. The written notice and Restricted Stock Purchase Agreement shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice and Restricted Stock Purchase Agreement accompanied by the Exercise Price. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares purchasable -------------------------- pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. Lock-Up Period. Optionee hereby agrees that if so requested by the -------------- Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or -3- otherwise transfer any Shares or other securities of the Company during the 180- day period (or such longer period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 5. Method of Payment. Payment of the Exercise Price shall be by any of ----------------- the following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; (iii) promissory note (in the form attached hereto as Exhibit C-7); (iv) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or (v) to the extent permitted by the Administrator, delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the Exercise Price. 6. Restrictions on Exercise. This Option may not be exercised until such ------------------------ time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Relationship. In the event an Optionee's Continuous --------------------------- Status as an Employee or Consultant terminates, Optionee may, to the extent the Option was vested at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set -4- out in the Notice of Grant. To the extent that Optionee was not vested in this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate. 8. Disability of Optionee. Notwithstanding the provisions of Section 6 ---------------------- above, in the event of termination of an Optionee's consulting relationship or Continuous Status as an Employee as a result of his or her disability, Optionee may, but only within six (6) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Stock Option Agreement), exercise the Option to the extent the Option was vested at the date of such termination; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an ISO such ISO shall cease to be treated as an ISO and shall be treated for tax purposes as an NSO on the ninety-first (91st) day following such termination. To the extent that Optionee is not vested in the Option at the date of termination, or if Optionee does not exercise such Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 9. Death of Optionee. In the event of termination of Optionee's ----------------- Continuous Status as an Employee or Consultant as a result of the death of Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent the Option was vested at the date of death. To the extent that Optionee is not vested in the Option at the date of death, or if the Option is not exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 10. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 11. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 7 of the Plan regarding Options designated as ISOs and Options granted to more than ten percent (10%) shareholders shall apply to this Option. 12. Tax Consequences. Set forth below is a brief summary as of the date ---------------- of this Option of some of the federal and state tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. -5- (i) Exercise of ISO. If this Option qualifies as an ISO, there will --------------- be no regular federal income tax liability or state income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (ii) Exercise of ISO Following Disability. If the Optionee's ------------------------------------ Continuous Status as an Employee or Consultant terminates as a result of disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within 90 days of such termination for the ISO to be qualified as an ISO. (iii) Exercise of NSO. There may be a regular federal income tax --------------- liability and state income tax liability upon the exercise of an NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. If the Optionee is subject to Section 16 of the Securities Act of 1934, as amended, the date of income recognition may be deferred for up to six months. (iv) Disposition of Shares. In the case of an NSO, if Shares are --------------------- held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal and state income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal and state income tax purposes. If Shares purchased under an ISO are disposed of within such one-year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the Fair Market Value of the Shares on the date of exercise, or (2) the sale price of the Shares. (v) Notice of Disqualifying Disposition of ISO Shares. If the ------------------------------------------------- Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. (vi) Section 83(b) Election for Unvested Shares Purchased Pursuant ------------------------------------------------------------- to Nonqualified Stock Options. With respect to the exercise of a nonqualified - ----------------------------- stock option for unvested Shares, an -6- election may be filed by the Optionee with the Internal Revenue Service and, if necessary, the proper state taxing authorities, within 30 days of the purchase -------------- of the Shares, electing pursuant to Section 83(b) of the Code (and similar state tax provisions if applicable) to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase. This will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the fair market value of the Shares, at the time the Option is exercised over the purchase price for the Shares. Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) and similar tax provisions. A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference. (vii) Section 83(b) Election for Unvested Shares Purchased Pursuant ------------------------------------------------------------- to Incentive Stock Options. With respect to the exercise of an incentive stock - -------------------------- option for unvested Shares, an election may be filed by the Optionee with the Internal Revenue Service and, if necessary, the proper state taxing authorities, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) - -------------- of the Code (and similar state tax provisions if applicable) to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase for alternative minimum tax purposes. This will result in a recognition of income to the Optionee on the date of exercise, for alternative minimum tax purposes, measured by the excess, if any, of the fair market value of the Shares, at the time the option is exercised, over the purchase price for the Shares. Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. Optionee is strongly encouraged to seek the advice of his or her tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) and similar tax provisions. A form of Election under Section 83(b) for alternative minimum tax purposes is attached hereto as Exhibit C-6 for reference. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S BEHALF. SYMPHONIX DEVICES, INC., a California Corporation By: ___________________________ Title: ___________________________ -7- OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated: _____________________ _______________________________ , Optionee Residence Address: _______________________________ _______________________________ -9- EXHIBIT A --------- SYMPHONIX DEVICES, INC. 1994 STOCK OPTION PLAN EXERCISE NOTICE Symphonix Devices, Inc. 3047 Orchard Parkway San Jose, CA 95134 Attention: Chief Financial Officer 1. Exercise of Option. Effective as of today, ________________, 19_____, ------------------ the undersigned ("Optionee") hereby elects to exercise Optionee's option to -------- purchase _____________ shares of the Common Stock (the "Shares") of Symphonix Devices, Inc. (the "Company") under and pursuant to the Company's 1994 Stock Option Plan, as amended (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement dated ______________________ (the "Option Agreement"). ---------------- 2. Representations of Optionee. Optionee acknowledges that Optionee has --------------------------- received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. Rights as Shareholder. Until the stock certificate evidencing such --------------------- Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Optionee shall enjoy rights as a shareholder until such time as Optionee disposes of the Shares or the Company and/or its assignee(s) exercises the Right of First Refusal hereunder. Upon such exercise, Optionee shall have no further rights as a holder of the Shares so purchased except the right to receive payment for the Shares so purchased in accordance with the provisions of this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation. 4. Company's Right of First Refusal. Before any Shares held by Optionee or -------------------------------- any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). (a) Notice of Proposed Transfer. The Holder of the Shares shall deliver --------------------------- to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). (b) Exercise of Right of First Refusal. At any time within thirty (30) ---------------------------------- days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) Purchase Price. The purchase price ("Purchase Price") for the -------------- Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (d) Payment. Payment of the Purchase Price shall be made, at the option ------- of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within thirty (30) days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) Holder's Right to Transfer. If all of the Shares proposed in the -------------------------- Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within one hundred twenty (120) days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Exception for Certain Family Transfers. Anything to the contrary -------------------------------------- contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, -2- mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. (g) Termination of Right of First Refusal. The Right of First Refusal ------------------------------------- shall terminate as to any Shares ninety (90) days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the 1933 Act. 5. Tax Consultation. Optionee understands that Optionee may suffer adverse ---------------- tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 6. Restrictive Legends and Stop-Transfer Orders. -------------------------------------------- (a) Legends. Optionee understands and agrees that the Company shall ------- cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST -3- REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. Optionee understands that transfer of the Shares may be restricted by Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached to Exhibit B, the Investment Representation Statement. (b) Stop-Transfer Notices. Optionee agrees that, in order to ensure --------------------- compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) Refusal to Transfer. The Company shall not be required (i) to ------------------- transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 7. Successors and Assigns. The Company may assign any of its rights under ---------------------- this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 8. Interpretation. Any dispute regarding the interpretation of this -------------- Agreement shall be submitted by Optionee or by the Company forthwith to the Company's Board of Directors or the committee thereof that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or committee shall be final and binding on the Company and on Optionee. 9. Governing Law; Severability. This Agreement shall be governed by and --------------------------- construed in accordance with the laws of the State of California excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. -4- 10. Notices. Any notice required or permitted hereunder shall be given in ------- writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 11. Further Instruments. The parties agree to execute such further ------------------- instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement. 12. Delivery of Payment. Optionee herewith delivers to the Company the full ------------------- Exercise Price for the Shares. 13. Entire Agreement. The Plan and Notice of Grant/Option Agreement are ---------------- incorporated herein by reference. This Agreement, the Plan, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and is governed by California law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: SYMPHONIX DEVICES, INC. By:___________________________ Its:__________________________ __________________________ (Signature) Address: - ------- __________________________ __________________________ -5- EXHIBIT B --------- INVESTMENT REPRESENTATION STATEMENT OPTIONEE : COMPANY : SYMPHONIX DEVICES, INC. SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: (a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. Optionee is acquiring these securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) Optionee acknowledges and understands that the securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one (1) year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the securities. Optionee understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their transfer without the consent of the Commissioner of Corporations of the State of California and any other legend required under applicable state securities laws. (c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Exchange Act); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of securities being sold during any three (3) month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than two (2) years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three (3) years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. (d) Optionee hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall only apply to the first registration statement of the Company to become effective under the Securities Act which include securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such one hundred eighty (180) day period. (e) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. (f) Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. Optionee has read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Signature of Optionee: __________________________ Date:__________________________, 19 ATTACHMENT 1 STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE ---------------------------------------------------- Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11: Restriction on Transfer. (a) The issuer of any security upon ---------- ----------------------- which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferror's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferrer or the transferror's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; or (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." -2- EXHIBIT C-1 ----------- 1994 STOCK OPTION PLAN RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made between (the "Purchaser") and Symphonix Devices, Inc. (the "Company") as of __________________, 199__. RECITALS -------- (1) Pursuant to the exercise of the stock option (grant no. 51) granted to Purchaser under the Company's 1994 Stock Option Plan and pursuant to the Stock Option Agreement (the "Option Agreement") by and between the Company and Purchaser with respect to such grant, which Option Agreement is hereby incorporated by reference, Purchaser has elected to purchase _________ of those shares which have not become vested under the vesting schedule set forth in the Option Agreement ("Unvested Shares"). The Unvested Shares and the shares subject to the Option Agreement which have become vested are sometimes collectively referred to herein as the "Shares". (2) As required by the Option Agreement, as a condition to Purchaser's election to exercise the option, Purchaser must execute this Restricted Stock Purchase Agreement, which sets forth the rights and obligations of the parties with respect to Shares acquired upon exercise of the Option. 1. Repurchase Option. ----------------- (a) If Purchaser's employment or consulting relationship with the Company is terminated for any reason, including for cause, death, and disability, the Company shall have the right and option to purchase from Purchaser, or Purchaser's personal representative, as the case may be, all of the Purchaser's Unvested Shares as of the date of such termination at the price paid by the Purchaser for such Shares (the "Repurchase Option"). (b) Upon the occurrence of a termination, the Company may exercise its Repurchase Option by delivering personally or by registered mail, to Purchaser (or his transferee or legal representative, as the case may be), within ninety (90) days of the termination, a notice in writing indicating the Company's intention to exercise the Repurchase Option and setting forth a date for closing not later than thirty (30) days from the mailing of such notice. The closing shall take place at the Company's office. At the closing, the holder of the certificates for the Unvested Shares being transferred shall deliver the stock certificate or certificates evidencing the Unvested Shares, and the Company shall deliver the purchase price therefor. (c) At its option, the Company may elect to make payment for the Unvested Shares to a bank selected by the Company. The Company shall avail itself of this option by a notice in writing to Purchaser stating the name and address of the bank, date of closing, and waiving the closing at the Company's office. (d) If the Company does not elect to exercise the Repurchase Option conferred above by giving the requisite notice within ninety (90) days following the termination, the Repurchase Option shall terminate. 2. Transferability of the Shares; Escrow. ------------------------------------- (a) Purchaser hereby authorizes and directs the secretary of the Company, or such other person designated by the Company, to transfer the Unvested Shares as to which the Repurchase Option has been exercised from Purchaser to the Company. (b) To insure the availability for delivery of Purchaser's Unvested Shares upon repurchase by the Company pursuant to the Repurchase Option under Section 1, Purchaser hereby appoints the secretary, or any other person designated by the Company as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such Unvested Shares, if any, repurchased by the Company pursuant to the Repurchase Option and shall, upon execution of this Agreement, deliver and deposit with the secretary of the Company, or such other person designated by the Company, the share certificates representing the Unvested Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as Exhibit C-3 hereto, until the Company exercises its purchase right as provided in Section 1, until such Unvested Shares are vested, or until such time as this Agreement no longer is in effect. As a further condition to the Company's obligations under this Agreement, the spouse of the Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit C-4. Upon vesting of the Unvested Shares, the escrow agent shall promptly deliver to the Purchaser the certificate or certificates representing such Shares in the escrow agent's possession belonging to the Purchaser, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. (c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment. (d) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and the Exercise Notice executed by the Purchaser with respect to any -2- Unvested Shares purchased by Purchaser and shall acknowledge the same by signing a copy of this Agreement. 3. Ownership, Voting Rights, Duties. This Agreement shall not affect in any -------------------------------- way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 4. Legends. The share certificate evidencing the Shares issued hereunder ------- shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 5. Adjustment for Stock Split. All references to the number of Shares and -------------------------- the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 6. Notices. Notices required hereunder shall be given in person or by ------- registered mail to the address of Purchaser shown on the records of the Company, and to the Company at their respective principal executive offices. 7. Survival of Terms. This Agreement shall apply to and bind Purchaser and ----------------- the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 8. Section 83(b) Elections. ----------------------- (a) Election for Unvested Shares Purchased Pursuant to Nonqualified Stock --------------------------------------------------------------------- Options. Purchaser hereby acknowledges that he or she has been informed that, - ------- with respect to the exercise of a nonqualified stock option for Unvested Shares, that unless an election is filed by the Purchaser with the Internal Revenue Service and, if necessary, the proper state taxing authorities, within 30 days -------------- of the purchase of the Shares, electing pursuant to Section 83(b) of the Code (and similar state tax provisions if applicable) to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase, there will be a recognition of taxable income to the Optionee, measured by the excess, if any, of the fair market value of the Shares, at the time the Company's Repurchase Option lapses over the purchase price for the Shares. Optionee represents that Optionee has consulted any tax consultant(s) Optionee deems advisable in connection with the purchase of the Shares or the -3- filing of the Election under Section 83(b) and similar tax provisions. A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference. (b) Election for Unvested Shares Purchased Pursuant to Incentive Stock ------------------------------------------------------------------ Options. Purchaser hereby acknowledges that he or she has been informed that, - ------- with respect to the exercise of an incentive stock option for Unvested Shares, that unless an election is filed by the Purchaser with the Internal Revenue Service and, if necessary, the proper state taxing authorities, within 30 days -------------- of the purchase of the Shares, electing pursuant to Section 83(b) of the Code (and similar state tax provisions if applicable) to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase, there will be a recognition of income to the Optionee, for alternative minimum tax purposes, measured by the excess, if any, of the fair market value of the Shares, at the time the Company's Repurchase Option lapses over the purchase price for the Shares. Optionee represents that Optionee has consulted any tax consultant(s) Optionee deems advisable in connection with the purchase of the Shares or the filing of the Election under Section 83(b) and similar tax provisions. A form of Election under Section 83(b) for alternative minimum tax purposes is attached hereto as Exhibit C-6 for reference. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPON SIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S BEHALF. 9. Representations. Purchaser has reviewed with his own tax advisors the --------------- federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or represen tations of the Company or any of its agents. Purchaser understands that he (and not the Company) shall be responsible for his own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 10. Governing Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with applicable state laws. Purchaser represents that he has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. -4- IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. "COMPANY" SYMPHONIX DEVICES, INC. By:_____________________________________ Title:__________________________________ "PURCHASER" ________________________________________ Address:________________________________ ________________________________ Soc. Sec. No.:__________________________ -5- EXHIBIT C-2 ----------- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, __________________________, hereby sell, assign and transfer unto ______________________________ (__________) shares of the Common Stock of Symphonix Devices, Inc. standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint _________________________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement between________________________ and the undersigned dated ______________, 19__. Dated: _______________, 19_____ Signature:______________________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its "repurchase option," as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. EXHIBIT C-3 ----------- JOINT ESCROW INSTRUCTIONS ------------------------- ___________________, 19______ Corporate Secretary Symphonix Devices, Inc. 3047 Orchard Parkway San Jose, CA 95134 Attention: Secretary Dear ____________: As Escrow Agent for both Symphonix Devices, Inc. (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Company's repurchase option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's repurchase option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's repurchase option has been exercised, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's repurchase option. Within 120 days after cessation of Purchaser's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's repurchase option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. -2- 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Symphonix Devices, Inc. 3047 Orchard Parkway San Jose, CA 95134 Attention: Secretary PURCHASER: __________________________________________ __________________________________________ ESCROW AGENT: J. Casey McGlynn Corporate Secretary Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 -3- 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the laws of the State of California. SYMPHONIX DEVICES, INC. By:_____________________________________ Title:__________________________________ Purchaser:______________________________ Escrow Agent:___________________________ Corporate Secretary -4- EXHIBIT C-4 ----------- CONSENT OF SPOUSE ----------------- I, ____________________, spouse of ____________, have read and approve the foregoing Agreement. In consideration of granting of the right to my spouse to purchase shares of ____________________________, as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: _______________, 19____ ______________________________ EXHIBIT C-5 ----------- ELECTION UNDER SECTION 83(b) ---------------------------- OF THE INTERNAL REVENUE CODE OF 1986 ------------------------------------ The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with taxpayer's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME: TAXPAYER: _____________ SPOUSE: ADDRESS: IDENTIFICATION NO.: TAXPAYER: SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: _______ shares (the "Shares") of the Common Stock of Symphonix Devices, Inc. (the "Company"). 3. The date on which the property was transferred is:_______________, 19 ____. 4. The property is subject to the following restrictions: The Shares may not be transferred and are subject to forfeiture under the terms of an agreement between the taxpayer and the Company. These restrictions lapse upon the satisfaction of certain conditions contained in such agreement. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $______________________. 6. The amount (if any) paid for such property is: $______________________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked - -------------------------------------------------------------------------- except with the consent of the Commissioner. - ------------------------------------------- Dated: ___________________, 19____ ___________________________________ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: ___________________, 19____ ___________________________________ Spouse of Taxpayer EXHIBIT C-6 ----------- ELECTION UNDER SECTION 83(b) ---------------------------- OF THE INTERNAL REVENUE CODE OF 1986 ------------------------------------ The undersigned taxpayer hereby elects, pursuant to the provisions of Sections 55-56 and 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's alternative minimum taxable income for the current taxable year, as compensation for services, the excess, if any, of the fair market value of the property described below at the time of transfer over the amount paid for such property. 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME: TAXPAYER: _____________ SPOUSE: ADDRESS: IDENTIFICATION NO.: TAXPAYER: SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: ___________ shares (the "Shares") of the Common Stock of Symphonix Devices, Inc. (the "Company"). 3. The date on which the property was transferred is: _______________, 199___, 4. The property is subject to the following restrictions: The Shares may be repurchased by the Company, or its assignee, at its original purchase price, on certain events. This right lapses with regard to a portion of the Shares over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $_______________ 6. The amount paid for such property is: $_______________ The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked - -------------------------------------------------------------------------- except with the consent of the Commissioner. - ------------------------------------------- Dated: ___________________, 19____ ___________________________________ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: ___________________, 19____ ___________________________________ Spouse of Taxpayer EXHIBIT C-7 ----------- PROMISSORY NOTE $___________ ________________, 199___ For value received, the undersigned promises to pay to Symphonix Devices, Inc., a California corporation (the "Company"), or order, at its principal office the principal sum of $__________ with interest thereon at the rate of _____ percent compounded annually on the unpaid balance of the principal sum. Said principal and interest shall be due on the earlier of (i) ____________, or (ii) one year following the undersigned's termination of employment with the Company. Principal payable in lawful money of the United States of America. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares (the "Shares") of Common Stock of the Company, pursuant to the provisions of a Restricted Stock Purchase Agreement between the Company and the undersigned executed contemporaneously with this Note. The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the Shares or other collateral securing this Note in the event of default. ________________________________________ SYMPHONIX DEVICES, INC. 1994 STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. NOTICE OF STOCK OPTION GRANT ---------------------------- ________________________ Address ________________________ You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number Date of Grant Vesting Commencement Date Exercise Price per Share Total Number of Shares Granted (the "Shares") Total Exercise Price Type of Option ___________ Incentive Stock Option ________________ Nonstatutory Stock Option Term/Expiration Date Vesting Schedule: ---------------- This Option may be exercised, in whole or in part, in accordance with the following schedule: Termination Period: ------------------ This Option may be exercised for thirty (30) days after termination of employment or consulting relationship, or such longer period as may be applicable upon death or disability of Optionee as provided in the Plan, but in no event later than the Term/Expiration Date as provided above. I. AGREEMENT --------- 1. Grant of Option. Symphonix Devices, Inc., a California corporation (the --------------- "Company"), hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase up to a total number of shares of Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price") subject to the terms, definitions and provisions of the 1994 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option. If designated in the Notice of Grant as an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option. 2. Exercise of Option. This Option shall be exercisable during its term in ------------------ accordance with the Exercise Schedule set out in the Notice of Grant and with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. ----------------- (a) This Option may not be exercised for a fraction of a share. (b) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitation contained in subsection 2(i)(c). (c) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Grant. (ii) Method of Exercise. This Option shall be exercisable by written ------------------ notice (in the form attached as Exhibit A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and -2- agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares purchasable -------------------------- pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form attached hereto as Exhibit B, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. Method of Payment. Payment of the Exercise Price shall be by any of the ----------------- following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; (iii) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a fair market value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 5. Restrictions on Exercise. This Option may not be exercised until such ------------------------ time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to -3- make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. Termination of Relationship. In the event an Optionee's Continuous --------------------------- Status as an Employee or Consultant terminates, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate. 7. Disability of Optionee. Notwithstanding the provisions of Section 6 ---------------------- above, in the event of termination of an Optionee's consulting relationship or Continuous Status as an Employee as a result of his or her disability, Optionee may, but only within six (6) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the day three (3) months and one (1) day following such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 8. Death of Optionee. In the event of termination of Optionee's Continuous ----------------- Status as an Employee or Consultant as a result of the death of Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee could exercise the Option at the date of death. 9. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 10. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 7 of the Plan regarding Options designated as Incentive Stock Options and Options granted to more than ten percent (10%) shareholders shall apply to this Option. 11. Taxation Upon Exercise of Option. Optionee understands that, upon -------------------------------- exercising a nonstatutory Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the exercise price. However, the timing of this -4- income recognition may be deferred for up to six (6) months if Optionee is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If the Optionee is an employee, the Company will be required to withhold from Optionee's compensation, or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income. Additionally, the Optionee may at some point be required to satisfy tax withholding obligations with respect to the disqualifying disposition of an Incentive Stock Option. The Optionee shall satisfy his or her tax withholding obligation arising upon the exercise of this Option out of Optionee's compensation or by payment to the Company. 12. Tax Consequences. Set forth below is a brief summary as of the date of ---------------- this Option of some of the federal and California tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (i) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability or California income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (ii) Exercise of ISO following Disability. If the Optionee's ------------------------------------ Continuous Status as an Employee or Consultant terminates as a result of disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within ninety (90) days of such termination for the ISO to be qualified as an ISO. (iii) Exercise of Nonstatutory Stock Option. There may be a regular ------------------------------------- federal income tax liability and California income tax liability upon the exercise of a Nonstatutory Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (iv) Disposition of Shares. In the case of an NSO, if Shares are held --------------------- for at least one (1) year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal and California income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one (1) year after exercise and are disposed of at least two (2) years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal and California income tax purposes. If Shares purchased under an ISO are disposed of within such one (1) year period or within two (2) years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) -5- to the extent of the difference between the Exercise Price and the lesser of (1) the fair market value of the Shares on the date of exercise, or (2) the sale price of the Shares. (v) Notice of Disqualifying Disposition of ISO Shares. If the Option ------------------------------------------------- granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two (2) years after the Date of Grant, or (2) the date one (1) year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. SYMPHONIX DEVICES, INC., a California corporation By:________________________________ Title:_____________________________ -6- OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CON SULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Dated:__________________ __________________________________ -7- EX-10.3 8 1997 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.3 SYMPHONIX DEVICES, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1997 Employee Stock Purchase Plan of Symphonix Devices, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" shall mean the Board of Directors of the Company. ----- (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" shall mean the Common Stock of the Company. ------------ (d) "Company" shall mean [Name of Company] and any Designated ------- Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings ------------ and commissions, but exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been --------------------- designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the -------- Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering --------------- Period. (i) "Exercise Date" shall mean the last day of each Purchase Period. ------------- (j) "Fair Market Value" shall mean, as of any date, the value of ----------------- Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately ---------------- twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before October 31, 1998. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. ---- (m) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period --------------- commencing after one Exercise Date and ending with the next Exercise Date, except that the first -2- Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (o) "Reserves" shall mean the number of shares of Common Stock -------- covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of ---------- which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges ----------- a the Nasdaq System are open for trading. 3. Eligibility. ----------- (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, ---------------- overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before October 31, 1998. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. -3- 5. Participation. ------------- (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. ------------------ (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding [_______________ (___%)] of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, -4- the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each --------------- eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than [ ________ ] shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19) on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on -------- which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. ---------- (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions -5- shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. ------------------------- Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 13. Stock. ----- (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be seventy-five thousand (75,000) shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a -------------- committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and -6- determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company ------------ under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant ------- in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, --------------------------------------------------------------------- Merger or Asset Sale. -------------------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the Reserves, the maximum number of shares each participant may purchase each -7- Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or -------------------- substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. ------------------------ (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the -8- best interests of the Company and its shareholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent ----------------------------------------------- permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock -9- on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- EXHIBIT A --------- SYMPHONIX DEVICES, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. _____________________________________________________ hereby elects to participate in the [Name of Company] [1997] Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 1 to _____%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): ___________________________________________________________________________ ___________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I - hereby agree to notify the Company in writing --------------------------------------------- within 30 days after the date after the date of any disposition of my --------------------------------------------------------------------- shares and I will make adequate provision for Federal, state or other tax ------------------------------------------------------------------------- withholding obligations, if any, which arise upon the disposition of the ------------------------------------------------------------------------ Common Stock. The Company may, but will not be obligated to, withhold from ------------ my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)______________________________________________ (First) (Middle) (Last) _______________________________ _________________________________________ Relationship _________________________________________ (Address) -2- Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ ________________________________________ Signature of Employee ________________________________________ Spouse's Signature (If beneficiary other than spouse) -3- EXHIBIT B --------- SYMPHONIX DEVICES, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the [Name of Company] [1997] Employee Stock Purchase Plan which began on ____________, 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ________________________________ ________________________________ ________________________________ Signature: ________________________________ Date:__________________________ EX-10.4 9 RESTATED INVESTORS RIGHTS AGREEMENT EXHIBIT 10.4 SYMPHONIX DEVICES, INC. RESTATED INVESTORS RIGHTS AGREEMENT This Restated Investors Rights Agreement (the "Agreement") is effective as of June 11, 1997, by and among Symphonix Devices, Inc., a California corporation (the "Company") and certain holders of the Company's securities listed on Exhibit A attached hereto (the "Holders"). The Investors Rights Agreement originally executed on July 27, 1994 and subsequently amended is hereby restated in its entirety to read as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall ------------------- have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other ---------- federal agency at the time administering the Securities Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. ------------ "Holder" shall mean any holder of outstanding Securities. ------ "Initiating Holders" shall mean any Holder or Holders of not less than ------------------ fifty percent (50%) of the then outstanding Registrable Securities. "Major Holder" shall mean a Holder of at least one hundred thousand ------------ (100,000) shares of Preferred Stock (or shares of Common Stock issuable upon conversion thereof). "Restricted Securities" shall mean the securities of the Company required --------------------- to bear the legend set forth in Section 2.2 hereof. "Registrable Securities" means (i) shares of Common Stock issued or ---------------------- issuable pursuant to the conversion of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock, (ii) shares of Common Stock issued or issuable pursuant to the conversion of the Series A Preferred Stock and Series B Preferred Stock issued or issuable upon exercise of Warrants issued to Lighthouse Capital Partners (or any entity affiliated therewith) in connection with equipment financings, and (iii) shares of Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange or in replacement of such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Common Stock, excluding in all cases, however, any Registrable Securities sold by a holder (y) pursuant to a registration statement under this Agreement or (z) in a transaction in which his rights under this Agreement are not transferred, including a transaction pursuant to a registration statement under this Agreement. The number of shares of "Registrable Securities then outstanding" shall be --------------------------------------- determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. The terms "register," "registered" and "registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement by the Commission. "Registration Expenses" shall mean all expenses incurred by the Company in --------------------- complying with Sections 3.1 and 3.2 hereof and all expenses incurred in complying with Section 3.9 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single special counsel for the Holders, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) and Selling Expenses. "Securities" shall mean the warrants issued to Lighthouse Capital Partners ---------- and the securities issuable upon exercise thereof, and the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock. "Securities Act" shall mean the Securities Act of 1933, as amended, or any -------------- similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in affect at the time. "Selling Expenses" shall mean all underwriting discounts and selling ---------------- commissions applicable to the sale of Registrable Securities. 2. Transferability. --------------- 2.1 Restrictions on Transferability. The Securities shall not be ------------------------------- transferable except upon the conditions specified in this Agreement, which conditions are intended to insure compliance with the provisions of the Securities Act, or, in the case of Section 3.8 hereof, to assist in an orderly distribution. Each Holder will cause any proposed transferee of the Securities held by such Holder to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Agreement. 2.2 Restrictive Legend. Each certificate representing (i) the Securities ------------------ or (ii) any securities issued in respect of the Securities shall (unless otherwise permitted by the provisions of -2- Section 2.3 below) be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT UNDER AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN EXEMPTION THEREFROM OR IN CONTRAVENTION OF THE AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER. COPIES OF THE AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE. 2.3 Notice of Proposed Transfers. The holder of each certificate ---------------------------- representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 2.3. Prior to any proposed transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied (except in the following cases, with respect to which the requirements set forth in the balance of this sentence need not be complied with; transactions in compliance with Rule 144 or Rule 144A so long as the Company is furnished with evidence of compliance with such Rule; transactions involving the distribution of Restricted Securities by any holder thereof which is a general or limited partnership to any of its partners, or retired partners, or to the estate of any of its partners or retired partners; transactions involving the transfer of Restricted Securities to a parent, subsidiary or affiliate of the transferring holder; transactions involving the transfer of Restricted Securities by any holder who is an individual to his family members or to a trust for the benefit of such shareholder or his family members; or transfers not involving a change in beneficial ownership) by either (i) a written opinion of legal counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, (ii) a "no action" letter from the Commission to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, or (iii) such other showing that may be reasonably satisfactory to legal counsel to the Company, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 2.2 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provisions of the Securities Act. All Restricted Securities transferred as above that continue to -3- bear the restrictive legend set forth in Section 2.2 shall continue to be subject to the provisions of this Section 2.3 in the same manner as before such transfer. 3. Registration Rights. ------------------- 3.1 Requested Registration. Prior to such time as the Company has ---------------------- effected two (2) registrations pursuant to this Section 3.1 and such registrations have been declared or ordered effective, if the Company shall receive from Initiating Holders a written request that the Company effect any registration (other than a registration on Form S-3 or any related form of registration statement) with respect to Registrable Securities having an anticipated aggregate offering price to the public of at least one million dollars ($1,000,000), the Company will: (a) promptly give written notice of the proposed registration to all other Holders; and (b) as soon as practicable but in any event within one hundred twenty (120) days, use its diligent best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post- effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 3.1: (i) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or com pliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) Prior to the earlier of two (2) years after the date of this Agreement or three (3) months following closing of the first underwritten public offering of common stock of the Company for its own account pursuant to a registration statement filed under to the Securities Act; or (iii) If at the time of the request to register Registrable Securities the Company in good faith gives notice within thirty (30) days of such request that it is engaged or has fixed plans to engage within sixty (60) days of the time of the request in an initial firmly underwritten registered public offering; provided, however, that such notice may not be given more than once in any six (6) month period. -4- Subject to the foregoing clauses (i) through (iii) and to Section 3.1(d), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Initiating Holders. (c) Underwriting. If the Initiating Holders intend to distribute the ------------ Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 3.1 and the Company shall include such information in the written notice referred to in Section 3.1(a). The right of any Holder to registration pursuant to Section 3.1 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested (unless otherwise mutually agreed by a majority in interest of the Holders and such Holder) to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders with the approval of the Company, which approval shall not be unreasonably withheld. Notwithstanding any other provision of this Section 3.1, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten and so advises the Initiating Holders in writing, then the Initiating Holders shall so advise all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting) and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all such Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities owned by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used above in determining the underwriter limitation; and, provided further that in the event that the withdrawal of a Holder, and the subsequent inclusion of additional Registrable Securities by other Holders, results in an anticipated aggregate offering price to the public of less than one million dollars ($1,000,000), the Company shall no longer be required to effect such registration pursuant to this Section 3.1. If the underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or the account of others in such registration if the underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited. -5- (d) Delay of Registration. If the Company shall furnish to the --------------------- Initiating Holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer the filing of such registration statement, then the Company may direct that such request for registration be delayed for a period not in excess of ninety (90) days, such right to delay a request to be exercised by the Company not more than once in any one-year period. 3.2 Company Registration. -------------------- (a) If at any time or from time to time, the Company shall determine to register any of its Common Stock, for its own account or for the account of others (other than the Holders), other than a registration relating solely to employee benefit plans or a registration relating solely to a Commission Rule 145 transaction or a registration on any registration form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within ten (10) days after receipt of such written notice from the Company, by any Holder or Holders. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3.2(a)(i). In such event the right of any Holder to registration pursuant to Section 3.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 3.2, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit the number of Registrable Securities and shares of Common Stock to be included in the registration and underwriting to (i) in the case of the first underwritten public offering of the securities of the Company, any amount that the underwriter may determine, or (ii) in the case of any registration subsequent to the first underwritten public offering of the securities of the Company, to not less than thirty percent (30%) of the total securities covered by the registration. The Company shall so advise all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting), and the number of shares of -6- Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities owned by the Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the underwriter. The securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used above in determining the underwriter limitation. 3.3 Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration pursuant to Section 3.1 or Section 3.2 shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder and all Registration Expenses incurred in connection with any registration pursuant to Section 3.9 hereunder, shall be borne by the Holders of the Registrable Securities so registered pro-rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 3.1, the request of which has been subsequently withdrawn by the Initiating Holders (unless the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or unless the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 3.1 in which event such right shall be forfeited by all Holders), in which case such expenses shall be borne by the holders of Registrable Securities requesting such registration in proportion to the number of shares for which registration was requested. 3.4 Registration Procedures. In the case of each registration, ----------------------- qualification or compliance effected by the Company pursuant to this Section 3, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Keep such registration, qualification or compliance effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; and (b) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request. -7- 3.5 Indemnification. --------------- (a) The Company will indemnify each Holder, each of its officers, directors, partners and legal counsel, and each person controlling such Holder within the meaning of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 3, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other similar document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, or (ii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors, partners and legal counsel, and each person controlling such Holder, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, as incurred, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein or furnished by the Holder to the Company in response to a request by the Company stating specifically that such information will be used by the Company therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each legal counsel and independent accountant of the Company, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors, and partners and each person controlling such Holder within the meaning of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other similar document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and will reimburse the Company, such Holders, such directors, officers, persons, or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, as incurred, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in con formity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein or furnished by the Holder to the Company in response to a request by the Company stating specifically that such information will be used by the Company therein; provided, however, that the obligations of such Holders hereunder shall be limited to an -8- amount equal to the proceeds to each such Holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 3.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has received written notice of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). The Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party shall bear the expense of such defense of the Indemnified Party if representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest. The failure of any Indemnified Party to give notice within a reasonable period of time as provided herein shall relieve the Indemnifying Party of its obligations under this Section 3.5 only to the extent that such failure to give notice shall materially adversely prejudice the Indemnifying Party in the defense of any such claim or any such litigation. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) Notwithstanding the foregoing, to the extent that the provisions on indemnification contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (e) The obligations of the Company and Holders under this Section 3.5 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 3, and otherwise. 3.6 Information by Holder. Each Holder including securities of the --------------------- Company in any registration shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 3. 3.7 Rule 144 Reporting. With a view to making available the benefits of ------------------ certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: (a) Use its best efforts to facilitate the sale of the Restricted Securities to the public, without registration under the Securities Act, pursuant to Rule 144 under the Securities Act, -9- provided that this shall not require the Company to file reports under the Securities Act and the Exchange Act at anytime prior to the Company's being otherwise required to file such reports. (b) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act at all times after ninety (90) days after the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (c) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act, (at any time after it has become subject to such reporting requirements); (d) So long as a Holder owns any Restricted Securities to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 3.8 "Market Stand-off" Agreement. Each Holder agrees not to sell or ---------------------------- otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by it for a period not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act if so requested by the Company and the underwriter of Common Stock (or other securities) of the Company, provided that: (a) such agreement shall apply only to the first underwritten registered public offering of the Company; and (b) all officers and directors of the Company enter into similar agreements. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such period. 3.9 Form S-3. The Company shall use its best efforts to qualify for -------- registration on Form S-3 and to that end the Company shall register (whether or not required by law to do so) its Common Stock under the Exchange Act within twelve (12) months following the effective date of the first registration of any securities of the Company on Form S-1. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Section 3, the Holders of Registrable Securities shall have the right to request registrations on Form S-3 thereafter under this Section 3.9 (such requests shall be in a writing signed by Holders holding not less than twenty percent (20%) of the then outstanding Registrable Securities and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of such -10- shares by such Holder or Holders), provided that the Company shall not be required to effect a registration pursuant to this Section 3.9 unless the Holder or Holders requesting registration propose to dispose of shares of Registrable Securities which they reasonably anticipate will have an aggregate disposition price (before deduction of underwriting discounts and expenses of sale) of at least five hundred thousand dollars ($500,000), provided further that the Company shall not be required to effect a registration pursuant to this Section 3.9 if at the time of the request for a registration on Form S-3 the Company in good faith gives notice within thirty (30) days of such request that it is engaged or has fixed plans to engage within sixty (60) days of the time of the request in a firmly underwritten registered public offering (but such notice may not be given more than once in any six (6) month period), and provided further that the Company shall not be required to effect more than one registration pursuant to this Section 3.9 in any twelve (12) month period. The Company shall give notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 3.9 and shall provide a reasonable opportunity for other Holders to participate in the registration. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3, as the case may be, to the extent requested by the Holder or Holders thereof for purposes of disposition. 3.10 Transfer of Registration Rights. Except as otherwise provided ------------------------------- herein, the rights contained in this Section 3 may be assigned or otherwise conveyed to a transferee, affiliate or assignee of Registrable Securities, who shall be considered a "Holder" for purposes of this Section 3, provided that (i) such transfer is effected in accordance with applicable federal and state securities laws, (ii) such transferee or assignee becomes a party to this Agreement or agrees in writing to be subject to the terms hereof to the same extent as if he were an original purchaser hereunder and (iii) such transferee or assignee (A) is a parent, wholly owned subsidiary or constituent partner (including limited partners) or affiliate of the transferring Holder, or (B) acquires at least ten thousand (10,000) shares of Registrable Securities (as shares are presently constituted) or (C) acquires all of the Registrable Securities originally held by the transferring Holder and, provided further, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 3. 3.11 Certain Limitations in Connection with Future Grants of ------------------------------------------------------- Registration Rights. From and after the date of this Agreement, the Company - ------------------- shall not, without the prior written consent of the Holders of at least a majority of the outstanding Registrable Securities, enter into any agreement with any person or persons providing for the granting to such holder of registration rights superior to those granted to Holders pursuant to this Section 3, or of registration rights which might cause a reduction -11- in the number of shares includable by the Holders in any offering pursuant to Section 3.1 or in any offering subject to Section 3.2. 3.12 Delay of Registration. No Holder shall have any right to obtain or --------------------- seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. 3.13 Termination of Registration Rights. All rights and duties provided for ---------------------------------- in this Section 3 shall terminate on the date five (5) years from the date of a Qualified IPO (as defined below in Section 4.1(d)). 4. Right of First Refusal on Company Issuances. ------------------------------------------- 4.1 Right of First Refusal. The Company hereby grants to each Major ---------------------- Holder the right of first refusal to purchase, pro rata, all (or any part) of New Securities (as defined in this Section 4.1) that the Company may, from time to time propose to sell and issue. Such Major Holder's pro rata share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock then owned or issuable upon conversion of the Preferred Stock of the Company then owned by such Major Holder to the total number of shares of Common Stock outstanding immediately prior to the issuance of the New Securities, assuming full conversion of all outstanding shares of Preferred Stock of the Company and exercise of all outstanding rights, options and warrants to acquire, directly or indirectly, Common Stock of the Company. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock of the Company, whether now authorized or not, and rights, options, or warrants to purchase said capital stock, and securities of any type whatsoever that are, or may become, convertible into said capital stock; provided, however, that "New Securities" does not include (1) currently outstanding securities; (ii) securities issuable upon conversion or exercise of or with respect to outstanding options, warrants or convertible securities; (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company owns more than fifty percent (50%) of the voting power of such corporation; (iv) shares of the Company's Common Stock (or related options) issued to employees, officers, directors, consultants or advisers of the Company pursuant to any employee stock offering, plan, or arrangement approved by a majority of the outside Board of Directors; (v) shares of the Company's Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, or similar recapitalization by the Company; (vi) securities issued in connection with equipment or debt financing or leases (including securities issued in consideration of guarantees of such financing or leases) which are approved by the Company's Board of Directors; or (vii) securities issued to vendors, customers or coventurers or to other persons in similar commercial or corporate partnering situations with the Company if such issuance is approved by a majority of the outside Board of Directors. (b) In the event that the Company proposes to undertake an issuance of New Securities, it shall give each Major Holder written notice of its intention, describing the type of New -12- Securities, the price, and the general terms upon which the Company proposes to issue the same. Each Major Holder shall have twenty (20) days from the date of mailing of any such notice to agree to purchase its pro rata share of such New Securities, in whole or in part, for the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. Each Major Holder shall have a right of overallotment such that if any Major Holder fails to exercise its right hereunder to purchase its full pro rata portion of New Securities, the Company shall so notify the other Major Holders who are purchasing their full pro rata portion, and such fully-exercising Major Holders may purchase that portion of the New Securities not subscribed for on a pro rata basis, within ten (10) days from the date of such notice. (c) In the event that Major Holders fail collectively to exercise in full the right of first refusal within said twenty (20) day period (plus ten (10) day period, if applicable) the Company shall have sixty (60) days thereafter to sell or enter into an agreement providing for the closing of the sale of the New Securities respecting which the Major Holders' rights were not exercised within thirty (30) days of such agreement at a price and upon general terms no more favorable to the purchasers thereon than specified in the Company's notice. In the event the Company has not sold the New Securities within such sixty (60) day period, the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Major Holders in the manner provided above. (d) The right of first refusal granted under this Agreement shall not apply to and shall expire upon the closing of the first firmly underwritten public offering of Common Stock of the Company that is pursuant to a registration statement filed with, and declared effective by, the Commission under the Securities Act, covering the offer and sale of Common Stock to the public in which the shares of the Company's Preferred Stock will be converted into shares of the Company's Common Stock pursuant to the provisions of the Company's Articles of Incorporation, as now in effect or hereafter amended (a "Qualified IPO"). (e) This right of first refusal is assignable only to an affiliate of a Major Holder or in connection with a sale or transfer of Registrable Securities. 5. Waiver of Right of First Refusal. The Holders hereby waive their rights of -------------------------------- first refusal set forth in Section 4 of the Agreement with regard to the proposed sale and issuance of Series D Preferred Stock and the Common Stock into which such shares are convertible and all prior issuances. This waiver shall be effective upon execution of this Agreement by the Company and the Holders of more than 50% of the Securities. 6. Information Rights. ------------------ 6.1 Financial Information. The Company will furnish the following --------------------- information to each Major Holder: (a) within twenty (20) days after the end of each quarterly accounting period in each fiscal year, -13- (i) unaudited statements of income and of cash flow of the Company for such quarterly period and for the period from the beginning of such fiscal year to the end of such quarterly period, and (ii) balance sheets of the Company as of the end of such quarterly period, which statements will be prepared in accordance with generally accepted accounting principles, consistently and uniformly applied. (b) promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of the Company's operations and financial affairs or in conjunction with any annual or interim audit given to the Company by its independent accountants (and not otherwise contained in other materials provided pursuant to this Section); (c) not less than thirty (30) days prior to the end of each fiscal year, annual consolidated budgets prepared on a monthly basis for the Company for the succeeding fiscal year, as approved by the Board of Directors (displaying anticipated statements of income and cash flow and balance sheets and containing a brief description by the Chief Executive Officer of the Company's plans for the subsequent year); (d) within ninety (90) days after the end of each fiscal year, statements of income and retained earnings and cash flows of the Company for such fiscal year, and a balance sheet of the Company as of the end of such fiscal year, which statements shall be prepared in accordance with generally accepted accounting principles, consistently and uniformly applied, and accompanied by the unqualified opinion of an accounting firm of recognized national standing. 6.2 Inspection Rights; Management Rights. The Company shall permit each ------------------------------------ Major Holder, its attorney, or its other representative to visit and inspect the Company's properties, to examine the Company's books of account and other records, to make copies or extracts therefrom and to discuss the Company's affairs, finances and accounts with its officers, management employees and independent accountants, all at such reasonable times and as often as such Major Holder may reasonably request. 6.3 Termination of Covenants. The covenants provided in Sections 6.1 and ------------------------ 6.2 shall terminate upon a Qualified IPO. 6.4 Assignment of Rights to Information. The rights granted pursuant to ----------------------------------- Sections 6.1 and 6.2 may not be assigned or otherwise conveyed by any Major Holder or by any subsequent transferee of any such rights without the written consent of the Company, which consent shall not be unreasonably withheld; provided that the Company may refuse such written consent if the proposed transferee is a competitor of the Company as determined by the Company's Board of Directors; and provided further, that no such written consent shall be required if the transfer is made to a party who is not a competitor of the Company and who is a parent, subsidiary, affiliate, partner or group member of any Major Holder. -14- 6.5 Confidentiality. Each Holder agrees that it will keep confidential --------------- and will not disclose or divulge any confidential, proprietary or secret information which such Holder may obtain from the Company, and which the Company has prominently marked "confidential", "proprietary" or "secret" or has otherwise identified as being such, pursuant to financial statements, reports and other materials submitted by the Company as required hereunder, or pursuant to visitation or inspection rights granted hereunder unless such information is or becomes known to the Holder from a source other than the Company or is or becomes publicly known, or unless the Company gives its written consent to the Holder's release of such information, except that no such written consent shall be required (and Holder shall be free to release such information) if such information is to be provided to a Holder's counsel or accountant, or to an officer, director or general or limited partner of a Holder or to employees of, or consultants to, a Holder on a "need to know" basis, provided that the Holder shall inform the recipient of the confidential nature of such information, and shall instruct the recipient to treat the information as confidential. 7. Miscellaneous. ------------- 7.1 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. 7.2 Successors and Assigns. Except as otherwise provided herein, the ---------------------- provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 7.3 Entire Agreement. This Agreement between the Holders and the Company ---------------- constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof. 7.4 Notices, etc. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be effective five (5) days after deposited by first-class mail, postage prepaid, with the United States mail or delivery by hand or by messenger, if addressed (a) to a Holder, at such Holder's address set forth on the attached Exhibit A, or at such other address as such Holder shall have furnished to the Company in writing, or (b) to any other Holder of Registrable Securities, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Registrable Securities who has so furnished an address to the Company, or (c) to the Company, at the address set forth below the Company's name on the signature page to this Agreement or such other address as the Company shall have furnished to each Holder and each such other holder in writing. -15- 7.5 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any party, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereunder occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 7.6 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which may be executed by less than all of the Holders, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 7.7 Severability. In the case any provision of this Agreement shall be ------------ invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 7.8 Amendments. The provisions of this Agreement may be amended at any ---------- time and from time to time, and particular provisions of this Agreement may be waived, with and only with an agreement or consent in writing signed by the Company and by the holders of not less than a majority of the number of shares of Securities outstanding as of the date of such amendment or waiver. Each Holder acknowledges that by the operation of this Section 7.8 the Holders of a majority of the outstanding Securities may have the right and power to diminish or eliminate all rights of such Holder under this Agreement. -16- The foregoing Restated Investors Rights Agreement is hereby executed as of the date first above written. COMPANY: SYMPHONIX DEVICES, INC. /s/ Harry S. Robbins -------------------- Harry S. Robbins Chairman, President and CEO -17- HOLDERS: ANDREW P. AMES & DELORES L. AMES, TRUSTEES UNDER DECLARATION OF TRUST DATED JUNE 22, 1988 By: /s/ A.P. Ames --------------------------- Title: ___________________________ /s/ Ronald P. Antipa --------------------------------- Ronald P. Antipa /s/ Anelina Ayala --------------------------------- Angelina Ayala /s/ James Victor Ball --------------------------------- James Victor Ball /s/ Diane Ball --------------------------------- Diane Ball THE FIRST NATIONAL BANK OF CHICAGO AS CUSTODIAN TO THE BRINSON VENTURE CAPITAL FUND III, L.P. By: __________________________ Title: __________________________ -18- THE FIRST NATIONAL BANK OF CHICAGO AS CUSTODIAN TO THEBRINSON TRUST COMPANY AS TRUSTEE OF THE BRINSON MAP VENTURE CAPITAL FUND III By: ___________________________ Title: ___________________________ CASSIN FAMILY PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP By: ___________________________ Title: ___________________________ BRENDAN JOSEPH CASSIN AND ISABEL B. CASSIN, TRUSTEES OF THE CASSIN FAMILY TRUST U/D/T DATED JANUARY 31, 1996 By: /s/ B. J. Cassin --------------------------- Title: ___________________________ ANDREW L. CHASE, TTEE CHASE 1991 REVOCABLE TRUST DTD. 4-2-91 By: /s/ Andrew Chase --------------------------- Title: ___________________________ /s/ Warren G. Christianson ---------------------------------- Warren G. Christianson -19- /s/ Carol P. Christie ---------------------------------- Carol P. Christie CORAL PARTNERS IV, LIMITED PARTNERSHIP By: Coral Management Partners IV Limited Partnership, Its: General Partner /s/ Peter H. McNerney ---------------------------------- Peter H. McNerney, General Partner LAURENCE CORASH, M.D. AND MICHELE B. CORASH AS JOINT TENANTS /s/ Laurence Corash ---------------------------------- Laurence Corash, M.D. /s/ Michele B. Corash ---------------------------------- Michele B. Corash /s/ Allen Cross ---------------------------------- Allen Cross ANGELO DELLAPORTA, TTEE DELLAPORTA FAMILY TRUST, DTD. 8-16-82 By: /s/ A. Delaporte --------------------------- Title: ___________________________ /s/ Gerald C. Down ---------------------------------- Gerald C. Down /s/ Larry G. Gerdes ---------------------------------- Larry G. Gerdes -20- G&H PARTNERS By: /s/ Illigible --------------------------- Title: ___________________________ JOHN EUGENE HEARST AND JEAN BANKSON HEARST, CO-TTEES FBO HEARST REVOCABLE TRUST DTD 3/13/89 c/o JOHN E. HEARST By: /s/ John E. Hearst --------------------------- Title: ___________________________ PETER HERTZMANN, INC. By: /s/ P. Hertzmann --------------------------- Title: ___________________________ /s/ Walter S. Huff ---------------------------------- Walter S. Huff, Jr. /s/ Steve Isaacs ---------------------------------- Steve Isaacs /s/ Paul K. Joas ---------------------------------- Paul K. Joas -21- JOHNSON & JOHNSON DEVELOPMENT CORPORATION By: /s/ Illigible --------------------------- Title: ___________________________ /s/ Roy Kirkorian ---------------------------------- Roy Kirkorian /s/ Larry Kuhn ---------------------------------- Larry Kuhn ANGELINA P. LAWTON IRREVOCABLE TRUST By: /s/ Angelina P. Lawton --------------------------- Title: ___________________________ DONALD L. LUCAS, SUCCESSOR TTEE PROFIT SHARING TRUST DATED 1-1-87 By: /s/ Donald L. Lucas --------------------------- Title: ___________________________ DONALD L. LUCAS, TTEE, DONALD L. LUCAS & LYGIA S. LUCAS TRUST DTD 12/3/84 -22- By: ____________________________ Title: ___________________________ /s/ Donald L. Lucas ---------------------------------- Donald A. Lucas RICHARD M. LUCAS CANCER FOUNDATION By: ___________________________ Title: ___________________________ MAYFIELD VII A CALIFORNIA LIMITED PARTNERSHIP BY MAYFIELD VII MANAGEMENT A CALIFORNIA LIMITED PARTNERSHIP By: /s/ Illigible --------------------------- MAYFIELD ASSOCIATES FUND II A CALIFORNIA LIMITED PARTNERSHIP By: /s/ Illigible --------------------------- __________________________________ Jonathan Osgood -23- ROBERT J. & MARION E. OSTER, TTEE OSTER FAMILY REVOCABLE TRUST, DTD. 10-5-76, AS AMENDED By: ___________________________ Title: ___________________________ ADRIANA I. RAHN IRREVOCABLE TRUST By: /s/ Adriana I. Rahn --------------------------- Title: ___________________________ NOEL P. RAHN, JR. IRREVOCABLE TRUST By: /s/ Noel P. Rahn, Jr. --------------------------- Title: ___________________________ MARK C. RAHN IRREVOCABLE TRUST By: /s/ Mark C. Rahn --------------------------- Title: ___________________________ /s/ Noel P. Rahn ---------------------------------- Noel P. Rahn -24- SAND HILL FINANCIAL COMPANY By: /s/ Donald L. Lucas --------------------------- Title: ___________________________ ROBERT F. SHAW, TRUSTEE OF THE ROBERT F. SHAW 1990 FAMILY TRUST By: ___________________________ Title: ___________________________ SIERRA VENTURES IV, L.P., A CALIFORNIA LIMITED PARTNERSHIP BY SV ASSOCIATES IV, L.P., A CALIFORNIA LIMITED PARTNERSHIP, ITS GENERAL PARTNER By: /s/ Petri Vainio --------------------------- Petri Vainio, General Partner SIERRA VENTURES IV INTERNATIONAL, L.P., A DELAWARE LIMITED PARTNERSHIP BY SV ASSOCIATES IV, L.P., A CALIFORNIA LIMITED PARTNERSHIP, ITS GENERAL PARTNER By: ___________________________ Petri Vainio, General Partner ARNOLD N. SILVERMAN, TTEE SILVERMAN FAMILY TRUST DTD. 6-2-88 -25- By: /s/ Arnold N. Silverman --------------------------- Title: ___________________________ ST. MARY'S COLLEGE OF CALIFORNIA GAEL GROWTH FUND By: /s/ Illigible --------------------------- Title: ___________________________ ST. FRANCIS GROWTH FUND By: /s/ Kevin J. Makley --------------------------- Title: ___________________________ STANFORD UNIVERSITY By: /s/ Carol Gilmer --------------------------- Title: ___________________________ /s/ Wesley Sterman ---------------------------------- Wesley Sterman /s/ Richard . Stubblefield ---------------------------------- Richard D. Stubblefield /s/ Gregory V. Vaughn ---------------------------------- Gregory V. Vaughn -26- VWCSYM INVESTORS By: /s/ Paul W. Brown --------------------------- Title: ___________________________ WS INVESTMENT CO. 94B By: /s/ Illigible --------------------------- Title: ___________________________ /s/ Leonard S. Yaffe ---------------------------------- Leonard S. Yaffe /s/ Gwill E. York ---------------------------------- Gwill E. York -27- EX-10.5 10 MASTER EQUIPMENT LEASE AGREEMENT EXHIBIT 10.5 MASTER EQUIPMENT LEASE AGREEMENT Agreement No. 1001 Dated: December 2, 1994 LESSOR: LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited partnership ("Lessor"), 100 Drakes Landing Road, Suite 260, Greenbrae, California 94904 LESSEE: SYMPHONIX DEVICES, INC., a California corporation ("Lessee") ADDRESS: 3047 Orchard Parkway, San Jose, CA 95134. IN CONSIDERATION of the mutual covenants contained herein, the parties agree as follows: 1. LEASE. Lessor leases to Lessee and Lessee leases from Lessor the personal property described in each Equipment Schedule executed pursuant hereto, subject to the terms and conditions of this Master Equipment Lease Agreement ("Master Lease") and the applicable Lease Line Schedule (defined below). The "Equipment" (as defined in the Lease Line Schedule) is being leased for commercial or business purposes only, and not for personal, home, or family purposes. The parties agree that each Lease is a "finance lease" under the Uniform Commercial Code (as in effect in the State of California during the term of the Lease and referred to hereafter as the "UCC"). 2. LEASE LINE SCHEDULE. "Lease Line Schedule" means a Lease Line Schedule in the form of EXHIBIT A, signed by Lessor and Lessee and incorporating by reference the terms and provisions of this Master Lease. 3. EQUIPMENT SCHEDULES. "Equipment Schedule" means an Equipment Schedule in the form of EXHIBIT B, signed by Lessor and Lessee and incorporating, by reference, the terms and provisions of this Master Lease and the applicable Lease Line Schedule. Each Equipment Schedule shall constitute a separate and independent lease (a "Lease"); the original of such Lease shall consist of the signed Equipment Schedule and a copy of the Master Lease and applicable Lease Line Schedule. Capitalized terms used, but not defined, in this Master Lease have the meanings given to such terms in the applicable Lease Line Schedule or Equipment Schedule, as the case may be. 4. TERM AND RENTALS. (a) ACCEPTANCE. The Lease shall commence with respect to Equipment described on the Equipment Schedule upon the Acceptance Date. The "Acceptance Date" shall be the date upon which Lessee executes a Delivery and Acceptance Certificate in the form of EXHIBIT C. (b) TERM AND PAYMENT OF RENT. The lease term for the Equipment shall be the "Lease Term" set forth in the Equipment Schedule which shall commence on the "Commencement Date" (as defined in the Lease Line Schedule). Lessee agrees to pay to Lessor the "Rental Payments" for the Lease Term, in the amounts and at the times set forth in the Equipment Schedule. (c) INTERIM PERIOD. If the Acceptance Date does not fall on the Commencement Date, then Lessee agrees to pay to Lessor "Interim Rent" for the period commencing on the Acceptance Date through and including the day preceding the Commencement Date (the "Interim Period"). The Interim Rent payment for the Interim Period shall accrue at the "Interim Rate" (as defined in the Lease Line Schedule) and shall be due and payable in full on the Commencement Date. (d) LEASE TERMINATION. Lessee may terminate the Lease at the expiration of the Lease Term or any renewal term (the "Lease Termination") by submitting to Lessor a Notice of Election in the form of EXHIBIT D. If a Notice of Election is not submitted by Lessee to Lessor during the "Advance Notice Period" (as defined in the Lease Line Schedule), then the Lease Term or any renewal Term will be automatically extended for an additional period equal to the "Automatic Extension Period" (as defined in the Lease Line Schedule). The Lease 1. will continue to automatically extend until Lessee submits to Lessor a Notice of Election. The Lease may only be terminated as expressly provided in this Section, in the applicable Lease Line Schedule or in the applicable Equipment Schedule. Lessee agrees to continue paying rent for the Equipment in the amount of the Rental Payment set forth in the Equipment Schedule until the later of (i) the expiration of the Lease Term, any renewal term and any Automatic Extension Period and (ii) either (A) the purchase option price is paid pursuant to SECTION 6(A), or (B) a mutually agreed renewal of the Lease takes effect pursuant to SECTION 6(B), or (C) the Equipment is returned in the manner and condition prescribed in SECTION 6(C), in each case after delivery of a Notice of Election. (e) NET LEASE. Each Equipment Schedule shall be a net lease, and Lessee's obligation to pay all rent and other sums thereunder shall be absolute and unconditional, and shall not be subject to any abatement, reduction, set- off, defense, counterclaims, interruption, deferment or recoupment, for any reason whatsoever. 5. LATE FEE. Lessee shall pay a late charge on any rent payments or other sums due hereunder which are past due, in the amount specified in the Lease Line Schedule, payable on demand. In addition, interest shall accrue daily at the "Default Rate" (as defined in the Lease Line Schedule), or if such rate exceeds the maximum rate allowed by law, then at such maximum rate, and shall be payable on demand. 6. LEASE TERMINATION OPTIONS. Upon Lease Termination, Lessee will have the option to purchase the Equipment, renew the term of the Lease, or return the Equipment to Lessor, as set forth below. Lessee shall specify its election of a Lease Termination Option in the Notice of Election. (a) PURCHASE OPTION. If Lessee exercises the option to purchase, then, provided no Event of Default has occurred and is then continuing, Lessee shall at the expiration of the Lease Term, renewal term or extension, as the case may be, purchase the Equipment. The purchase price shall be the Equipment's then fair market value ("FMV"). FMV, as applied to a purchase option, shall be determined by Lessor based on the price a willing buyer would pay and a willing seller would accept (neither buyer nor seller being under compulsion to act) for the Equipment as installed and in use, giving due consideration to its condition, utility, revenue-producing capability, and replacement costs. If Lessee fails to agree with Lessor's good faith determination of the FMV, Lessee shall nevertheless pay Lessor's invoice and provide Lessor with a written request for a determination of the FMV with or prior to such payment. Within ten (10) days after such request Lessor and Lessee shall agree on an appraiser to determine the FMV or, lacking such agreement, shall each tender the name of an appraiser. The appraiser(s) shall, within thirty (30) days, either agree on the FMV or select a third appraiser, to form a committee to determine the FMV. Determination by the appraiser(s) shall be final and binding on both parties. Within fifteen (15) days after such determination, Lessor shall refund any excess received over the FMV, and/or Lessee shall pay any additional amount of the FMV above the amount previously paid. Each party shall bear the fees and expenses of any appraiser which it names and share equally the fees and expenses of any appraiser(s) jointly selected. If the appraised FMV is within 5% of the amount invoiced by Lessor, then Lessee shall pay all appraiser fees and expenses. The purchase option price shall be paid not later than the last day of the Lease Term. (b) RENEWAL. If Lessee exercises the option to renew this Lease, such renewal shall be upon the terms and conditions of this Master Lease and the applicable Lease Line Schedule, for a rental period and rental amount to be agreed upon by Lessee and Lessor. (c) RETURN. If the Notice of Election specifies return of the Equipment, Lessee at its own risk and expense (i) will immediately return the Equipment to Lessor in the same condition as when delivered, ordinary wear and tear excepted, at such location as Lessor shall designate; and (ii) will, on request from Lessor, obtain from the Equipment supplier (or other maintenance service supplier approved by Lessor) a certificate stating that the Equipment qualifies for continued maintenance service at the standard rates and terms then in effect. 2. 7. USE; MAINTENANCE. (a) Lessee, at its expense, shall make all necessary site preparations and cause the Equipment to be operated in accordance with any applicable operating manuals and manufacturer's instructions. Notwithstanding any transfer or assignment by Lessor and provided Lessee is not in default hereunder, Lessee shall have the right to quietly possess and use the Equipment as provided herein without interference by Lessor, its assigns or any other third party claiming through or under Lessor. (b) Lessee shall effect and bear the expense of all necessary repair, maintenance, operation and replacements required to be made to maintain the Equipment in good condition, reasonable wear and tear excepted, and to comply with all domestic and international laws to which the use and of the Equipment may be or become subject. All replacement Equipment and parts furnished in connection with such maintenance or repair shall immediately become the property of Lessor and part of the Equipment for all purposes hereof. All such maintenance, repair and replacement services shall be immediately paid for and discharged by Lessee with the result that no lien under any applicable laws will attach to the Equipment as a result of the performance of such services or the provision of any such material. 8. INSURANCE. Lessee shall obtain and maintain for the Lease Term (and any renewal term or extension), at its own expense, (a) "all risk" insurance against loss or damage to the Equipment, (b) commercial general liability insurance (including contractual liability, products liability and completed operations coverages) reasonably satisfactory to Lessor, and (c) such other insurance against such other risks of loss and with such terms, as shall in each case be reasonably satisfactory to or reasonably required by Lessor (as to carriers, amounts and otherwise). The amount of the "all risk" insurance shall be greater than or equal to the Stipulated Loss Value (as defined in SECTION 9 below) of all Equipment outstanding under the Lease Line Schedule, and must otherwise be reasonably satisfactory to Lessor as of each anniversary date of this Lease. Any increase in the amount of such insurance coverage reasonably requested by Lessor shall be put into effect on the next succeeding renewal date of such insurance. Each "all risk" policy shall: (i) name Lessor as sole loss payee with respect to the Equipment, (ii) provide for each insurer's waiver of its right of subrogation against Lessor and Lessee, and (iii) provide that such insurance shall not be invalidated by any action of, or breach of warranty by, Lessee of a provision of any of its insurance policies, and shall waive set-off, counterclaim or offset against Lessor. Each liability policy shall name Lessor as an additional insured and provide that such insurance shall have cross-liability and severability of interest endorsements (which shall not increase the aggregate policy limits of Lessee's insurance). All insurance policies shall provide that Lessee's insurance shall be primary without a right of contribution of Lessor's insurance, if any, or any obligation on the part of Lessor to pay premiums of Lessee, and shall contain a clause requiring the insurer to give Lessor at least 30 days' prior written notice of its cancellation (other than cancellation for non-payment for which 10 days' notice shall be sufficient). Lessee shall on or prior to the date of Equipment Schedule No. 1 and prior to each policy renewal, furnish to Lessor certificates of insurance or other evidence satisfactory to Lessor that such insurance coverage is in effect. Lessee further agrees to give Lessor prompt notice of any damage to, or loss of, the Equipment, or any part thereof. 9. LOSS OR DAMAGE. If any items of Equipment shall become lost, stolen, destroyed, or damaged beyond repair for any reason, or in the event of condemnation, confiscation, seizure or requisition of title to or use of such items (collectively, an "Event of Loss"), Lessee shall promptly pay to Lessor the applicable Stipulated Loss Value of the Equipment subject to the Event of Loss. Upon payment by Lessee of the Stipulated Loss Value, Lessor will transfer to Lessee, "AS IS, WHERE IS, WITHOUT RECOURSE, REPRESENTATION OR WARRANTY," all of Lessor's right, title and interest, if any, in such items of Equipment. The "Stipulated Loss Value" payable by Lessee under this Lease shall be an amount equal to the product of (a) Lessor's Cost of the affected Equipment and (b) the percentage set forth in the table attached to the applicable Lease Line Schedule as 3. ANNEX A opposite the Rental Payment number next following the Event of Loss. Stipulated Loss Values and Rental Payments shall not be prorated. 10. TITLE, INSPECTION AND LOCATION. (a) TITLE. Lessor and Lessee confirm their intent that title to the Equipment shall remain in Lessor (or its successors and assigns) exclusively. If requested by Lessor, Lessee will affix plates or markings on the Equipment and on any operating manuals and manufacturer's instructions indicating the interests of Lessor and its assigns therein, and Lessee will not allow any other indicia of ownership or other interest in the Equipment to be placed on the Equipment. Lessee shall not sell, assign, grant a security interest in, sublet, pledge, hypothecate or otherwise encumber or suffer a lien upon or against this Lease or the Equipment. (b) INSPECTION. Lessor (through any of its officers, employees or agents) shall have the right to inspect the Equipment during regular business hours, with reasonable notice, and in compliance with Lessee's reasonable security procedures; provided, that such inspections will be conducted no more often than every six (6) months unless an Event of Default, or event which, with notice or lapse of time or both, would become an Event of Default, has occurred and is continuing. (c) LOCATION. In the case of Equipment other than mobile Equipment, Lessee may move such Equipment from the installation address shown on the Equipment Schedule (or any other location for which Lessee has complied with this provision) only if (i) the new location is within the continental United ---- States, and (ii) Lessee gives at least 30 days' prior written notice of the relocation and provides UCC-1 financing statements, landlord waivers or such other documentation as Lessor reasonably requests to protect its interest in the Equipment. In the case of mobile equipment (including, without limitation, lap- top computers), Lessee agrees to obtain from the person using such mobile Equipment, and deliver to Lessor, an Acknowledgment in the form of EXHIBIT F. (d) Lessee shall keep copies of all operating manuals and manufacturer's instructions with respect to the Equipment in good condition at the locations specified in SECTION 10(C). 11. LESSEE'S REPRESENTATIONS, WARRANTIES AND WAIVERS. Upon execution of the Master Lease and each Equipment Schedule, Lessee warrants and represents the following: (a) Lessee is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Lessee has full power and authority and all necessary licenses and permits to carry on its business as presently conducted, to own or hold under lease its properties and to enter into this Master Lease, the Lease Line Schedule and each Equipment Schedule and to perform its obligations thereunder; and Lessee is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of its properties or the nature of its business or the performance of its obligations under this Master Lease, the Lease Line Schedule and any Equipment Schedule requires such qualification, except for such jurisdictions in which failure to qualify would not have a material adverse effect on Lessee. (b) The execution and delivery by Lessee of this Master Lease, the Lease Line Schedule and each Equipment Schedule and the performance by Lessee of its obligations thereunder have been duly authorized by all necessary corporate action on the part of Lessee; and do not and will not contravene the provisions of, or constitute a default (either with or without notice or lapse of time, or both) under, or result in the creation of any lien upon, the Equipment or any property of Lessee under any indenture, mortgage, contract or other instrument to which Lessee is a party or by which Lessee or its properties is bound. (c) No consent or approval of, giving of notice to, registration with, or taking of any other action by, any state, federal, foreign or other governmental commission, agency or regulatory authority or any other person or entity is required for the consummation or performance by Lessee of the transactions contemplated under this Master Lease, the Lease Line Schedule and each Equipment Schedule. 4. (d) This Master Lease, the Lease Line Schedule and each Equipment Schedule, when executed by Lessee, constitute legal, valid and binding agreements of Lessee enforceable against Lessee in accordance with their terms, except as limited by any bankruptcy, insolvency, reorganization, or other similar laws of general application affecting the enforcement of creditor or Lessor rights. (e) There are no actions, suits or proceedings pending or threatened against or affecting Lessee or any property of Lessee in any court, before any arbitrator of any kind or before or by any federal state, municipal or other government department, commission, board, bureau, agency or instrumentality (collectively "Governmental Body"), which, if adversely determined, would materially adversely affect the business, financial condition, assets, or operations of Lessee, or adversely affect the ability of Lessee to perform its obligations under this Master Lease, the Lease Line Schedule and each Equipment Schedule; and Lessee is not in default with respect to any order of any court, arbitrator or Governmental Body or with respect to any material loan agreement, debt instrument or contract with a supplier or customer of Lessee, except as disclosed in writing to Lessor. (f) To the extent permitted by applicable law, Lessee waives any and all rights and remedies to: (i) cancel this Lease; (ii) repudiate this Lease; (iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover damages from Lessor for any breaches of warranty or for any other reason; (vi) claim a security interest in the Equipment in Lessee's possession or control for any reason; (vii) deduct from Rental Payments all or any part of any claimed damages resulting from Lessor's default, if any, under this Lease; (viii) accept partial delivery of the Equipment; (ix) "cover" by making any purchase or lease of or contract to purchase or lease equipment in substitution for Equipment designated in the Lease; (x) recover any direct, general, special, incidental, indirect, exemplary or consequential damages, for any reason whatsoever; and (xi) obtain specific performance, replevin, detinue, sequestration, claim and delivery or the like for any Equipment identified to this Lease. To the extent permitted by applicable law, Lessee also waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's damages or which may otherwise limit or modify any of Lessor's rights or remedies. 12. ASSIGNMENT BY LESSOR. LESSEE ACKNOWLEDGES THAT LESSOR MAY SELL, ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN THIS LEASE AND THE EQUIPMENT WITHOUT NOTICE TO OR CONSENT OF LESSEE. Upon Lessor's written notice to Lessee that this Lease, or the right to the Rental Payments hereunder, have been assigned, Lessee shall, if requested, pay directly to Lessor's assignee without abatement, deduction or set-off all amounts which become due hereunder. Lessee waives and agrees it will not assert against Lessor's assignee any counterclaim or set-off in any action for rent under the Lease. Upon the assignment of this Lease, Lessor's assignee shall have and be entitled to exercise any and all rights and remedies (but none of the obligations) or lessor hereunder, and all references herein to Lessor shall include Lessor's assignee. Lessee acknowledges that any assignment or transfer by Lessor does not materially change Lessee's duties or obligations under this Lease nor materially increase the burdens or risks imposed on Lessee. 13. ASSIGNMENT BY LESSEE. LESSEE MAY NOT, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, (i) ASSIGN THIS LEASE, WHETHER BY OPERATION OF LAW OR OTHERWISE, OR SUBLEASE THE EQUIPMENT OR ANY PART THEREOF OR (II) ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN AND TO THIS LEASE OR THE EQUIPMENT. In the event Lessee makes an assignment, sublease or other transfer (to which Lessor has consented), Lessee shall not thereby be relieved of its duties and obligations hereunder, for which it shall remain fully responsible and liable (independent of its assignee). 14. TAXES. (a) Lessee shall comply with all applicable federal, state, local, foreign and international laws, regulations and orders relating to this Lease. Lessee assumes liability for, and shall pay when due, and on a net after-tax basis shall indemnify and defend Lessor against, all federal, state, local, foreign and international fees, taxes and government charges (including, without limitation, interest and penalties) or any nature imposed upon 5. or in any way relating to Lessor, Lessee, any item of Equipment or this Lease, except federal, state and local taxes on or measured by Lessor's net income (other than any such tax which is in substitution for or relieves Lessee from the payment of taxes it would otherwise be obligated to pay to or reimburse Lessor for as herein provided). Lessee shall at its expense file when due with the appropriate authorities any and all tax and similar returns and reports required to be filed with respect thereto or, if requested by Lessor, notify Lessor of all such requirements and furnish Lessor with all information required for Lessor to effect such filings, which filings shall also be at Lessee's expense. Any fees, taxes or other charges paid by Lessor upon failure of Lessee to make such payments shall at Lessor's option become immediately due from Lessee to Lessor. (b) This Lease has been entered into on the assumption that Lessor shall be entitled to all deductions, credits, and other tax benefits as are provided in the Internal Revenue Code of 1986, including amendments as may occur (the "Code"), to an owner of property including, without limitation, depreciation deductions and interest deductions with respect to any debts incurred to finance the purchase of the Equipment. If, as a result of any acts, omissions or misrepresentations by Lessee or as a result of any changes in the Code, the regulations issued thereunder or the administrative or judicial interpretations, Lessor's projected after-tax economic return resulting from ownership and lease of the Equipment is reduced, then Lessee's Rental Payments shall be increased in an amount (based on Lessor's reasonable calculations) sufficient to provide the same net after-tax economic return as if such acts or omissions or changes had not occurred. Appropriate increases shall also be made in the applicable Stipulated Loss Values for this Lease. In the event the Equipment is sold by Lessor to another party, the net after-tax economic returns considered shall be those of such other party. 15. EQUIPMENT WARRANTIES. Lessee acknowledges that (i) Lessee has selected the supplier of the Equipment, (ii) Lessor acquired the goods or the right to possession and use of the goods in connection with the Lease, and (iii) Lessee received a copy of the contract by which Lessor acquired the Equipment or the right to possession and use of the Equipment before signing the Lease. LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING THOSE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE WITH RESPECT TO THE EQUIPMENT AND DISCLAIMS THE SAME. Lessor shall have no liability for any damages, whether direct, indirect, general, special, incidental, exemplary or consequential, incurred by Lessee as a result of any defect or malfunction of the Equipment. Lessee shall look solely to the Equipment supplier for any and all claims related to the Equipment. Lessor assigns to Lessee, for and during the Lease Term, any warranty on the Equipment provided by the supplier. Lessor and Lessee agree that all limitations on remedies and liability contained in this Lease represent a reasonable allocation of risks that is part of the fundamental bargain between the parties. 16. EVENTS OF DEFAULT. An Event of Default shall occur if Lessee (i) fails to pay any Rental Payment or other payment required under the Lease when due and such failure continues for a period of five (5) days after written notice from Lessor; or (ii) fails to perform or observe any other covenant, condition or agreement to be performed or observed by it or breaches any provision contained in the Lease or in any other document furnished to Lessor in connection herewith, and such failure or breach continues for a period of thirty (30) days after written notice from Lessor; or (iii) without Lessor's consent, attempts to assign this Lease or sell, transfer, encumber, part with possession, or subject any item of Equipment; or (iv) makes any representation or warranty herein or in any document furnished by Lessor in connection herewith, which shall have been materially false or inaccurate when made or at the time to which such representation or warranty relates; or (v) shall commit an act of bankruptcy or become insolvent or bankrupt or made an assignment for the benefit of creditors or consent to the appointment of a Trustee or Receiver or either shall be appointed for Lessee or for a substantial part of its property without its consent, or bankruptcy reorganization, or insolvency proceedings shall be instituted by or against Lessee, and if instituted against Lessee shall not be vacated or dismissed within sixty (60) days. Any Event of Default shall be deemed material and a substantial impairment of Lessor's interests for the purposes of this Lease, the UCC, and any other applicable law. 17. REMEDIES. Upon the occurrences of any Events of Default and at any time thereafter, provided such Event of Default is then continuing, Lessor may, in its discretion, do any one or more of the following: 6. (a) cancel any or all Leases which reference this Master Lease or the Lease Line Schedule, upon notice to Lessee; (b) recover any accrued and unpaid Rental Payments and other amounts which are due and owing under the Leases so canceled on the Rental Payment Date immediately preceding the date on which Lessor obtains possession of the Equipment (or such earlier date as judgment is entered in favor of Lessor) (the "Determination Date"), plus interest at the Default Rate; (c) with or without canceling this Lease, recover (i) such Stipulated Loss Value as of the Rental Payment Date immediately preceding the Determination Date, and (ii) the amount of any loss or reduction of tax benefits which Lessor anticipated it would receive if the Lease continued for its full Lease Term; (d) recover any amounts due under any indemnity then determinable, plus interest at the Default Rate; (e) require that Lessee provide the return and certification of the Equipment in accordance with SECTION 6(C) hereof; (f) enter the premises where such Equipment is located and take immediate possession of and remove the same, all without liability to Lessor or its agents for such entry; (g) sell any or all of the Equipment at public or private sale, with or without notice to Lessee or advertisement, or otherwise dispose of, hold, use, operate, lease to others or keep idle such Equipment, all free and clear of any rights of Lessee and without any duty to account to Lessee for such action or inaction or for any proceeds with respect thereto; and (h) exercise any other right or remedy which may be available to it under the UCC or other applicable law including the right to recover damages for the breach hereof. In addition, Lessee shall be liable for, and reimburse Lessor for, all reasonable legal fees and all commercially reasonable costs and expenses incurred by Lessor as a result of the foregoing defaults or the exercise of Lessor's remedies, including without limitation recovering possession of the Equipment, selling or leasing the Equipment (including broker's and sales representative's fees and commissions), and placing any Equipment in the condition and obtaining the certificate required by SECTION 6(C) hereof. No remedy referred to in this Section is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity. No express or implied waiver by Lessor of any default shall constitute a waiver of any other default by Lessor, or a waiver of any of Lessor's rights. 18. INDEMNIFICATION. Lessee assumes liability for, and shall pay when due, and shall indemnify, reimburse and hold each Indemnified Person (defined below) harmless from and against all Claims (defined below), directly or indirectly relating to or arising out of the acquisition, use, manufacture, purchase, shipment, transportation, delivery, installation, lease or sublease, ownership, operation, possession, control, storage, return or condition of any item of Equipment (regardless of whether such item of Equipment is at the time in the possession of Lessee), the falsity of any non-tax representation or warranty of Lessee or Lessee's failure to comply with the terms of the Lease during the Lease Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of Equipment, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, or (iii) any Claim for negligence or strict or absolute liability in tort; provided, however, that Lessee shall not indemnify Lessor for any liability incurred by Lessor as a direct and sole result of Lessor's gross negligence or willful misconduct. "Claim" means all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including, without limitation, claims relating to environmental discharge, cleanup or compliance), and all costs and expenses whatsoever to the extent they may be incurred or suffered by an Indemnified Person in connection 7. therewith (including, without limitation, reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Equipment, damage to or loss of use of property (including, without limitation, consequential or special damages to third parties or damages to Lessee's property), or bodily injury to or death of any person (including, without limitation, any agent or employee of Lessee). "Indemnified Person" means Lessor (including without limitation, each of its partners) and each of their respective successors, assigns, agents, officers, directors, shareholders, partners, servants, agents and employees. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Lease. Upon Lessor's written demand, Lessee shall assume and diligently conduct, at its sole cost and expense, the entire defense of any Indemnified Person against any indemnified Claim described in this SECTION 18. Lessee shall not settle or compromise any Claim against or involving Lessor without first obtaining Lessor's written consent thereto, which consent shall not be unreasonably withheld. Lessee shall give Lessor prompt notice of any occurrence, event or condition in connection with which Lessor may be entitled to indemnification hereunder. The provisions of this SECTION 18 are in addition to, and not in limitation of, the provisions of SECTION 14(B). 19. NOTICES. Any notices or demands required or permitted hereunder shall be given to the parties in writing and by personal delivery, regular or certified mail, facsimile or telegram at the address set forth in the Lease Line Schedule or to such other address as the parties may hereafter substitute by written notice given in the manner prescribed in this Section. Such notices or demands shall be deemed given upon receipt in the case of personal delivery and upon mailing or transmission in the case of mail, facsimile or telegram. Lessee agrees to provide Lessor with thirty (30) days' prior written notice of (a) any merger or consolidation with or into any other business organization, (b) any sale, lease or other disposition of assets not in the ordinary course of business, and (c) any other material change in Lessee's financial structure or ownership. 20. FURTHER ASSURANCES. Lessee will promptly execute and deliver to Lessor such further reasonable documents and take such further reasonable action as Lessor may request in order to more effectively carry out the intent and purpose of this Lease or an assignment of Lessor's interest herein. 21. MISCELLANEOUS. This Lease shall be binding upon and inure to the benefit of the parties hereto, their permitted successors and assigns. Any provision of the Lease which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof; and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction; provided, however, that to the extent that the provisions of any such applicable law can be waived, they are waived by Lessee. Time is of the essence with respect to the Lease. Lessee expressly assumes liability for and agrees to indemnify and defend and hold Lessor harmless from and against any breach by Lessee of any representation, warranty or covenant made by Lessee herein and in connection therewith to pay and reimburse Lessor for the payment of any and all expenses, including reasonable attorney fees incurred by Lessor in connection with or as the result of any such breach. The captions set forth herein are for convenience only and shall not define or limit any of the terms hereof. THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES. LESSOR AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM THIS LEASE. THIS LEASE SHALL BECOME EFFECTIVE AND BINDING ON THE PARTIES, THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS, AND SHALL BE DEEMED EXECUTED AND PERFORMED IN THE STATE OF CALIFORNIA, WHEN THE RELATED EQUIPMENT SCHEDULE IS ACCEPTED BY LESSOR. LESSEE CONSENTS TO THE NON- EXCLUSIVE JURISDICTION OF THE STATE COURTS OF CALIFORNIA FOR THE RESOLUTION OF ANY DISPUTES HEREUNDER. 8. 22. AMENDMENTS, MODIFICATIONS, WAIVERS. NONE OF THE PROVISIONS OF THIS LEASE MAY BE AMENDED, MODIFIED OR WAIVED EXCEPT IN A WRITING SIGNED BY LESSOR AND LESSEE. INITIALS (LESSEE) INITIALS (LESSOR) ---------- ---------- LESSEE: LESSOR: SYMPHONIX DEVICES, INC. LIGHTHOUSE CAPITAL PARTNERS, L.P. By: By: LIGHTHOUSE MANAGEMENT PARTNERS, ----------------------------- L.P., its general partner Name: By: LIGHTHOUSE CAPITAL PARTNERS, ---------------------------- INC., its general partner Title: By: ---------------------------- ---------------------------- Name: -------------------------- Title: -------------------------- 9. LIGHTHOUSE CAPITAL PARTNERS, L.P. --------------------------------- VENTURE LEASE DOCUMENTATION PACKAGE TABLE OF CONTENTS Tab - --- 1. Master Equipment Lease Agreement 2. Exhibit A -- Lease Line Schedule Annex A Stipulated Loss Value Table 3. Exhibit B -- Equipment Schedule Annex A Summary of Equipment Schedule 4. Exhibit C -- Delivery and Acceptance Certificate Annex A Equipment Description Annex B-1 Bill of Sale Annex B-2 Purchase Order and Invoice Assignment 5. Exhibit D Notice of Election 6. Exhibit E Landlord Waiver Annex A Legal Description of Premises 7. Exhibit F Form of Acknowledgement re mobile Equipment 8. Exhibit G Warrant EXHIBIT A LEASE LINE SCHEDULE NO. ________, dated _________________, 199____ ("Lease Line Schedule"), to MASTER EQUIPMENT LEASE AGREEMENT NO. ________, dated ___________, 199____ ("Master Lease"), by and between LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited partnership ("Lessor") and SYMPHONIX DEVICES, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) IN CONSIDERATION of the mutual covenants contained herein, the parties agree as follows: 1. LEASE LINE. The total Lessor's Cost of all units of Equipment under all Equipment Schedules pursuant to this Lease Line Schedule shall not exceed Five Hundred Thousand Dollars ($500,000) (the "Commitment"). "LESSOR'S COST" means, with respect to a unit of Equipment, the total cost to Lessor of purchasing such unit, as indicated on the applicable Equipment Schedule. Lessor's obligation to fund Equipment Schedules under the Commitment shall terminate on October 31, 1996 (the "Commitment Termination Date"). The minimum Lessor's Cost for each Equipment Schedule shall be Ten Thousand Dollars ($10,000). 2. RENTAL FACTOR. The Rental Factor for each Equipment Schedule will be based upon an implicit interest rate equal to the prime lending rate as quoted in The Wall Street Journal three business days prior to the Commencement Date for such Equipment Schedule (the "Prime Rate") plus 300 basis points. If on ---- such date the Prime Rate is other than 7.75%, then the Rental Factor for that Equipment Schedule will be adjusted upward of downward basis point for basis point to maintain an implicit interest rate equal to the Prime Rate plus 300 ---- basis points. Once the Lease Term commences for any Equipment Schedule, there will be no further adjustments to the Rental Factor for such Equipment Schedule. The Rental Payment under a particular Equipment Schedule shall be an amount equal to the product of (a) the Rental Factor and (b) the aggregate Lessor's Cost of Equipment subject to such Equipment Schedule. 3. INTERIM RATE. The Interim Rate used to calculate the daily Interim Rent shall be equal to the Rental Factor for each Equipment Schedule divided by thirty (30). 4. ADVANCE RENT. Upon execution of this Lease Line Schedule, Lessee shall pay to Lessor advance rent of Twelve Thousand Seven Hundred and Forty-Eight Dollars ($12,748) ("Advance Rent"), to be applied on a pro rata basis (using the ratio of the Lessor's Cost under each Equipment Schedule to the total Commitment amount) toward the last Rental Payment due from Lessee to Lessor under each Equipment Schedule. If Lessee shall not have leased, on or prior to the Commitment Termination Date or the earlier termination of this Lease, Equipment in an aggregate Lessor's Cost equal to the Commitment, then Lessor shall retain as a non-utilization fee any portion of the Advance Rent not applied as set forth in this SECTION 4. 5. EXPENSES. Lessee agrees to reimburse Lessor for up to One Thousand Five Hundred Dollars ($1,500) of expenses incurred in connection with the negotiation and documentation of this transaction, promptly upon receipt of an invoice together with appropriate back-up. 6. ELIGIBLE EQUIPMENT. All equipment financed under an Equipment Schedule shall be Eligible Equipment. "Eligible Equipment" means the following the types of equipment to the extent acceptable to Lessor: Various used and new computers, peripherals, analytical and test equipment, office furniture and equipment, and other equipment; provided, that all Equipment shall be delivered to Lessee by the manufacturer or vendor after, upon or not more than ninety (90) days prior to the funding date with respect to such Equipment. together with all replacements, parts, cables, repairs, additions and accessories incorporated therein or affixed thereto and all operating manuals and manufacturer's instructions (collectively hereinafter called the "Equipment"). Such replacements, parts, cables, repairs, additions and accessories shall (whether or not purchased by Lessor) be considered part of the Equipment for all purposes and, when installed in or attached to the Equipment (unless 1. otherwise agreed), be or become the property of the Lessor. Except as otherwise specifically provided or the context so requires, the term "Equipment" includes operating system or other bundled software which is delivered on or with the Equipment or is included on the Equipment Schedules. 7. COMMENCEMENT DATE. The "Commencement Date" for each Equipment Schedule shall be the first day of the calendar quarter following the Acceptance Date for the items of Equipment subject to such Equipment Schedule. If the Acceptance Date is the first day of a calendar quarter, then the Commencement Date shall be the Acceptance Date. 8. LEASE TERMINATION OPTIONS. Upon Lease Termination (as defined in the Master Lease), Lessee will have, with respect to all but not less than all of the Equipment governed by this Lease Line Schedule, the option to purchase the Equipment, renew the Lease or return the Equipment to Lessor as provided in SECTION 6 of the Master Lease. 9. ADVANCE NOTICE PERIOD. The "Advance Notice Period" shall be at least ninety (90) days, but not more than 180 days, prior to Lease Termination (as defined in the Master Lease) of Equipment Schedule No. 1 to this Lease Line Schedule. 10. AUTOMATIC EXTENSION PERIOD. The "Automatic Extension Period" shall equal three (3) months and affects each Equipment Schedule under this Lease Line Schedule. 11. INSURANCE. The amount of commercial general liability insurance (other than products liability coverage and completed operations insurance) required under the Master Lease shall be at least $2,000,000 per occurrence. The amount of the products liability and completed operations insurance under the Master Lease shall be at least $2,000,000 per occurrence. 12. ASSIGNMENT BY LESSEE. Notwithstanding anything to the contrary in SECTION 13 of the Master Lease, in the event of (a) a merger, sale of substantially all of the assets or other reorganization involving Lessee in which the shareholders of Lessee immediately prior to such transaction own less than 50% of the voting securities of the surviving entity or purchaser of assets (or its parent) in such transaction or (b) a merger or other reorganization effected solely for the purpose of changing Lessee's jurisdiction of incorporation, Lessor shall not withhold its consent to the assignment of this Lease to the successor entity if each of the following conditions precedent is satisfied: (i) in the case of paragraph (a) above, the successor entity is as of the date of such assignment at least as creditworthy (as reasonably determined by Lessor in accordance with Lessor's usual credit standards) as Lessee on the date of this Lease; (ii) Lessee gives Lessor at least thirty (30) days prior written notice of such merger, sale of assets or other reorganization; (iii) such merger, sale of assets or other reorganization does not adversely affect the rights of Bank; (iv) the corporation that results from such merger or other reorganization or which purchases the assets in the case of a sale of assets (the "Surviving Corporation") shall have executed and delivered to Lessor an agreement in form and substance reasonably satisfactory to Lessor, containing an assumption by the Surviving Corporation of the due and punctual performance and observance of each covenant and condition of Lessee in the Master Lease, Lease Line Schedule and Equipment Schedules (the "Lease Documents") and making representations and warranties with respect to the Surviving Corporation similar in scope and substance to the representations and warranties made by Lessee in the Lease Documents; (v) the Surviving Corporation executes any precautionary financing statements or amendments thereto reasonably requested by Lessor; and 2. (vi) immediately after giving effect to such merger, sale of assets or other reorganization, no Event of Default or, event which with the lapse of time or giving of notice or both, would result in an Event of Default shall have occurred and be continuing. 13. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as soon as available, but in any event within twenty (20) days after the end of each month, a company prepared balance sheet, income statement and cash flow statement covering Lessee's operations during such period, certified by an officer of Lessee reasonably acceptable to Lessor; (b) as soon as available, but in any event within ninety (90) days after the end of Lessee's fiscal year, audited financial statements of Lessee prepared in accordance with generally accepted accounting principles, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Lessor; (c) promptly upon becoming available, copies of all statements, reports, budgets, sales projections, operating plans and notices sent or made available generally by Lessee to its security holders; (d) immediately upon receipt of notice thereof, a report of any material legal actions pending or threatened against Lessee; and (e) such other financial information as Lessor may reasonably request from time to time. 14. MAINTENANCE SERVICE CONTRACTS. Lessee shall obtain and keep in effect at all times during the Lease Term (and any renewal or extension thereof), maintenance service contracts covering the Equipment with the Equipment supplier or with suppliers of maintenance services approved by Lessor, such approval not to be unreasonably withheld. 15. INSTALLATION, HANDLING AND DELIVERY CHARGES. Any handling and delivery charge to cover all Equipment transportation, rigging, drayage, packing, installation and handling to and from vendor's plant and upon return to Lessor's designated location shall be paid by Lessee. 16. MISCELLANEOUS TAXES. Without limitation of the provisions of the Master Lease, Lessee agrees to pay and to indemnify Lessor for any sales or use tax and any property tax in connection with the sale, lease or use of the Equipment. 17. LATE FEE. Lessee shall pay a late charge on any rent payments or other sums due hereunder which are past due, in an amount equal to two percent (2%) of the past due amount, payable on demand. 18. DEFAULT RATE. The Default Rate of interest on late payments shall be eighteen percent (18%) per annum. 19. NOTICES. All notices shall be addressed as follows: If to Lessor: If to Lessee: Lighthouse Capital Partners, L.P. Symphonix Devices, Inc. 100 Drakes Landing Road, Suite 260 3047 Orchard Parkway Greenbrae, California 94904 San Jose, CA 95134 Attn: Contract Administration Attn: _________________________ Phone: (415) 459-3346 Phone: ________________________ Fax: (415) 459-4874 Fax: __________________________ 20. CONDITIONS TO THE FIRST EQUIPMENT SCHEDULE. On or prior to the date of execution of the first Equipment Schedule under this Lease Line Schedule, Lessor shall have received in form and substance satisfactory to Lessor, each of the following: (a) A Warrant substantially in the form of EXHIBIT G to the Master Lease. (b) Copies, certified by the Secretary or Assistant Secretary or Chief Financial Officer of Lessee, of: (i) the Articles of Incorporation and By- Laws of Lessee (as amended to the date of the Lease) and (ii) the 3. resolutions adopted by Lessee's board of directors authorizing the execution and delivery of this Lease, the Lease Line Schedule, the Equipment Schedules, the Warrant and the other documents referred in this Lease Line Schedule and the performance by Lessee of its obligations in such documents. (c) A Good Standing Certificate (including franchise tax status) with respect to Lessee from Lessee's state of incorporation, dated a date reasonably close to the date of acceptance of the Lease by Lessor. (d) Evidence of the insurance coverage required by SECTION 8 of the Master Lease. (e) All necessary consents of shareholders and other third parties with respect to the subject matter of the Master Lease, the Lease Line Schedule, the Equipment Schedules and the Warrant. (f) Payment of the Advance Rent. 21. CONDITIONS TO ALL FUNDINGS UNDER ALL EQUIPMENT SCHEDULES. On or prior to each funding under each Equipment Schedule under this Lease Line Schedule, each of the following conditions shall have been satisfied: (a) No Event of Default or event which, with notice or lapse of time or both, would become an Event of Default, has occurred and is continuing. (b) Lessor shall have received all necessary or desirable estoppel certificates and UCC filings, releases or terminations. (c) Lessor shall have received a landlord waiver and consent in substantially the form of EXHIBIT E to the Master Lease with respect to each equipment location. (d) There shall not have occurred (i) any material adverse change to the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Lessee, whether or not arising from transactions in the ordinary course of business, or (ii) any material adverse deviation by Lessee from the business plan of Lessee presented to and not disapproved by Lessor, since the date of the Master Lease. (e) Lessee shall have delivered to Lessor an Equipment Schedule covering the appropriate funding period. (f) Lessee shall have delivered to Lessor (i) in the case of a sale-leaseback, copies of invoices, canceled checks or other proof of payment, a Bill of Sale, a Delivery and Acceptance Certificate, and any UCC filings or other notices deemed necessary or desirable in connection with the sale- leaseback or (ii) at Lessor's request, in the case of a purchase of new equipment in excess of $25,000 from an equipment vendor, a Purchase Order and Invoice Assignment and a Delivery and Acceptance Certificate. (g) All terms and conditions in the Equipment Schedule shall have been satisfied by the Acceptance Date for the Equipment under such Equipment Schedule. (h) Lessor shall have received any security deposit provided for in the Equipment Schedule as security for Lessee's performance of its obligations hereunder. Lessor shall not be required to escrow the security deposit or credit Lessee with any interest earned thereon, and Lessor may, at its option, apply such deposit against any sum due from Lessee or paid by Lessor on Lessee's behalf, but such application shall not relieve Lessee of its obligation to pay or reimburse Lessor. (i) All other documents as Lessor shall have reasonably requested. 4. LESSEE: LESSOR: SYMPHONIX DEVICES, INC. LIGHTHOUSE CAPITAL PARTNERS, L.P. By: By: LIGHTHOUSE MANAGEMENT PARTNERS, ----------------------------- L.P., its general partner Name: By: LIGHTHOUSE CAPITAL PARTNERS, ---------------------------- INC., its general partner Title: By: ---------------------------- ---------------------------- Name: -------------------------- Title: -------------------------- ANNEX A - Stipulated Loss Value Table 5. ANNEX A STIPULATED LOSS VALUE TABLE TO LEASE LINE SCHEDULE NO. __________, dated __________, 199____, to MASTER EQUIPMENT LEASE AGREEMENT NO. __________, dated ______, 199__ ("Master Lease"), by and between LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited partnership ("Lessor"), and SYMPHONIX DEVICES, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) In the case of an Event of Loss, the Stipulated Loss Value for each item of leased Equipment is the Lessor's Cost for the item multiplied by Stipulated Loss Value Percentage for the Rent Payment Number following the month of the Event of Loss.
Stipulated Stipulated Rent Loss Rent Loss Payment Value Payment Value Number Percentage Number Percentage --------- ----------- ------- ----------- 1 111.3590% 25 69.4005% 2 109.7841% 26 67.4498% 3 108.1952% 27 65.4816% 4 106.5920% 28 63.4957% 5 104.9744% 29 61.4921% 6 103.3424% 30 59.4705% 7 101.6957% 31 57.4309% 8 100.0343% 32 55.3729% 9 98.3580% 33 53.2985% 10 96.6667% 34 51.2015% 11 94.9602% 35 49.0878% 12 93.2385% 36 46.9551% 13 91.5013% 37 44.8033% 14 89.7485% 38 42.6322% 15 87.9801% 39 40.4417% 16 86.1958% 40 38.2315% 17 84.3955% 41 36.0016% 18 82.5791% 42 33.7516% 19 80.7465% 43 31.4815% 20 78.8974% 44 29.1911% 21 77.0317% 45 26.8802% 22 75.1494% 46 24.5486% 23 73.2501% 47 22.1960% 24 71.3339% 48 20.0000%
Lessor: ____________________ Lessee: ____________________ 6. EXHIBIT B EQUIPMENT SCHEDULE NO. __________ dated _________, 199___ ("Equipment Schedule") to LEASE LINE SCHEDULE NO. _______ dated __________, 199____ ("Lease Line Schedule"), to MASTER EQUIPMENT LEASE AGREEMENT NO. __________ dated __________, 199___ ("Master Lease"), by and between LIGHTHOUSE CAPITAL PARTNERS, L.P. ("Lessor") and SYMPHONIX DEVICES, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.)
1. Total Lessor's Cost: The total Lessor's Cost under this Equipment Schedule shall be an amount equal to the sum of the Lessor's Cost under each Delivery and Acceptance Certificate executed by Lessee between the date of this Equipment Schedule and the Commencement Date, and which refers to this Equipment Schedule. 2. Lease Term: Forty-Eight (48) Months 3. Commencement Date: -------------------- 4. Interim Rent: On or about the Commencement Date, Lessor shall send Lessee a "Summary of Equipment Schedule" in the form of ANNEX A hereto, specifying, among other things, the applicable Interim Rent; provided, however, that any failure by Lessor to send Lessee a Summary Equipment Schedule shall not relieve Lessee of its obligation to pay rent hereunder. 5. Rental Factor: The Rental Factor shall be set forth in the Summary of Equipment Schedule. 6. Rental Payments: The amount of the monthly Rental Payments, calculated in accordance with the Lease Line Schedule and payable monthly in advance, shall be set forth in the Summary of Equipment Schedule. Payments shall be made to Lessor's address set forth in the Lease Line Schedule. 7. Rental Payment Dates: First day of each calendar month. 8. Equipment Description. The Equipment shall be described in each Delivery and Acceptance Certificate executed by Lessee between the date of this Equipment Schedule and the Commencement Date, and which refers to this Equipment Schedule. Delivery and Acceptance Certificates under this Equipment Schedule must be received by Lessor no later than the Commencement Date. 9. Equipment Location: ---------------------------------------------------- 10. Terms and conditions. The terms and conditions of the above-referenced Master Lease and Lease Line Schedule are incorporated herein. In addition, the following attachments apply to this Equipment Schedule only: . ------------------
1. 11. No Default. No Event of Default or event which, with notice or lapse of time or both, would become an Event of Default, has occurred and is continuing. LESSEE: LESSOR: SYMPHONIX DEVICES, INC. LIGHTHOUSE CAPITAL PARTNERS, L.P. By: By: LIGHTHOUSE MANAGEMENT PARTNERS, ----------------------------- L.P., its general partner Name: By: LIGHTHOUSE CAPITAL PARTNERS, ---------------------------- INC., its general partner Title: By: ---------------------------- ---------------------------- Name: -------------------------- Title: -------------------------- 2. ANNEX A SUMMARY OF EQUIPMENT SCHEDULE NO. __________ to LEASE LINE SCHEDULE NO. ______ dated _______, 199__, to MASTER EQUIPMENT LEASE AGREEMENT NO. __________ dated __________, 199___ ("Master Lease") by and between LIGHTHOUSE CAPITAL PARTNERS, L.P. ("Lessor") and SYMPHONIX DEVICES, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) 1. Total Lessor's Cost: ----------------------------- 2. Total Interim Rent: $ ----------------------------- 3. Rental Factor: % ----------------------------- 4. Rental Payments: Payments of $ ----------------------------- ---------- each, payable monthly in advance 5. Amount of Advance Rent applied to this Equipment Schedule: $ ---------------- LESSOR: LIGHTHOUSE CAPITAL PARTNERS, L.P. By: LIGHTHOUSE MANAGEMENT PARTNERS, L.P., its general partner By: LIGHTHOUSE CAPITAL PARTNERS, INC., its general partner By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 3. EXHIBIT C DELIVERY AND ACCEPTANCE CERTIFICATE UNDER EQUIPMENT SCHEDULE NO. __________, dated ___________, 199___, to LEASE LINE SCHEDULE NO. _____, dated ________, 199__, to MASTER EQUIPMENT LEASE AGREEMENT NO. __________, dated __________, 199___ by and between LIGHTHOUSE CAPITAL PARTNERS, L.P. ("Lessor") and SYMPHONIX DEVICES, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) 1. Installation Address: --------------------------------------- 2. Lessor's Cost: -------------------------- 3. Commencement Date: ---------------- 4. Equipment Description: MODEL & ORIGINAL UNIT QTY. DESCRIPTION PURCHASE PRICE LESSOR'S COST ---- ----------- -------------- ------------- SEE ANNEX A 5. Lessee acknowledges receipt and acceptance of the Equipment listed in ANNEX A and agrees the Equipment has been delivered and is ready for use under the terms of the above-referenced Master Equipment Lease Agreement, Lease Line Schedule, and Equipment Schedule, the terms and conditions of which are incorporated herein, including, without limitation, the obligation to pay Interim Rent and to make Rental Payments. Acceptance Date: _________________, 19____. LESSEE: SYMPHONIX DEVICES, INC. By: --------------------------------- Name: --------------------------- Title: -------------------------- ANNEX A EQUIPMENT DESCRIPTION Model & Original Unit Quantity Description Purchase Price Lessor's Cost - -------- ----------- -------------- ------------- 2. ANNEX B-1 BILL OF SALE For and in consideration of the sum of One Dollar ($1.00) and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, SYMPHONIX DEVICES, INC. (herein "Seller"), does hereby sell, grant, transfer and deliver all right, title and interest in and to the equipment further described on ANNEX A hereto (herein the "Equipment"), together with all warranties, guarantees or other similar rights with respect to the Equipment ("Equipment Warranties") unto LIGHTHOUSE CAPITAL PARTNERS, L.P. (herein "Purchaser") and to its successors and assigns to have and to hold said Equipment and the Equipment Warranties forever. Except for the Equipment Warranties, the Equipment is sold "as is" and "where is" and the description of the Equipment is for the sole purpose of identifying it and is not part of the basis of the bargain. Seller represents and warrants that it holds all right, title and interest in and to the Equipment being transferred free and clear of all liens and encumbrances of any kind and Seller does for itself, its successors and assigns covenant and agree with Purchaser, its successors and assigns, to warrant and defend the sale of the Equipment and the transfer of the Equipment Warranties unto Purchaser, its successors and assigns against all and every person and persons whomsoever claiming or laying claim to the same, except for any defects in title or liens or encumbrances in or to the Equipment arising solely by reason of Purchaser's own acts. THE WARRANTY SET FORTH IN THE FOREGOING PARAGRAPH AND THE EQUIPMENT WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES OF SELLER, WHETHER WRITTEN, ORAL OR IMPLIED, AND SELLER SHALL NOT, BY VIRTUE OF HAVING SOLD THE EQUIPMENT HEREWITH, BE DEEMED TO HAVE MADE ANY REPRESENTATION OF WARRANTY AS TO THE MERCHANTABILITY, FITNESS, DESIGN OR CONDITION OF, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN, THE EQUIPMENT. IN WITNESS WHEREOF, we have set our hand and seal this _________ day of _________, 19_______. SYMPHONIX DEVICES, INC. By:___________________________ Name:_________________________ Title: _______________________ 1. ANNEX B-2 PURCHASE ORDER AND INVOICE ASSIGNMENT THIS PURCHASE ORDER ASSIGNMENT, dated as of ______________________, 199____________ (this "Assignment"), between SYMPHONIX DEVICES, INC., a California corporation ("Assignor") and LIGHTHOUSE CAPITAL PARTNERS, L.P. ("Assignee"). W I T N E S S E T H : WHEREAS, Assignor has submitted its Purchase Orders and Invoices listed in SCHEDULE 1 hereto (collectively, the "Purchase Orders"), to ________________________________________________________________________________ ___________________________________________________________ (the "Vendor") concerning certain units of equipment (the "Units") listed in SCHEDULE 1 hereto to be subject to a Master Equipment Lease Agreement No. ____, dated as of _____________________________________________, 19___________ (the "Master Lease"), between Assignor and Assignee (all terms used but not otherwise defined herein shall have the meaning given to them in the Master Lease): NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Assignor does hereby sell, assign, transfer and set over unto Assignee, all of the Assignor's rights to and interests in the Purchase Orders as and to the extent that the same relates to the Units. The assignment herein shall include, without limitation, the right of Assignee to purchase the Units pursuant to the Purchase Orders and to take title to the Units, all claims for damages in respect of the Units arising as a result of any default by Vendor under the Purchase Orders, together with any and all rights of Assignor to compel performance of the terms of the Purchase Orders in respect of the Units. 2. The exercise by Assignee of any of the rights assigned hereunder shall not release Assignor from any of its duties or obligations to Vendor under the Purchase Orders except to the extent that such exercise by Assignee shall constitute performance of such duties and obligations. 3. Upon satisfaction of the conditions set forth in the applicable Lease Line Schedule to the Master Lease with respect to the Units, Assignee shall purchase such Unit by paying or causing to be paid, by check mailed or delivered to Vendor, on such date or thereafter as permitted by Vendor, an amount equal to the purchase price of the Unit, as such amount may be adjusted in accordance with the terms of the Purchase Orders and reflected on invoices prepared by Vendor to Assignee on or before the date of delivery and acceptance of the Unit. 4. Assignor agrees that it will, at any time and from time to time, upon the written consent of Assignee, promptly and duly exercise and deliver any and all such further instruments and documents and take such further action as Assignee may reasonably request in order that Assignee may obtain the full benefits of this Agreement and of the rights and powers herein granted. 5. Assignor represents and warrants that the Purchase Orders are in full force and effect and that Assignor is not in default under any of them. Assignor further represents and warrants that Assignor has not assigned or pledged, and so long as this Assignment shall remain in effect, will not assign or pledge, the whole or any part of the rights hereby assigned or any of its rights with respect to the Units under the Purchase Orders to anyone other than Assignee. 1. IN WITNESS WHEREOF, the parties hereto have caused this Purchase Order Assignment to be duly executed as of the day and year first above written. SYMPHONIX DEVICES, INC. LIGHTHOUSE CAPITAL PARTNERS, L.P. By: By: LIGHTHOUSE MANAGEMENT PARTNERS, ----------------------------- L.P., its general partner Name: By: LIGHTHOUSE CAPITAL PARTNERS, ---------------------------- INC., its general partner Title: By: ---------------------------- ---------------------------- Name: -------------------------- Title: -------------------------- Acknowledged and Consented to this ___________________ day of______________________, 199_______________. __________________________________________(Vendor) By:____________________________ Title:_______________________________ 2. SCHEDULE I TO PURCHASE ORDER AND INVOICE ASSIGNMENT 3. EXHIBIT D NOTICE OF ELECTION under LEASE LINE SCHEDULE NO. _____, dated ________, 199__, to MASTER EQUIPMENT LEASE AGREEMENT NO. __________, dated __________, 199___ ("Master Lease") by and between LIGHTHOUSE CAPITAL PARTNERS, L.P. ("Lessor") and SYMPHONIX DEVICES, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) 1. Pursuant to SECTION 4(D) of the Master Lease, Lessee hereby elects the Lease Termination Option indicated below for the above Lease Line Schedule. Option Election (check one) ------ -------------------- Purchase ______________________ Renew ______________________ Return ______________________ 2. If the renewal option is selected, then Lessee and Lessor must agree upon the rental period and rental amount. If Lessee and Lessor are unable to agree upon the terms of renewal, then this Notice of Election shall be deemed invalid and a new Notice of Election must be submitted by Lessee. Dated: __________________ SYMPHONIX DEVICES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 1. EXHIBIT E RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: Lighthouse Capital Partners, L.P. 100 Drakes Landing Road, Suite 260 Greenbrae, California 94904 Attn: Contract Administration LANDLORD'S WAIVER AND CONSENT THIS LANDLORD'S WAIVER AND CONSENT (this "Waiver"), dated as of _________________________________________, 199____________, is executed by and between _____________, a _______________ ("Landlord") and LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited partnership ("Lessor"). RECITALS A. Landlord and SYMPHONIX DEVICES, INC., a California corporation ("Tenant") are parties to a [Lease Agreement], dated as of , 19 (together with any other agreement between Landlord and Tenant relating to the Premises, as defined below, all as amended from time to time, to be referred to herein collectively as the "Lease"), pursuant to which Landlord has leased to Tenant that certain real property commonly known as , and more particularly described in ANNEX A hereto (the "Premises"). B. Tenant and Lessor intend to or have entered into a Master Equipment Lease Agreement No. _____ dated as of ____________, 199____________ (the "Credit Agreement") pursuant to which Lessor has agreed or will agree to lease to Tenant from time to time certain equipment (the "Equipment") which will be located on the Premises. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Lessor agree as follows: 1. WAIVER AND CONSENT. Landlord consents to the location of the Equipment on the Premises and does irrevocably waive, disclaim and relinquish and assign to Lessor any and all rights to impose, receive, assert or enforce any lien, encumbrance, charge, security interest, ownership interest, claim or demand of any kind against or involving the Equipment, whether arising by common law, statute or consensually (under the Lease or otherwise) and whether now in existence or hereafter created, including, but not limited to, those for rent or other right of payment. This waiver, disclaimer, relinquishment and assignment shall survive the termination of the Lease. Landlord further agrees that (a) neither the Equipment nor any item thereof shall become part of, or otherwise be or become a fixture attached to, the Premises, notwithstanding the manner of the Equipment's annexation, the Equipment's adaptability to the uses and purposes for which the Premises are used, and the intentions of the party making the annexation; (b) the Equipment (or any item thereof) may be repossessed by Lessor; (c) in connection with such repossession or otherwise, Lessor, and any of its agents and employees, may enter upon the Premises for the purposes of (i) guarding and maintaining the Equipment (or any item thereof), (ii) showing the Equipment (or any item thereof) to prospective lenders, buyers, lessees and sublessees, as applicable, and any of their respective agents and employees, (iii) preparing, disassembling, dismantling, loading and/or removing the Equipment (or any item thereof), and (iv) general inspections of the Equipment pursuant to the Credit Agreement; and (d) the right of Lessor to enter the Premises and the other rights granted to Lessor in this Waiver shall not terminate until thirty (30) days after Lessor receives written notice from Landlord of the termination of the Lease. If Lessor should exercise its rights hereunder (and the failure to exercise such rights shall not be construed as a waiver thereof), Landlord agrees upon receiving prior written notice, to provide ingress and egress to effect such exercise as well as provide reasonably adequate space contiguous to the location of the Equipment to permit the exercise of such rights. Landlord further agrees that Lessor has no obligation to exercise any right granted to Lessor in this Waiver and that Lessor may elect to remove only a portion or none of the Equipment from the Premises. 2. COSTS. Lessor agrees to indemnify and hold the Landlord harmless from any out-of-pocket costs incurred by Landlord for any physical damage to the Premises caused by Lessor solely from the exercise of its rights under clause (b) or (c) of Paragraph 1 above. 3. LEASE DEFAULTS. Landlord further agrees to provide Lessor written notice of any default or event of default under the Lease (each a "Default Notice") simultaneously with the giving of notice of the same to Tenant or, if no such notice is required under the Lease, at least thirty (30) days prior to the date Landlord would be entitled to terminate the Lease. Each such notice shall be sent to the address of Lessor set forth below the signature of Lessor on the last page hereof or such other address as Lessor may from time to time provide to Landlord, and shall be deemed delivered (i) in the case of notice by letter, five (5) business days after deposited in the United States mail registered and return receipt requested, (ii) in the case of notice by overnight courier, two (2) business days after delivery to such courier and (iii) in the case of notice given by telex or telecommunication, when given or sent with electronic confirmation of receipt. During any time period when Tenant is in default under the Lease, Lessor shall have the option, but not the obligation, to cure any such default. Landlord shall accept such cure if it occurs within thirty (30) days after Lessor has received the relevant Default Notice as fully as if Tenant had fully performed its obligation under the Lease. Upon curing any such default, Lessor shall be subrogated to the rights of Landlord against Tenant and, as between Landlord and Tenant, such cured defaults shall no longer exist. 4. LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord warrants and represents to Lessor that (a) Landlord is the lessor under the Lease; (b) there are no other agreements between the parties affecting or relating to the Premises; (c) Landlord has all requisite power and authority to execute and deliver this Waiver and no consents from any third party are required to do so; (d) Landlord is the sole owner of the landlord's interest under the Lease and has not conveyed, transferred or assigned any part of that interest to any other person or entity; (e) no event of default (nor any event which with the passage of time would constitute an event of default) has occurred under the Lease; (f) there exists no litigation affecting title to the Premises or any adverse claim with respect to the Premises of which Landlord has received notice; (g) there is no condemnation proceeding pending with respect to any part of the Premises, nor any threat thereof, of which the Landlord has received notice; (h) the Lease is in full force and effect; and (i) the Premises are not subject to any mortgage or other security interest in favor of any person which has not executed an attornment agreement acceptable to Lessor with respect to this Waiver. 5. MISCELLANEOUS. This Waiver and all rights granted to Lessor hereunder shall remain in effect so long as there are any obligations owing by Tenant under the Credit Agreement or any present or future agreement between Tenant and Lessor which involves the Equipment. All the terms and provisions of this Waiver shall be binding on and inure to the benefit of the respective successors and assigns of Landlord and Lessor, and Landlord covenants and agrees that any assignment, mortgage or other transfer of all or any part of its interest as the owner and/or landlord of the Premises shall provide and shall be subject and subordinate to all the terms and provisions hereof. Landlord shall provide each of Tenant and Lessor a duly executed copy of the agreement evidencing such subordination. Such agreement shall be in form and substance reasonably satisfactory to Lessor. The rights and benefits of this Waiver may be assigned or transferred by Lessor or to third parties who may become the lessor, directly or indirectly, to Tenant. Lessor shall provide subsequent written notice to Landlord and Tenant of the assignment or transfer. Headings in this Waiver are for convenience of reference only and are not part of the substance hereof. This Waiver shall be governed by and construed in accordance with the laws of the State of California. 2. IN WITNESS WHEREOF, Landlord and Lessor have executed this Waiver as of the date and year first written above. ----------------------------------- By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Address: ----------------------------------- ----------------------------------- ----------------------------------- Attention: ------------------------- LIGHTHOUSE CAPITAL PARTNERS, L.P. By: LIGHTHOUSE MANAGEMENT PARTNERS, L.P., its general partner By: LIGHTHOUSE CAPITAL PARTNERS, INC., its general partner By: --------------------------- Name: ------------------------- Title: ------------------------ Address: Lighthouse Capital Partners, L.P. 100 Drakes Landing Road, Suite 260 Greenbrae, California 94904 Attention: Contract Administrator 3. ANNEX A LEGAL DESCRIPTION OF PREMISES [To Be Provided By Tenant] 4. NOTARY ACKNOWLEDGEMENT TO LANDLORD'S WAIVER AND CONSENT State of ) ------------------------ ) County of ) ---------------- On , 19 before me, the undersigned, personally appeared -- ------- , personally known to me (or proved to me on the basis of satisfactory - ---------- evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ______________________________________________ (Seal) State of ) ------------------------ ) County of ) ---------------- On , 19 before me, the undersigned, personally appeared ------- -------- , personally known to me (or proved to me on the basis of satisfactory - ---------- evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ____________________________ (Seal) 5. EXHIBIT F ACKNOWLEDGEMENT FROM USER OF MOBILE EQUIPMENT UNDER EQUIPMENT SCHEDULE NO. __________, dated ___________, 199___ ("Equipment Schedule"), to LEASE LINE SCHEDULE NO. _____, dated ________, 199__ ("Lease Line Schedule"), to MASTER EQUIPMENT LEASE AGREEMENT NO. __________, dated __________, 199___ ("Master Lease") by and between LIGHTHOUSE CAPITAL PARTNERS, L.P. ("Lessor") and SYMPHONIX DEVICES, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) 1. The undersigned acknowledges and agrees that: (a) the Equipment listed in ANNEX A is owned by Lessor and is subject to the terms and conditions of the Master Lease, Lease Line Schedule and Equipment Schedule; and (b) upon the occurrence and continuance of an Event of Default under the Master Lease, Lessor may, among other things, take possession of the Equipment and upon request the undersigned agrees to make such Equipment available to Lessor. 2. The undersigned's address is: _______________________ _______________________ _______________________ Phone: ________________ Fax: __________________ IN WITNESS WHEREOF, the undersigned has executed this Acknowledgement as of the date written below. Dated: _______________, 199____ ------------------------------------ Name: ------------------------------- EXHIBIT G WARRANT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS IS AVAILABLE WITH RESPECT THERETO. PREFERRED STOCK PURCHASE WARRANT Warrant No. 1001 Number of Shares 37,000 ---- SYMPHONIX DEVICES, INC, Void after October 31, 2004 1. ISSUANCE. This Warrant is issued to LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited partnership, by SYMPHONIX DEVICES, INC., a California corporation (hereinafter with its successors called the "Company"). 2. PURCHASE PRICE; NUMBER OF SHARES. The registered holder of this Warrant (the "Holder"), commencing on the date hereof, is entitled upon surrender of this Warrant with the subscription form annexed hereto duly executed, at the principal office of the Company, to purchase from the Company at a price per share (the "Purchase Price") of $1.00, Thirty-Seven Thousand (37,000) fully paid and nonassessable shares (the "Shares") of Series A Preferred Stock, no par value, of the Company (the "Preferred Stock"). Until such time as this Warrant is exercised in full or expires, the Purchase Price and the securities issuable upon exercise of this Warrant are subject to adjustment as hereinafter provided. The person or persons in whose name or names any certificate representing shares of Preferred Stock is issued hereunder shall be deemed to have become the holder of record of the shares represented thereby as at the close of business on the date this Warrant is exercised with respect to such shares, whether or not the transfer books of the Company shall be closed. 3. PAYMENT OF PURCHASE PRICE. The Purchase Price may be paid (i) in cash or by check, (ii) by the surrender by the Holder to the Company of any promissory notes or other obligations issued by the Company, with all such notes and obligations so surrendered being credited against the Purchase Price in an amount equal to the principal amount thereof plus accrued interest to the date of surrender, or (iii) by any combination of the foregoing. 4. NET ISSUE ELECTION. The Holder may elect to receive, without the payment by the Holder of any additional consideration, shares of Preferred Stock equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the net issue election notice annexed hereto duly executed, at the principal office of the Company. Thereupon, the Company shall issue to the Holder such number of fully paid and nonassessable shares of Preferred Stock as is computed using the following formula: Y (A-B) X= ------- A where: X = the number of shares of Preferred Stock to be issued to the Holder pursuant to this SECTION 4. Y = the number of shares of Preferred Stock covered by this Warrant in respect of which the net issue election is made pursuant to this SECTION 4. 1. A = the fair market value of one share of Preferred Stock, as determined in good faith by the Board, as at the time the net issue election is made pursuant to this SECTION 4 or in the case of an Accelerating Merger as contemplated by SECTION 10 , the value received per share of Preferred Stock by all holders of the Preferred Stock as determined in good faith by the Board. B = the Purchase Price in effect under this Warrant at the time the net issue election is made pursuant to this SECTION 4. 5. PARTIAL EXERCISE. This Warrant may be exercised in part, and the Holder shall be entitled to receive a new warrant, which shall be dated as of the date of this Warrant, covering the number of shares in respect of which this Warrant shall not have been exercised. 6. FRACTIONAL SHARES. In no event shall any fractional share of Preferred Stock be issued upon any exercise of this Warrant. If, upon exercise of this Warrant as an entirety, the Holder would, except as provided in this SECTION 6, be entitled to receive a fractional share of Preferred Stock, then the Company shall issue the next higher number of full shares of Preferred Stock, issuing a full share with respect to such fractional share. 7. EXPIRATION DATE; AUTOMATIC EXERCISE. This Warrant shall expire at the close of business on October 31, 2004, and shall be void thereafter. Notwithstanding the foregoing, this Warrant shall automatically be deemed to be exercised in full pursuant to the provisions of SECTION 4 hereof, without any further action on behalf of the Holder, immediately prior to the time this Warrant would otherwise expire pursuant to the preceding sentence. 8. RESERVED SHARES; VALID ISSUANCE. The Company covenants that it will at all times from and after the date hereof reserve and keep available such number of its authorized shares of Preferred Stock and Common Stock, no par value, of the Company (the "Common Stock"), free from all preemptive or similar rights therein, as will be sufficient to permit, respectively, the exercise of this Warrant in full and the conversion into shares of Common Stock of all shares of Preferred Stock receivable upon such exercise. The Company further covenants that such shares as may be issued pursuant to such exercise and/or conversion will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 9. STOCK SPLITS AND DIVIDENDS. If after the date hereof the Company shall subdivide the Preferred Stock, by split-up or otherwise, or combine the Preferred Stock, or issue additional shares of Preferred Stock in payment of a stock dividend on the Preferred Stock, the number of shares of Preferred Stock issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination, and the Purchase Price shall forthwith be proportionately decreased in the case of a subdivision or stock dividend, or proportionately increased in the case of a combination. 10. MERGERS AND RECLASSIFICATIONS. If after the date hereof the Company shall enter into any Reorganization (as hereinafter defined), then, as a condition of such Reorganization, lawful provisions shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall thereafter have the right to purchase, at a total price not to exceed that payable upon the exercise of this Warrant in full, the kind and amount of shares of stock and other securities and property receivable upon such Reorganization by a holder of the number of shares of Preferred Stock which might have been purchased by the Holder immediately prior to such Reorganization, and in any such case appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including without limitation, provisions for the adjustment of the Purchase Price and the number of shares issuable hereunder) shall thereafter be applicable in relation to any shares of stock or other securities and property thereafter deliverable upon exercise hereof. For the purposes of this SECTION 10, the term "Reorganization" shall include without limitation any reclassification, capital reorganization or change of the Preferred Stock (other than as a result of a subdivision, combination or stock dividend provided for in SECTION 9 hereof), or any consolidation of the Company with, or 2. merger of the Company into, another corporation or other business organization (other than a merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding Preferred Stock), or any sale or conveyance to another corporation or other business organization of all or substantially all of the assets of the Company. Notwithstanding the foregoing, the unexercised portion of this Warrant shall automatically be deemed to be exercised in full upon satisfaction of each of the following conditions precedent: (a) the Company shall enter into a merger or consolidation of the Company with or into another corporation where the Company is not the surviving corporation (an "Accelerating Merger") and such Accelerating Merger results in a value of $3.00 or more per share of Preferred Stock (as proportionately adjusted for any stock splits, stock dividends or recapitalizations relating to the Preferred Stock and occurring after the date of this Warrant); (b) the consideration received by the holders of Preferred Stock of the Company in the Accelerating Merger consists of either cash or Liquid Stock (defined below) or a combination of cash and Liquid Stock and Holder receives the same cash and/or Liquid Stock in the same proportion as the other holders of Preferred Stock; and (c) Holder receives at least twenty (20) business days written notice prior to the effective date of the Accelerating Merger. Such notice shall contain such details of the proposed Accelerating Merger as are reasonable in the circumstances and notice that this Warrant may expire upon closing thereof in accordance with the terms and conditions of this SECTION 10. Upon failure of Holder to exercise this Warrant in full prior to the effective date of an Accelerating Merger, the unexercised portion of this Warrant shall be deemed to have been automatically exercised in full pursuant to SECTION 4 hereof immediately prior to such effective date. If the closing of the Accelerating Merger does not take place, the Company shall promptly notify Holder that such proposed transaction has been terminated. Anything to the contrary in this Warrant notwithstanding, Holder may rescind the exercise of its purchase rights promptly after such notice of termination of the proposed transaction if the exercise or conversion of the Warrant occurred after the Company notified the Holder that the Accelerating Merger was proposed, or if the exercise or conversion were otherwise precipitated by such proposed Accelerating Merger. In the event of such rescission, the Warrant will continue to be exercisable on the same terms and conditions as if the Company's notice of the Accelerating Merger had not been given. "Liquid Stock" means stock or other securities (i) which are freely tradeable and which have been registered pursuant to a registration statement or similar document in compliance with the Securities Act of 1933, as amended, and for which the registration statement or similar document has gone effective or (ii) which are freely tradeable by virtue of their issuance pursuant to a transaction described in Section 3(a)(10) of the Securities Act of 1933. as amended. 11. CERTIFICATE OF ADJUSTMENT. Whenever the Purchase Price is adjusted, as herein provided, the Company shall promptly deliver to the Holder a certificate of the Company's chief financial officer setting forth the Purchase Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. 12. NOTICES OF RECORD DATE, ETC. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase, sell or otherwise acquire or dispose of any shares of stock of any class or any other securities or property, or to receive any other right; 3. (b) any reclassification of the capital stock of the Company, capital reorganization of the Company, consolidation or merger involving the Company, or sale or conveyance of all or substantially all of its assets; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; then and in each such event the Company will provide or cause to be provided to the Holder a written notice thereof. Such notice shall be provided at least twenty (20) business days prior to the date specified in such notice on which any such action is to be taken. 13. REPRESENTATIONS, WARRANTIES AND COVENANTS. This Warrant is issued and delivered by the Company and accepted by each Holder on the basis of the following representations, warranties and covenants made by the Company: A. The Company has all necessary authority to issue, execute and deliver this Warrant and to perform its obligations hereunder. This Warrant has been duly authorized, issued, executed and delivered by the Company and is the valid and binding obligation of the Company, enforceable in accordance with its terms. B. The shares of Preferred Stock issuable upon the exercise of this Warrant have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable. C. The issuance, execution and delivery of this Warrant do not, and the issuance of the shares of Preferred Stock upon the exercise of this Warrant in accordance with the terms hereof will not, (i) violate or contravene the Company's articles of incorporation or by-laws, or any law, statute, regulation, rule, judgment or order applicable to the Company, (ii) violate, contravene or result in a breach or default under any contract, agreement or instrument to which the Company is a party or by which the Company or any of its assets are bound or (iii) require the consent or approval of or the filing of any notice or registration with any person or entity. D. As long as this Warrant is, or any shares of Preferred Stock issued upon exercise of this Warrant or any shares of Common Stock issued upon conversion of such shares of Preferred Stock are, issued and outstanding, the Company will provide to the Holder the financial and other information described in SECTION 12 of that certain Lease Line Schedule No. I to Master Equipment Lease Agreement No. 1001 between the Company and Lighthouse Capital Partners, ---- L.P. dated as of December 2, 1994. ---------- ---- E. The Company hereby grants to the Holder the Registration Rights contained in Section 3 of the Company's Investor Rights Agreement dated as of July 27, 1994, so that (i) the shares of Common Stock issuable upon conversion of the shares of Preferred Stock issuable upon exercise of this Warrant shall be Registrable Securities, and (ii) the Holder shall be a "Holder", for all purposes of such Investor Rights Agreement. 14. AMENDMENT. The terms of this Warrant may be amended, modified or waived only with the written consent of the Holder. 15. NOTICES, TRANSFERS, ETC. A. Any notice or written communication required or permitted to be given to the Holder may be given by certified mail or delivered to the Holder at the address most recently provided by the Holder to the Company. B. Subject to compliance with applicable federal and state securities laws, this Warrant may be transferred by the Holder with respect to any or all of the shares purchasable hereunder. Upon surrender of this Warrant to the Company, together with the assignment notice annexed hereto duly executed, for transfer of this Warrant as an entirety by the Holder, the Company shall issue a new warrant of the same denomination to the 4. assignee. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, by the Holder for transfer with respect to a portion of the shares of Preferred Stock purchasable hereunder, the Company shall issue a new warrant to the assignee, in such denomination as shall be requested by the Holder hereof, and shall issue to such Holder a new warrant covering the number of shares in respect of which this Warrant shall not have been transferred. C. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new warrant of like tenor and denomination and deliver the same (i) in exchange and substitution for and upon surrender and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or destroyed, upon receipt of an affidavit of the Holder or other evidence reasonably satisfactory to the Company of the loss, theft or destruction of such Warrant. 16. NO IMPAIRMENT. The Company will not, by amendment of its articles of incorporation or through any reclassification, capital reorganization, consolidation, merger, sale or conveyance of assets, dissolution, liquidation, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance of performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder. 17. GOVERNING LAW. The provisions and terms of this Warrant shall be governed by and construed in accordance with the internal laws of the State of California. 18. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon the Company's successors and assigns and shall inure to the benefit of the Holder's successors, legal representatives and permitted assigns. 19. BUSINESS DAYS. If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Saturday or Sunday or a legal holiday in California, then such action may be taken or right may be exercised on the next succeeding day which is not a Saturday or Sunday or such a legal holiday. 20. QUALIFYING PUBLIC OFFERING. If the Company shall effect a firm commitment underwritten public offering of shares of Common Stock which results in the conversion of the Preferred Stock into Common Stock pursuant to the Company's Articles of Incorporation in effect immediately prior to such offering, then, effective upon such conversion, this Warrant shall change from the right to purchase shares of Preferred Stock to the right to purchase shares of Common Stock, and the Holder shall thereupon have the right to purchase, at a total price equal to that payable upon the exercise of this Warrant in full, the number of shares of Common Stock which would have been receivable by the Holder upon the exercise of this Warrant for shares of Preferred Stock immediately prior to the such conversion of such shares of Preferred Stock into shares of Common Stock, and in such event appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including, without limitation, provisions for the adjustment of the Purchase Price and of the number of shares purchasable upon exercise of this Warrant) shall thereafter be applicable to any shares of Common Stock deliverable upon the exercise hereof. Dated: December 2 , 1994 SYMPHONIX DEVICES, INC, ---------------------- ----- /s/ HARRY S. ROBBINS ----------------------------- (Corporate Seal) By: Harry S. Robbins ------------------------- Title: President ---------------------- Attest: - ------------------------------------ 5. Subscription To: Date: ---------------------------------- --------------------------------- The undersigned hereby subscribes for shares of ----------------------- preferred Stock covered by this Warrant. The certificate(s) for such shares shall be issued in the name of the undersigned or as otherwise indicated below: -------------------------------- Signature -------------------------------- Name in Registration -------------------------------- Mailing Address Net Issue Election Notice To: Date: ---------------------------------- --------------------------------- The undersigned hereby elects under SECTION 4 to surrender the right to purchase shares of Preferred Stock pursuant to this Warrant. The -- certificate(s) for the shares issuable upon such net issue election shall be issued in the name of the undersigned or as otherwise indicated below. -------------------------------- Signature -------------------------------- Name in Registration -------------------------------- Mailing Address 6. Assignment For value received __________________ hereby sells, assigns and transfers unto ___________________________________________________________________________ ________________________________________________________________________________ [Please print or typewrite name and address of Assignee] ________________________________________________________________________________ the within Warrant, and does hereby irrevocably constitute and appoint _________ _________________ its attorney to transfer the within Warrant on the books of the within named Company with full power of substitution on the premises. Dated: ______________________ __________________________________________ In the Presence of: _____________________________ 7. EX-10.6 11 ASSIGNMENT TO VIBRIX EXHIBIT 10.6 ASSIGNMENT TO VIBRX, INC. In exchange for the consideration set forth on Exhibit A attached hereto, Symphonix Devices, Inc. ("Symphonix") hereby assigns to VibRx, Inc. ("VibRx") all of the right, title and interest of Symphonix in and to any and all existing inventions, original works of authorship, developments, improvements, trade secrets, patents and patent applications related to (i) an apparatus and method for sonically enhanced drug delivery and (ii) an apparatus and method for sonically enhanced drug delivery with MEMS. With respect to the original works of authorship, developments, improvements, trade secrets, patents and patent applications assigned by Symphonix to VibRx hereunder, Symphonix will assist VibRx in any reasonable manner to obtain for VibRx's benefit patents and/or copyrights in any and all countries and Symphonix will execute, when requested, patent and/or copyright applications and assignments thereof to VibRx or persons designated by it, and any other lawful documents deemed necessary by VibRx to carry out the purposes of this Assignment. Symphonix will further assist VibRx in every way to enforce any patents and/or copyrights obtained, including without limitation, testifying in any suit or proceeding involving any of said patents and/or copyrights, or by executing any documents deemed necessary by VibRx. Dated: March 14, 1997 SYMPHONIX DEVICES, INC. By: /s/ Alfred G. Merriweather --------------------------- Chief Financial Officer Title: ___________________________ EXHIBIT A --------- 1. Repayment of all expenses incurred by Symphonix in preparing the Patent Applications. 2. Issuance of shares of VibRx equal to 20% of the outstanding capital stock of VibRx (including reserved shares) immediately prior to the closing of an initial financing of at least $500,000. 3. VibRx would assume all patent expenses with regard to the drug delivery patent applications. 4. For a period of three years after the effective date of this Assignment, VibRx agrees to not solicit or hire any Symphonix employee while they are employed by Symphonix and for one year thereafter without the consent of the board of directors of Symphonix. Harry Robbins would, however, be entitled to spend a limited amount of time (less than 10 hours per week) outside of normal business hours as a consultant, officer and/or director of VibRx. EX-10.7 12 SERIES D PREFERRED STOCK PURCHASE AGREEMENT Exhibit 10.7 SYMPHONIX DEVICES, INC. SERIES D PREFERRED STOCK PURCHASE AGREEMENT JUNE 11, 1997 TABLE OF CONTENTS
PAGE ---- SECTION 1 Authorization and Sale of the Shares................... -1- ------------------------------------ 1.1 Authorization.......................................... -1- ------------- 1.2 Sale and Purchase of the Shares........................ -1- ------------------------------- 1.3 Purchases and Sales Subsequent to the Closing.......... -1- -------------------------------------------- SECTION 2 Closing Date; Delivery................................. -2- ---------------------- 2.1 Closing Date........................................... -2- ------------ 2.2 Closing................................................ -2- ------- SECTION 3 Representations of the Company......................... -2- ------------------------------ 3.1 Organization and Standing.............................. -2- ------------------------- 3.2 Corporate Power........................................ -3- --------------- 3.3 Capitalization......................................... -3- -------------- 3.4 Authorization.......................................... -4- ------------- 3.5 Absence of Changes..................................... -4- ------------------ 3.6 Title to Properties and Assets; Liens, etc............. -5- ------------------------------------------ 3.7 Financial Statements................................... -5- -------------------- 3.8 Patents, Trademarks, and Trade Secrets................. -5- -------------------------------------- 3.9 Compliance with Other Instruments, None Burdensome, etc -6- ------------------------------------------------------- 3.10 Litigation, etc........................................ -6- --------------- 3.11 Registration Rights.................................... -7- ------------------- 3.12 Governmental Consent, etc.............................. -7- ------------------------- 3.13 Offering............................................... -7- -------- 3.14 Disclosure............................................. -7- ---------- 3.15 No Conflicting Agreements.............................. -7- ------------------------- 3.16 Contracts and Other Commitments........................ -7- ------------------------------- 3.17 Subsidiaries........................................... -8- ------------ 3.18 Manufacturing Rights................................... -8- -------------------- 3.19 Transactions with Principals........................... -8- ---------------------------- 3.20 Insurance.............................................. -8- --------- 3.21 Employees.............................................. -9- --------- 3.22 Voting Agreement....................................... -9- ---------------- 3.23 Permits................................................ -9- ------- 3.24 Environmental and Safety Laws.......................... -9- ----------------------------- 3.25 Tax Returns, Payments and Elections.................... -9- ----------------------------------- 3.26 Section 83(b) Elections................................ -9- ----------------------- 3.27 Qualified Small Business Stock......................... -10- ------------------------------ SECTION 4 Investment Representations............................. -10- -------------------------- 4.1 Authorization.......................................... -10- -------------
-i- TABLE OF CONTENTS (CONTINUED)
PAGE ---- 4.2 Experience............................................. -10- ---------- 4.3 Investment............................................. -10- ---------- 4.4 Rule 144 and Rule 144A................................. -11- ---------------------- 4.5 No Public Market....................................... -11- ---------------- 4.6 Access to Data......................................... -11- -------------- SECTION 5 Conditions to Investors' Obligations at the Closing.... -11- --------------------------------------------------- 5.1 Representations and Warranties Correct................. -11- -------------------------------------- 5.2 Covenants.............................................. -11- --------- 5.3 Opinion of Company's Counsel........................... -11- ---------------------------- 5.4 Election of Directors.................................. -12- --------------------- 5.5 Investors Rights Agreement............................. -12- -------------------------- 5.6 Articles............................................... -12- -------- 5.7 Compliance Certificate................................. -12- ---------------------- 5.8 Proceedings and Documents.............................. -12- ------------------------- SECTION 6 Conditions to Company's Obligations at Closing......... -12- ---------------------------------------------- 6.1 Representations Correct................................ -12- ----------------------- 6.2 Qualifications, Legal Investment....................... -12- -------------------------------- 6.3 Minimum Investment..................................... -12- ------------------ 6.4 Covenants.............................................. -13- --------- 6.5 Articles............................................... -13- -------- SECTION 7 Affirmative Covenants of the Company................... -13- ------------------------------------ 7.1 Employee Agreements.................................... -13- ------------------- 7.2 Key Man Life Insurance................................. -13- ---------------------- 7.3 Preservation of Small Business Stock Status............ -13- ------------------------------------------- 7.4 Termination of Covenants............................... -14- ------------------------ SECTION 8 Certain Covenants...................................... -14- ----------------- 8.1 First Negotiation Right................................ -14- ----------------------- 8.2 Observer Rights........................................ -14- --------------- 8.3 Publicity.............................................. -15- --------- SECTION 9 Miscellaneous.......................................... -15- ------------- 9.1 Governing Law.......................................... -15- ------------- 9.2 Survival............................................... -15- -------- 9.3 Successors and Assigns................................. -16- ---------------------- 9.4 Entire Agreement; Amendment............................ -15- --------------------------- 9.5 Effect of Amendment or Waiver.......................... -16- -----------------------------
-ii- TABLE OF CONTENTS (CONTINUED)
PAGE ---- 9.6 Rights of Investors.................................... -16- ------------------- 9.7 Exculpation Among Investors............................ -16- --------------------------- 9.8 Notices, etc........................................... -16- ------------ 9.9 Delays or Omissions.................................... -16- ------------------- 9.10 California Corporate Securities Law.................... -17- ----------------------------------- 9.11 Expenses............................................... -17- -------- 9.12 Counterparts........................................... -17- ------------ 9.13 Severability........................................... -17- ------------
Exhibits Exhibit A - Schedule of Investors Exhibit B - Restated Certificate of Incorporation Exhibit C - Restated Investors Rights Agreement Exhibit D - Schedule of Exceptions -iii- SYMPHONIX DEVICES, INC. Series D Preferred Stock Purchase Agreement This Agreement is made as of June 11, 1997 by and among Symphonix Devices, Inc., a California corporation (the "Company"), and the persons and entities listed on the "Schedule of Investors" attached hereto as Exhibit A (the "Investors"). In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: SECTION 1 Authorization and Sale of the Shares ------------------------------------ 1.1 Authorization. The Company has, or before the Closing (as ------------- hereinafter defined) will have, authorized the sale and issuance of one million two hundred fifty thousand (1,250,000) shares of its Series D Preferred Stock (the "Shares") having the rights, restrictions, privileges and preferences set forth in the Restated Articles of Incorporation of the Company attached hereto as Exhibit B (the "Articles"). The Company has, or before the Closing will have, adopted and filed the Articles with the Secretary of State of the State of California. 1.2 Sale and Purchase of the Shares. Subject to the terms and conditions ------------------------------- hereof and in reliance upon the representations and agreements contained herein, at the Closing the Company will issue and sell to each Investor and each Investor, severally and not jointly, will purchase from the Company, the number of Shares set forth opposite the Investor's name in the column entitled "Shares" on the Schedule of Investors at a purchase price of eight dollars ($8.00) per Share. 1.3 Purchases and Sales Subsequent to the Closing. If less than all of --------------------------------------------- the authorized number of Shares are sold at the closing, then, subject to the terms and conditions of this Agreement, the Company may sell, on or before the thirtieth (30th) day after the date hereof, up to the balance of the authorized but unissued Shares to such persons or entities (the "Subsequent Investors") as the Company may determine at the same price per share as the Shares purchased and sold at the Closing. Any such sale shall be upon the same terms and conditions as those contained herein, may occur on one or more occasions, and the Subsequent Investors shall become parties to this Agreement and that certain Restated Investors Rights Agreement dated as of the date hereof, by and among the Company and the Investors, the form of which is attached hereto as Exhibit C (the "Investors Rights Agreement"). Such persons or entities may become parties to such agreements (i)(a) by executing copies of such agreements which, as of the date hereof, provide for execution by them or (b) by appending additional signature pages to such agreements containing their signatures and (ii) by appending additional pages to or revising the Exhibit A of each such agreement appropriately, and the Company is authorized to effect any of such alternatives on one or more occasions without the further consent of the Investors, provided, however, that (i) those persons designated in the Schedule of Investors who do not purchase the Shares set forth opposite their respective names shall be entitled to and the Company shall sell to them, upon receipt of the requisite consideration and signature pages and upon the Company's satisfaction that the issuance to such persons is in compliance with federal and state securities laws, the amount of Shares set forth opposite their respective names (and such purchases and sales shall not be deemed separate Closings hereunder) and (ii) the Shares reserved for any persons designated in the Schedule of Investors at the time of execution of this Agreement may not be allocated to any other person without the consent of Investors holding a majority of the then outstanding Shares. In the event that there is more than one Closing, the term "Closing" shall apply to each such Closing unless otherwise specified. At any Closing after the first Closing, to satisfy the conditions set forth in Section 5 hereof, the Company shall only be required to satisfy the conditions set forth in Sections 5.1, 5.2 and 5.8 thereof. A bring-down of the opinion of counsel referred to in Section 5.3 shall also be provided at any such Closing. SECTION 2 Closing Date; Delivery ---------------------- 2.1 Closing Date. The closing for the purchase and sale of the Shares ------------ hereunder (the "Closing") shall be held at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California, on June 11, 1997, at 10:00 a.m. or at such other time and place as the Company and a majority in interest of the Investors mutually agree upon (the "Closing Date"). 2.2 Closing. At the Closing, the Company will deliver to each Investor a ------- certificate representing the number of Shares to be purchased by such Investor, each as set forth in the Schedule of Investors, against payment of the purchase price therefor by cancellation of indebtedness, check payable to the order of the Company, wire transfer or any combination of the foregoing in the amounts specified in the Schedule of Investors. SECTION 3 Representations of the Company ------------------------------ Subject to and except as disclosed by the Company in the Schedule of Exceptions attached hereto as Exhibit D, the Company hereby represents to each Investor as follows: 3.1 Organization and Standing. The Company is a corporation duly ------------------------- organized, validly existing, and in good standing under the laws of the State of California. The Company has all requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which such qualification is required and where the failure -2- to be so qualified would have a material adverse effect on the Company's business. The Company has made available to special counsel for the Investors copies of its Articles of Incorporation, Bylaws, and minute books. Said copies are true, correct and complete and contain all amendments through the date of this Agreement. 3.2 Corporate Power. The Company has all requisite legal and corporate --------------- power to execute and deliver this Agreement and any other agreement contemplated hereby, to sell and issue the Shares hereunder and to carry out and perform its obligations under the terms of this Agreement and any other agreement contemplated hereby. 3.3 Capitalization. The authorized capital stock of the Company consists -------------- of twenty million (20,000,000) shares of Common Stock (the "Common Stock"), of which three million three hundred fifteen thousand five hundred sixty-one (3,315,561) shares are issued and outstanding, and nine million seven hundred fifty thousand (9,750,000) shares of Preferred Stock, of which five million four hundred sixty-three thousand (5,463,000) shares designated Series A Preferred Stock, one million three hundred seventy-eight thousand five hundred (1,378,500) shares designated Series B Preferred Stock, one million one hundred sixty two thousand four hundred fifty one (1,162,451) shares designated Series C Preferred Stock, and four hundred forty thousand six hundred eighty (440,680) shares designated Series D Preferred Stock are issued and outstanding. All such issued and outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. Five million five hundred thousand (5,500,000) shares of the Preferred Stock have been designated "Series A Preferred Stock," one million five hundred thousand (1,500,000) shares of the Preferred Stock have been designated "Series B Preferred Stock," one million five hundred thousand (1,500,000) shares of the Preferred Stock have been designated "Series C Preferred Stock" and one million two hundred fifty thousand (1,250,000) shares have been designated "Series D Preferred Stock." The rights, restrictions, privileges and preferences of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock are as stated in the Articles. The Company by appropriate action by the Board of Directors has reserved (or shall have reserved prior to the Closing) nine million seven hundred fifty thousand (9,750,000) shares of Common Stock for issuance upon conversion of the Preferred Stock. Two million two hundred thirty-five thousand (2,235,000) shares of Common Stock have been duly reserved under the Company's 1994 Stock Option Plan, and options exercisable for seven hundred ninty-five thousand three hundred sixty-two (795,362) shares of Common Stock are issued and outstanding, and warrants exercisable for 37,000 and 9,250 shares of Series A Preferred Stock and Series B Preferred Stock, respectively, are issued and outstanding. Except as set forth above and in the Investors Rights Agreement, there are no preemptive or other outstanding rights, options, warrants, conversion rights, understandings or agreements for the purchase or acquisition from the Company of any shares of its capital stock or other securities of the Company. To the best of the Company's knowledge, there are not any agreements, understandings or arrangements among the shareholders relating to the transfer of outstanding capital stock of the Company. All of the outstanding shares of Common Stock have been duly and validly issued in compliance with federal and state securities laws. Set forth in Section 3.3 of the Schedule of -3- Exceptions is an accurate list of the holders of the Company's outstanding Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. 3.4 Authorization. All corporate action on the part of the Company, its ------------- directors and shareholders necessary for the sale and issuance of the Shares, the Common Stock issuable upon conversion of the Shares (the Common Stock issuable upon conversion of the Shares being referred to herein as the "Underlying Stock") and the performance of the Company's obligations hereunder and under each of the other Agreements contemplated hereby and the reservation of the Underlying Stock has been taken or will be taken prior to the Closing. This Agreement and the other agreements contemplated hereby are valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to general equity principles and to limitations on the availability of equitable relief, including specific performance. The Shares and the Underlying Stock, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares and the Underlying Stock may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein. 3.5 Absence of Changes. ------------------ Since March 31, 1997, there has not been: (a) Any change in the assets, liabilities, financial condition or operations of the Company except changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse; (b) Any change (individually or in the aggregate), except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (c) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties or business of the Company; (d) Any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (e) Any loans made by the Company to its employees, officers or directors other than travel advances made in the ordinary course of business; (f) Any changes in the compensation of the Company's employees, officers or directors; (g) Any declaration or payment of any dividend or other distribution of the assets of the Company; -4- (h) Any agreement obligating the Company to make payments that could exceed twenty five thousand dollars ($25,000) in any fiscal year; (i) To the best knowledge of the Company, any other event or condition of any character which has materially and adversely affected the Company's business or prospects; or (j) Any agreement or commitment by the Company to do any of the things described in this Section 3.5. 3.6 Title to Properties and Assets; Liens, etc. The Company has good and ------------------------------------------ marketable title to all of its properties and assets, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company, and which have not arisen otherwise than in the ordinary course of business. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 3.7 Financial Statements. The Company has delivered to each Investor, -------------------- its audited balance sheet and income statement for the fiscal year ended December 31, 1996 and unaudited balance sheet and income statement for the period ended March 31, 1997 (collectively the "Financial Statements"). The Financial Statements, together with the notes thereto, (i) are complete and correct in all material respects, (ii) are in accordance with the Company's books and records, (iii) present fairly its financial position as of that date and the results of its operations for the period indicated, and (iv) have been prepared in conformity with generally accepted accounting principles consistently applied throughout the periods indicated, subject in the case of interim statements to normal year end adjustments and the absence of footnotes. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.8 Patents, Trademarks, and Trade Secrets. There are no pending or, to -------------------------------------- the best of the Company's knowledge, threatened claims against the Company alleging that the Company's business, as conducted or as proposed to be conducted, infringes or conflicts with the rights of others under patents, service marks, trade names, trademarks, copyrights, trade secrets or other proprietary rights. The Company's business as now conducted and as proposed to be conducted in the Business Plan (as hereinafter defined) does not and will not infringe or conflict with the rights of others, including rights under patents, service marks, trade names, trademarks, copyrights, trade secrets and other proprietary rights. The Company owns or possesses sufficient legal rights to all the patents, copyrights, trademarks, trade names, service marks, trade secrets and other rights necessary for the -5- operation of its business as now conducted and as proposed to be conducted without conflict or infringement against the rights of others. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, (trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. To the best of the Company's knowledge, no employee or consultant of the Company owns any rights in patents, trademarks, trade names, processes, data or know-how directly or indirectly competitive with those owned or to be used by the Company or derived from or in connection with the conduct of the Company's business. The Company is not aware of any violation or infringement by a third party of any of the Company's patents, licenses, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights. The Company has taken and will take reasonable security measures to protect the secrecy, confidentiality and value of all trade secrets useful in the conduct of its business. The Company does not believe it is or will be necessary to use any proprietary information of any of its employees or consultants (or persons it intends to hire or retain) made prior to their employment by, or consultation with, the Company. 3.9 Compliance with Other Instruments, None Burdensome, etc. The Company ------------------------------------------------------- is not in violation of any term of its Articles or Bylaws, or of any term contained in any instrument or contract to which it is a party the damages arising from which would have a liquidated value exceeding five thousand dollars ($5,000), and, to the best of its knowledge, is not in violation of any order, statute, rule or regulation applicable to the Company. No event or failure of performance has occurred which, with the passage of time or the giving of notice or both, would constitute such a violation. Neither the execution, delivery and performance of this Agreement nor any other agreement contemplated hereby, nor the issuance of the Shares or the Underlying Stock, will result in any such violation or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company; and there is no such violation or default, nor any such term, which materially and adversely affects the business of the Company as presently conducted or as proposed to be conducted or any of its properties or assets. To the best of the Company's knowledge, no other party is in material default of any such instrument or contract. 3.10 Litigation, etc. There is no action, suit, proceeding or --------------- investigation pending or currently threatened against the Company, nor, to the best of its knowledge, is there any basis therefor. The foregoing includes any action, suit, proceeding or investigation, pending or threatened, which questions the validity of this Agreement or any other agreement contemplated hereby or the right of the Company to enter into such agreements, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financial or otherwise, and also includes any litigation pending or threatened, (or any basis therefor known to the Company), against the Company, by reason of the past employment or consulting relationships of any employee, officer or consultant of the Company, the activities or proposed activities of the Company, or negotiations by the Company with possible backers of, or -6- investors in, the Company or its proposed business. No action, suit, proceeding or investigation is pending or threatened by the Company. The Company is not a party or subject to the provisions of any order, writ, injunction, judgement or decree of any court or governmental agency or instrumentality. 3.11 Registration Rights. Except as set forth in the Investors Rights ------------------- Agreement, the Company is not under any obligation to register any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.12 Governmental Consent, etc. No consent, approval or authorization ------------------------- of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution, delivery and performance of this Agreement and any other agreement contemplated hereby, or the offer, sale or issuance of the Shares or the Underlying Stock except (i) the filing of the Articles with the Secretary of State of the State of California which filing will have been made and be effective on the Closing Date, and (ii) the filing of a Notice with the California Commissioner of Corporations pursuant to Section 25102(f) of the California Corporations Code within 15 days of the Closing covering the sale of the Shares, which filing shall be promptly made. 3.13 Offering. Based in part on the representations of the Investors set -------- forth in Section 4 hereof, the offer, sale and issuance of the Shares and the Underlying Stock in conformity with the terms of this Agreement constitute transactions exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). 3.14 Disclosure. The Company has fully provided each Investor with all ---------- the information which such Investor has requested for deciding whether to purchase the Series D Preferred Stock and all information which the Company believes is reasonably necessary to enable such Investor to make such decision. No representation or warranty by the Company contained in this Agreement or any other agreement contemplated hereby, nor any other statement or certificate furnished or to be furnished to the Investors pursuant hereto or in connection with the transactions contemplated hereby by the Company (when read together) contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained therein or herein not misleading in light of the circumstances under which they were made; except that no representation is made with respect to projections delivered to the Investors, other than that the Company represents that such projections were prepared in good faith and that the Company reasonably believes there is a reasonable basis for such projections. 3.15 No Conflicting Agreements. To the best of the Company's knowledge, ------------------------- no employee of the Company is, or will be in connection with the proposed operations of the Company, in violation of any term of any employment contract, proprietary information and inventions agreement, or any other contract or agreement relating to the relationship of any such employee with the Company or any previous employer. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that -7- would interfere with the use of his best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. 3.16 Contracts and Other Commitments. The Company does not have any ------------------------------- contract, agreement, lease, or other commitment, written or oral, absolute or contingent, other than contracts for the purchase of supplies and services that were entered into in the ordinary and usual course of business and that do not involve more than twenty five thousand ($25,000), or do not extend for more than one year beyond the date hereof. For the purpose of this section, employment and consulting contracts, contracts with labor unions, license agreements, agreements with employees, directors or affiliates of employees or directors and any other agreements relative to the Company's technology, shall not be considered to be contracts entered into in the ordinary and usual course of business. For the purposes of the foregoing, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts set forth above. The Company has not engaged in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 3.17 Subsidiaries. The Company does not presently own or control, ------------ directly or indirectly, and has no stock or other interest as owner or principal in, any other corporation or partnership, joint venture, association or other business venture or entity. 3.18 Manufacturing Rights. The Company has not granted rights to -------------------- manufacture, produce, assemble, license or sell its products to any other person and is not bound by any agreement which affects the Company's exclusive right to manufacture, assemble or sell its products. 3.19 Transactions with Principals. No employee, shareholder, officer or ---------------------------- director of the Company is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers, or directors of the Company and members of their immediate families may own stock (not to exceed 3% of the outstanding voting securities of any such entity) in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. -8- 3.20 Insurance. The Company has insurance with financially sound and --------- reputable insurers, with respect to its properties that are of a character customarily insured by entities engaged in the same or a similar business similarly situated, against loss or damage of the kinds customarily insured against by such entities, which insurance is of such types (including public liability insurance) as are customarily carried under similar circumstances by such other entities. 3.21 Employees. The Company has no employment contract with any officer --------- or employee or any other consultant or person which is not terminable by it at will without liability, except as the Company's right to terminate its employees at will may be limited by applicable law. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. The Company has no deferred compensation, pension, health, profit sharing, bonus, stock purchase, stock option, hospitalization, insurance, severance or any other employee benefit or welfare benefit plan or obligation covering any of its officers or employees. There are no controversies or labor trouble or union organization activities pending or, to the knowledge of the Company, threatened, between it and its employees. None of the Company's employees belongs to any union or collective bargaining unit. All employees of the Company have signed proprietary information agreements with the Company prior to or at the commencement of their employment in substantially the form attached as Exhibit F to the Company's Series A Preferred Stock Purchase Agreement dated July 27, 1994. To the best of its knowledge, the Company has complied with all applicable state and federal equal employment opportunity and other laws related to employment. 3.22 Voting Agreement. Except as set forth in the Articles and the ---------------- Shareholders Agreement dated May 23, 1996 among the Company and certain holders of the Company's Common Stock and Series A, Series B, and Series C Preferred Stock (the "Shareholders Agreement"), the Company has no agreement, obligation or commitment with respect to the election of any individual or individuals to the Board of Directors, and to the best of the Company's knowledge, except as set forth in the Shareholders Agreement, there is no voting agreement or other arrangement among its shareholders with respect to the election of any individual or individuals to the Board of Directors. 3.23 Permits. The Company has all franchises, permits, licenses, and any ------- similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 3.24 Environmental and Safety Laws. To the best of its knowledge, the ----------------------------- Company is not in violation of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation. -9- 3.25 Tax Returns, Payments and Elections. The Company has filed all tax ----------------------------------- returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. 3.26 Section 83(b) Elections. To the best of the Company's knowledge, ----------------------- all elections and notices required by Section 83(b) of the Internal Revenue Code and any analogous provisions of applicable state tax laws have been timely filed by all individuals who have purchased shares of the Company's Common Stock. 3.27 Qualified Small Business Stock. ------------------------------ (a) As of and immediately following the Closing Date, the Shares will meet each of the requirements for qualification as "qualified small business stock" set forth in Section 1202(c) of the Internal Revenue Code of 1986, as amended (the "Code"), including without limitation the following: (i) the Company will be a domestic C corporation, (ii) the Company will not have made any purchases of its own stock described in Code Section 1202(c)(3)(B) during the one-year period preceding the Closing, and (iii) the Company's (and any predecessor's) aggregate gross assets, as defined by Code Section 1202(d)(2), at no time between August 10, 1993 and through the Closing Date have exceeded or will exceed $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with Code Section 1202(d)(3). (b) As of the Closing Date, at least 80% (by value) of the assets of the Company are used by it in the active conduct of one or more qualified trades or businesses, as defined by Code Section 1202(e)(3), and the Company is an eligible corporation, as defined by Code Section 1202(e)(4). SECTION 4 Investment Representations -------------------------- Each Investor hereby represents and warrants only to the Company with respect to this purchase as follows: 4.1 Authorization. The Investor has all the requisite power and is duly ------------- authorized to execute and deliver this agreement and each other agreement contemplated hereby and has taken all necessary action to consummate the transactions contemplated hereby and thereby. This Agreement and each other agreement contemplated hereby have been duly executed and delivered by the Investor and constitute valid and binding obligations of the Investor, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to general equity principles and to limitations on the availability of equitable relief, including specific performance. -10- 4.2 Experience. The Investor is experienced in evaluating and investing ---------- in high technology companies such as the Company and is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. 4.3 Investment. The Investor is acquiring the Shares for investment for ---------- its own account and not with a view to, or for resale in connection with, any distribution thereof, and it has no present intention of selling or distributing the Shares or the Underlying Stock. The Investor understands that the Shares and the Underlying Stock to be purchased by it have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent as expressed herein. 4.4 Rule 144 and Rule 144A. The Investor acknowledges that, because they ---------------------- have not been registered under the Securities Act, the Shares and the Underlying Stock being purchased by the Investor must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. The Investor is aware of the provisions of Rule 144 and Rule 144A promulgated under the Securities Act, which rules permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions. 4.5 No Public Market. The Investor understands that no public market now ---------------- exists for any of the securities issued by the Company and that it is uncertain whether a public market will ever exist for the Shares or the Underlying Stock. 4.6 Access to Data. The Investor has received and reviewed such -------------- information that such Investor deemed necessary to make an informed decision concerning the purchase of the Shares and has had an opportunity to discuss the Company's business, management and financial affairs with its management and to obtain any additional information necessary to verify the accuracy of the information given to such Investor. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of the Investors to rely thereon. SECTION 5 Conditions to Investors' Obligations at the Closing --------------------------------------------------- The Investors' obligations to purchase the Shares at the Closing are subject to the fulfillment on or prior to the Closing Date of all of the conditions set forth below in this Section 5 to the extent not waived by each Investor. 5.1 Representations and Warranties Correct. The representations and -------------------------------------- warranties made in Section 3 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. -11- 5.2 Covenants. All covenants, agreements and conditions contained in --------- this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all respects. 5.3 Opinion of Company's Counsel. At the Closing the Investors shall ---------------------------- have received from Wilson Sonsini Goodrich & Rosati, counsel to the Company, an opinion in form and substance satisfactory to them. 5.4 Election of Directors. The members of the Board of Directors as of --------------------- the Closing shall be Harry Robbins, Geoffrey Ball, Michael Levinthal, Petri Vainio, B.J. Cassin and Terry Gould. 5.5 Investors Rights Agreement. The Company and the Investors shall have -------------------------- entered into the Investors Rights Agreement attached hereto as Exhibit C. 5.6 Articles. The Articles attached hereto as Exhibit B shall have been -------- filed with the Secretary of State of the State of California. 5.7 Compliance Certificate. The Company shall have delivered to the ---------------------- Investors a certificate, executed by the President of the Company, dated the Closing Date, certifying to the fulfillment of the conditions specified in Sections 5.1 and 5.2 of this Agreement. 5.8 Proceedings and Documents. All corporate and other proceedings in ------------------------- connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Investors and their special counsel, and the Investors and their special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. SECTION 6 Conditions to Company's Obligations at Closing ---------------------------------------------- The Company's obligation to sell the Shares at the Closing is subject to the fulfillment of the following conditions to the extent not waived by the Company: 6.1 Representations Correct. The representations made by the Investors ----------------------- in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 6.2 Qualifications, Legal Investment. All authorizations, approvals, or -------------------------------- permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Shares or the proposed issuance of the Underlying Stock shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the Securities and Exchange Commission, the California Commissioner of -12- Corporations, or any commissioner of corporations or similar officer of any other state having jurisdiction over this transaction. At the time of the Closing, the sale and issuance of the Shares and the Warrants and the proposed issuance of the Underlying Stock shall be legally permitted by all laws and regulations to which the Investors and the Company are subject. 6.3 Minimum Investment. The Investors shall purchase Shares with an ------------------ aggregate purchase price of at least $6,000,000. 6.4 Covenants. All covenants, agreements and conditions contained in --------- this Agreement to be performed by the Investors on or prior to the Closing Date shall have been performed or complied with in all respects. 6.5 Articles. The Articles in the form of Exhibit B shall have been -------- filed with the Secretary of State of the State of California. SECTION 7 Affirmative Covenants of the Company ------------------------------------ The Company hereby covenants and agrees as follows: 7.1 Employee Agreements. All future technical and other key employees ------------------- and consultants of the Company shall be required to execute a proprietary information agreement substantially in the form attached as Exhibit F to the Company's Series A Preferred Stock Purchase Agreement dated July 27, 1994, with such amendments thereto or deviations therefrom as the Board of Directors may from time to time deem appropriate. All current and future employees, officers and consultants of the Company who shall, subsequent to the Closing Date, purchase or receive options to purchase shares of the Company's Common Stock shall (unless the Board of Directors shall direct otherwise) be required to execute stock purchase or option agreements providing for vesting of shares no less restrictive than as follows: one-eighth of the total number of shares subject to such an agreement six months after the date of employment and one forty-eighth of the total number of shares subject to such an agreement each month thereafter. Upon the termination of an employee, officer or consultant, with or without cause, the Company or its assignee will (unless the Board of Directors shall direct otherwise) have the option to repurchase the unvested portion of such shares held by the employee, officer or consultant at cost. Such stock purchase or option agreements shall (unless the Board of Directors shall direct otherwise) also provide for (i) no transfers prior to vesting, (ii) a right of first refusal on any vested shares terminating not prior to the initial public offering of the Company's securities and (iii) a "lock-up" provision of at least 180 days after the initial public offering of the Company's securities. 7.2 Key Man Life Insurance. The Company will maintain, with financially ---------------------- sound and reputable insurers, a term life insurance policy on the life of Harry S. Robbins in the amount of $1,000,000. Such policy shall be owned by the Company and all benefits thereunder shall be payable to the Company. -13- 7.3 Preservation of Small Business Stock Status. After the Closing Date, ------------------------------------------- the Company shall not (a) make any purchases of its stock during the one year period following the Closing Date having an aggregate value exceeding 5% of the aggregate value of all of the Company's stock, (b) fail to use at least 80% (by value) of its assets in the active conduct of one or more qualified trades or businesses for substantially all of the five-year period following the Closing Date, or (c) cease to be a C corporation which is an eligible corporation, as defined by Code Section 1202(e)(4). 7.4 Termination of Covenants. The covenants of the Company set forth in ------------------------ Section 7 shall terminate upon the first to occur of (i) the closing of the Company's first public offering at a price per share in excess of eleven dollars ($11.00) per share of Common Stock (as shares are presently constituted) with aggregate proceeds in excess of seventeen million dollars ($17,000,000) or (ii) the tenth anniversary of the Closing Date. SECTION 8 Certain Covenants ----------------- 8.1 First Negotiation Right. The Company agrees that it shall not ----------------------- transfer, dispose of, sell, lease or license (exclusively or nonexclusively), any of the Rights (as defined below) or transfer or dispose of all or substantially all of the assets or voting securities of the Company (any of such transactions begin hereinafter referred to as a "Sale") until it complies in full with the provisions of this Section 8.1. (a) Prior to consummating a Sale, or if the Company determines to commence discussions with any party with respect to a proposed Sale or receives an unsolicited offer from a third party with respect to a proposed Sale, the Company shall promptly notify Johnson & Johnson Development Corporation ("J&J") of the proposed Sale and the principal terms thereof (but not the identity of the third party) and shall, before entering into any agreement with respect thereto, during a sixty (60) day period negotiate in good faith with J&J to provide J&J the opportunity to consummate a similar Sale, If at the end of such period the parties are unable to agree upon mutually acceptable terms thereof, the Company shall have the right to continue or enter into discussions with third parties, but may not enter into any agreement with respect hereto with a third party on terms more favorable to the third party or less favorable to the Company than those offered by or to J&J either during or after such period. (b) For purposes of this Section 8.1, all inventions, developments, patents, patent applications, know-how, other proprietary rights or products owned, developed or acquired by the Company after the date hereof that are or may be used or may have application in the field of implantable and semi- implantable hearing aid devices shall be referred to as "Rights." J&J's rights under Section 8.1 shall not be assignable except to an affiliate of J&J and shall survive for a period of eighteen (18) months from the date of this Agreement or twelve (12) months from the effective date of the Company's registration statement relating to its initial public offering of equity securities, whichever first occurs. Notwithstanding the foregoing, J&J's rights under this Section 8.1 shall terminate in the event that J&J, either directly or through an affiliate, does not participate as an -14- investor in the Company's next equity financing transaction (which may involve the issuance of Common Stock, Preferred Stock or other equity security). (c) This Section 8.1 terminates and supersedes any prior agreements or understandings between the Company and J&J with regard to a first negotiation right, including Section 8.1 from the Company's Series D Preferred Stock Purchase Agreement dated November 13, 1996. 8.2 Observer Rights. Any holder of more than 100,000 shares of Series D --------------- Preferred Stock or an equivalent number of shares of Common Stock issued or issuable upon conversion of Series D Preferred Stock (subject to proportionate adjustment in the event of stock splits, dividends, combination and the like) shall be entitled to appoint one representative (an "Observer") to attend meetings of the Board of Directors of the Corporation. Notwithstanding the foregoing, the Company's board of directors may request the Observer to leave meetings of the board of directors when, in the reasonable judgment of the board, such recusal is necessary or appropriate because the matters to be discussed are of a competitive or confidential nature or relate to the relationship of the Company with J&J and/or one or more of its affiliates. 8.3 Publicity The Corporation shall not originate any publicity, news --------- release, or other announcement, written or oral, relating to this Agreement, or the performance hereunder or the existence of an arrangement between the parties, without the prior written approval of a majority in interest of the Investors. Notwithstanding the foregoing, the Company may make such disclosures as are necessary to comply with applicable laws, including without limitation the Securities Act of 1933, the Securities Exchange Act of 1934 and the rules and regulations thereunder. SECTION 9 Miscellaneous ------------- 9.1 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California without regard to that body of law known as Conflict of Laws. 9.2 Survival. The representations, warranties, covenants and agreements -------- made by the parties herein shall survive any investigation made by any Investor or the Company and shall survive the closing of the transactions contemplated hereby. 9.3 Successors and Assigns. Except as otherwise provided herein, the ---------------------- provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. -15- 9.4 Entire Agreement; Amendment. This Agreement and the other documents --------------------------- delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the holders of at least a majority in interest of (i) the outstanding Shares and (ii) any outstanding shares of Underlying Stock that have not been sold to the public (collectively determined on an as if converted basis). Any amendment or waiver effected in accordance with this section shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted or for which such, securities have been exercised), each future holder of all such securities, and the Company. 9.5 Effect of Amendment or Waiver. Each Investor acknowledges that, by ----------------------------- the operation of Section 9.4 hereof, the holders of a majority in interest of the outstanding Shares and outstanding shares of Underlying Stock (determined on an as if converted basis) that have not been sold to the public will have the right and power to diminish or eliminate all rights of such Investor under this Agreement. 9.6 Rights of Investors. Each holder of the Shares, or the Underlying ------------------- Stock shall have the absolute right to exercise or refrain from exercising any right or rights that such holder may have by reason of this Agreement or its ownership of the Shares or the Underlying Stock, including without limitation the right to consent to the waiver of any obligation of the Company under this Agreement and to enter into an agreement with the Company for the purpose of modifying this Agreement or any agreement effecting any such modification, and such holder shall not incur any liability to any other holder or holders of the Shares or the Underlying Stock with respect to exercising or refraining from exercising any such right or rights. 9.7 Exculpation Among Investors. Each Investor acknowledges that it is --------------------------- not relying upon any person, firm, or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Investor agrees that no Investor nor the respective controlling person, officers, directors, partners, agents, or employees of any Investor shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Shares. 9.8 Notices, etc. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be effective five days after mailed by first-class, registered, or certified mail, postage prepaid, or upon delivery if delivered by hand or by messenger or a courier delivery service, addressed (a) if to an Investor, at such Investor's address set forth in the Schedule of Investors, or at such other address as such Investor shall have furnished to the Company in writing, or (b) if to any other holder of any Shares or Underlying Stock, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares or Underlying Stock who has so furnished an address to the Company, or (c) if to the Company, at the address set forth below the -16- Company's name on the signature page to this Agreement or at such other address as the Company shall have furnished to each Investor and each such other holder in writing. 9.9 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any holder of any Shares upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereunder occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 9.10 California Corporate Securities Law. THE SALE OF THE SECURITIES ----------------------------------- WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION IS UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION BEING AVAILABLE. 9.11 Expenses. The Company and each Investor shall bear its own expenses -------- and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 9.12 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which may be executed by less than all of the Investors, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 9.13 Severability. In the case any provision of this Agreement shall be ------------ invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -17- The foregoing Series D Preferred Stock Purchase Agreement is hereby executed as of the date first above written. COMPANY: SYMPHONIX DEVICES, INC. /s/ Harry S. Robbins - ---------------------------------- Harry S. Robbins Chairman, President and CEO SYMPHONOX DEVICES, INC. Series D Preferred Stock Purchase Agreement -18- INVESTORS: CORAL PARTNERS IV, LIMITED PARTNERSHIP By: Coral Management Partners IV Limited Partnership, Its General Partner /s/ Peter H. McNerney ----------------------------------------- Peter H. McNerney, General Partner MAYFIELD VII A CALIFORNIA LIMITED PARTNERSHIP BY MAYFIELD VII MANAGEMENT A CALIFORNIA LIMITED PARTNERSHIP /s/ Michael J. Levinthal By:______________________________________ General Partner Title:___________________________________ MAYFIELD ASSOCIATES FUND II A CALIFORNIA LIMITED PARTNERSHIP /s/ Michael J. Levinthal By:______________________________________ General Partner Title:___________________________________ SIERRA VENTURES IV, L.P., A CALIFORNIA LIMITED PARTNERSHIP BY SV ASSOCIATES IV, L.P., A CALIFORNIA LIMITED PARTNERSHIP, ITS GENERAL PARTNER /s/Petri Vainio By:______________________________________ Petri Vainio, General Partner SYMPHONOX DEVICES, INC. Series D Preferred Stock Purchase Agreement -19- SIERRA VENTURES IV INTERNATIONAL, L.P., A DELAWARE LIMITED PARTNERSHIP BY SV ASSOCIATES IV, L.P. A CALIFORNIA LIMITED PARTNERESHIP, ITS GENERAL PARTNER By:\s\ Petri Vainio ------------------------------------- Petri Vainio, General Partner BRINSON VENTURE CAPITAL FUND III, L.P By: \s\ Terry Gould ------------------------------------ Terry Gould, Partner BRINSON TRUST COMPANY AS TRUSTEES OF THE BRINSON MAP VENTURE CAPITAL FUND III By:\s\ Terry Gould ------------------------------------- Terry Gould, Assistant Trust Officer Brinson Trust Company BRENDAN JOSEPH CASSIN AND ISABEL B. CASSIN, TRUSTEES OF THE CASSIN FAMILY TRUST U/D/T DATED JANUARY 31, 1996 \s\ B. J. Cassin ----------------------------------------- B. J. Cassin, Trustee SYMPHONOX DEVICES, INC. Series D Preferred Stock Purchase Agreement -20- JOHNSON & JOHNSON DEVELOPMENT CORPORATION By: /s/ Thomas M. Gorrie ------------------------------------- Title: Vice President ---------------------------------- SYMPHONOX DEVICES, INC. Series D Preferred Stock Purchase Agreement -21- EX-10.8 13 1994 LEASE AGREEMENT EXHIBIT 10.8 NET LEASE AGREEMENT BETWEEN REALTEC PROPERTIES I, L.P., a California limited partnership ("Landlord") and SYMPHONIX DEVICES, INC., a California corporation ("Tenant") TABLE OF CONTENTS -----------------
Page -------- 1. Summary of Lease Provisions................................................................. 1 2. Property Leased............................................................................. 2 2.1 Premises.............................................................................. 2 2.2 Improvements.......................................................................... 3 2.3 Acceptance of Premises................................................................ 3 3. Term........................................................................................ 4 3.1 Commencement Date..................................................................... 4 3.2 Delay of Commencement Date............................................................ 5 3.3 Early Occupancy....................................................................... 5 3.4 Tenant to Physically Occupy Premises.................................................. 5 4. Rent........................................................................................ 6 4.1 Rent................................................................................... 6 4.2 Late Charge............................................................................ 6 4.3 Additional Rent........................................................................ 6 5. Security Deposit............................................................................ 7 6. Use of Premises............................................................................. 7 6.1 Permitted Uses.......................................................................... 7 6.2 Tenant to Comply with Legal Requirements................................................ 8 6.3 Prohibited Uses......................................................................... 9 6.4 Hazardous Materials..................................................................... 9 7. Taxes....................................................................................... 11 7.1 Personal Property Taxes................................................................. 11 7.2 Other Taxes Payable Separately by Tenant................................................ 11 7.3 Common Taxes............................................................................ 12 8. Insurance; Indemnity; Waiver................................................................ 13 8.1 Insurance by Landlord.................................................................. 13 8.2 Insurance by Tenant.................................................................... 14 8.3 Failure by Tenant to Obtain Insurance.................................................. 15 8.4 Indemnification........................................................................ 16 8.5 Claims by Tenant....................................................................... 16 8.6 Mutual Waiver of Subrogation........................................................... 17 9. Utilities................................................................................... 17 10. Repairs and Maintenance..................................................................... 18 10.1 Landlord's Responsibilities............................................................ 18 10.2 Tenant's Responsibilities.............................................................. 18 11. Common Area................................................................................. 19 11.1 In General............................................................................. 19 11.2 Parking Areas.......................................................................... 20 11.3 Maintenance by Landlord................................................................ 20
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12. Common Area Charges......................................................................... 21 12.1 Definition............................................................................ 21 12.2 Payment of Common Area Charges by Tenant.............................................. 22 12.3 Exclusions From Common Area Charges................................................... 23 13.1 In General I.......................................................................... 24 13.2 Removal Upon Lease Termination........................................................ 25 13.3 Landlord's Improvements............................................................... 25 14. Default and Remedies........................................................................ 26 14.1 Events of Default...................................................................... 26 14.2 Remedies............................................................................... 26 15. Damage or Destruction....................................................................... 28 15.1 Definition of Terms................................................................... 28 15.2 Insured Casualty...................................................................... 29 15.3 Uninsured Casualty.................................................................... 29 15.4 Tenant's Election..................................................................... 30 15.5 Damage or Destruction Near End of Lease Term.......................................... 30 15.6 Termination of Lease.................................................................. 31 15.7 Abatement of Rentals.................................................................. 31 15.8 Liability for Personal Property....................................................... 31 15.9 Waiver of Civil Code Remedies......................................................... 31 15.10 Damage or Destruction to the Building................................................. 31 16. Condemnation................................................................................ 32 16.1 Definition of Terms.................................................................... 32 16.2 Rights................................................................................. 32 16.3 Total Taking........................................................................... 32 16.4 Partial Taking......................................................................... 32 17. Liens....................................................................................... 33 17.1 Premises to Be Free of Liens........................................................... 33 17.2 Notice of Lien; Bond................................................................... 33 18. Landlord's Right of Access to Premises...................................................... 34 19. Landlord's Right to Perform Tenant's Covenants.............................................. 34 20. Lender Requirements......................................................................... 35 20.1 Subordination.......................................................................... 35 20.2 Subordination Agreements............................................................... 35 20.3 Approval by Lenders.................................................................... 35 20.4 Attornment............................................................................. 35 20.5 Estoppel Certificates and Financial Statements......................................... 36 21. Holding Over................................................................................ 37 22. Notices..................................................................................... 37 23. Attorneys' Fees............................................................................. 38 24. Assignment, Subletting and Hypothecation.................................................... 38 24.1 In General............................................................................. 38 24.2 Voluntary Assignment and Subletting.................................................... 38
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24.3 Collection of Rent...................................................................... 41 24.4 No Bonus Value.......................................................................... 41 24.5 Corporations and Partnerships........................................................... 42 24.6 Reasonable Provisions................................................................... 42 24.7 Attorneys' Fees......................................................................... 42 24.8 Involuntary Transfer.................................................................... 43 24.9 Hypothecation........................................................................... 43 24.10 Binding on Successors.................................................................. 43 25. Successors................................................................................... 43 26. Landlord Default; Mortgagee Protection....................................................... 44 27. Exhibits..................................................................................... 44 28. Surrender of Lease Not Merger................................................................ 44 29. Waiver....................................................................................... 44 30. General...................................................................................... 45 30.1 Captions and Headings................................................................... 45 30.2 Definitions............................................................................. 45 30.3 Copies.................................................................................. 46 30.4 Time of Essence......................................................................... 46 30.5 Severability............................................................................ 46 30.6 Governing Law........................................................................... 46 30.7 Joint and Several Liability............................................................. 46 30.8 Construction of Lease Provisions........................................................ 46 30.9 Tenant's Financial Statements........................................................... 46 30.10 Withholding of Landlord's Consent...................................................... 46 31. Signs........................................................................................ 47 32. Landlord as Party Defendant.................................................................. 47 33. Landlord Not a Trustee....................................................................... 47 34. Interest..................................................................................... 47 35. Surrender of Premises........................................................................ 48 36. No Partnership or Joint Venture.............................................................. 48 37. Entire Agreement............................................................................. 48 38. Submission of Lease.......................................................................... 49 39. Quiet Enjoyment.............................................................................. 49 40. Building Plans............................................................................... 49 41. Authority.................................................................................... 49 42. Addendum..................................................................................... 50 44. Option to Extend Lease Term.................................................................. 51 45. Rent During the Extended Term................................................................ 51 46. Right of Notice.............................................................................. 53
-iii- NET LEASE AGREEMENT ------------------- (MultiTenant) For and in consideration of the rentals, covenants, and conditions hereinafter set forth, Landlord hereby leases to Tenant, and Tenant hereby rents from Landlord, the following described Premises for the term, at the rental and subject to and upon all of the terms, covenants and agreements set forth in this Net Lease Agreement, including Landlord's right to recover the Premises pursuant to Paragraph 24 below ("Lease"): 1 Summary of Lease Provisions. --------------------------- 1.1 Tenant: SYMPHONIX DEVICES, INC., a California corporation, ("Tenant"). 1.2 Landlord: REALTEC PROPERTIES I, L.P., a California limited partnership ("Landlord"). 1.3 Date of Lease, for reference purposes only: July 28, 1994. 1.4 Premises: That certain space hereinafter more particularly described, situated in that certain building shown crosshatched on the site plan attached hereto as Exhibit "A" and commonly referred to as 3047 Orchard Parkway and located in the City of San Jose, County of Santa Clara, State of California. (Paragraph 2.1) 1.5 Term: Three (3) Years (Paragraph 3) 1.6 Commencement Date: August 1, 1994, subject to the provisions of Paragraph 3 below. (Paragraph 3) 1.7 Ending Date: July 31, 1997, subject to the provisions of Paragraph 3 below, unless sooner terminated pursuant to the terms of this Lease. (Paragraph 3) 1.8 Rent: August 1, 1994 to July 31, 1997 - Seven Thousand Seven Hundred Twenty Dollars ($7,720.00) per month (Paragraph 4) Receipt of the first month's Rent is hereby acknowledged by Landlord. 1.9 Use of Premises: Office, marketing, research and development, light manufacturing, distribution -1- and warehousing of medical devices, and all legal related uses. (Paragraph 6) 1.10 Tenant's percentage share of Common Area Charges: 33.40% percent. (Paragraph 12) 1.11 Security Deposit: Seven Thousand Seven Hundred Twenty Dollars ($7,720.00). (Paragraph 5) 1.12 Addresses for Notices: To Landlord: Realtec Properties I, L. P. 987 University Avenue, Suite 3 Los Gatos, CA 95030 To Tenant: To the Premises, with a courtesy copy to: --------------------------- --------------------------- --------------------------- 1.13 Nonexclusive Right to Use No More Than: Forty-five (45) parking spaces within the Common Area. (Paragraph 11.2) 1.14 Summary Provisions in General. Parenthetical ----------------------------- references in this Paragraph 1 to other paragraphs in this Lease are for convenience of reference, and designate some of the other Lease paragraphs where applicable provisions are set forth. All of the terms and conditions of each such referenced paragraph shall be construed to be incorporated within and made a part of each of the above referring Summary of Lease Provisions. In the event of any conflict between any Summary of Lease provision as set forth above and the balance of the Lease, the latter shall control. 2. Property Leased. --------------- 2.1 Premises. Landlord hereby leases to Tenant and Tenant -------- hereby leases from Landlord upon the terms and conditions herein set forth, those certain premises ("Premises") referred to in Paragraph 1.4 above and shown on the floor plan attached hereto as Exhibit "B." In addition, Tenant shall have such rights in and to the Common Area (defined in Paragraph 11.1 below) as are more fully described in Paragraph 11.1 below. The building in which the Premises are located is referred to herein as the "Building." The "Land" shall mean and refer to all of the real property outlined in red on Exhibit "A," and shall not be limited to the parcel of real property on which the Building is located (if the same is a separate legal parcel). Any reference in this Lease to the "Parcel" shall be deemed a reference to the Land. The Land, Building and any other building(s) or improvement(s) now or hereafter located on the Land are referred 2 to herein collectively as the "Project." Landlord reserves the right to grant to tenants of the Project or of the buildings or improvements which now exist or may hereafter be constructed upon real property owned by Landlord adjacent to the Land, and to the agents, employees, servants, invitees, contractors, guests, customers and representatives of such tenants or to any other user authorized by Landlord, the nonexclusive right to use the Land for pedestrian and vehicular ingress and egress and vehicular parking (excluding only that portion of the Land designated herein for Tenant's exclusive use for vehicular parking, if any). 2.2 Improvements. The improvements to be constructed by Landlord ------------ for the Tenant's use in the Premises are set forth in detail on the attached Exhibits "C-l" and "C-2". The improvements identified on Exhibit "C-1" shall be constructed by Landlord at Landlord's sole cost. Tenant shall pay to Landlord the sum of Thirty-one Thousand Twenty-nine Dollars ($31,029) for the construction of the improvements identified on Exhibit "C-2", with one-half of said amount payable on execution of the Lease, and one-half of said amount payable on the Commencement Date. Tenant hereby agrees that Tenant has prepared the plans and specifications for the improvements identified on Exhibit "C-l" and that is shall be the responsibility of Tenant to assure that said improvements are in compliance with Title 24 and Title III of the Americans with Disabilities Act of 1990, 42 U.S.C. section 12101 et. seq., and the regulations promulgated thereunder (the "ADA"). In addition, Tenant shall be responsible for the cost of any alterations to the Premises, the Building and/or the Common Area that may be required as a result of the construction of said improvements. Since any construction work on the Premises by Tenant prior to substantial completion of the work required of Landlord pursuant to this Paragraph 2.2 may interfere with the work required of Landlord or with Landlord's ability to obtain a Certificate of Completion therefor, any such work by Tenant shall be subject to the provisions of Paragraph 13.1 hereof, and Landlord may in its reasonable discretion withhold its consent to any such work by Tenant. 2.3 Acceptance of Premises. By taking possession of the Premises, ---------------------- Tenant shall be deemed to have accepted the Premises as being in good and sanitary order, condition and repair and to have accepted the Premises in their condition existing as of the date Tenant takes possession of the Premises, subject to all applicable laws, covenants, conditions, restrictions, easements and other matters of public record and the rules and regulations from time to time promulgated by Landlord governing the use of any portion of the Project and further, to have accepted tenant improvements to be constructed by Landlord (if any) as being completed in accordance with the plans and specifications for such improvements subject only to completion of items on Landlord's punch list. Tenant acknowledges that neither Landlord nor -3- Landlord's agents have made any representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, the condition of the Building or Premises, or the use or occupancy which may be made thereof, and Tenant has independently investigated and is satisfied that the Premises are suitable for Tenant's intended use and that the Building and Premises meet all governmental requirements for such intended use. In addition, Landlord makes no representation or warranty as to the compliance of the Premises, the Building or the Project with the requirements of the ADA. Notwithstanding anything to the contrary contained in this Lease, Tenant's acceptance of the Premises or submission of a "punchlist" shall not be deemed a waiver of Tenant's right to have defects in the improvements constructed by Landlord pursuant to Paragraph 2.2 or the Premises repaired at no cost to Tenant. Tenant shall give notice to Landlord whenever any such defect becomes reasonably apparent, and Landlord shall repair the defect as soon as practicable. Landlord also hereby assigns to Tenant all warranties with respect to the Premises, including warranties that would reduce Tenant's maintenance obligations under this Lease, and shall cooperate with Tenant to enforce such warranties. Finally, notwithstanding anything to the contrary contained in this Lease, as of the Commencement Date, the roof (including roof screens and membrane), plumbing, electrical (including all outlets), heating and air conditioning systems in the Premises shall be in good working order and repair. 3. Term. ---- 3.1 Commencement Date. The term of this Lease (the "Lease ----------------- Term") shall be for the period specified in Paragraph 1.5 above, commencing on the date set forth in Paragraph 1.6 ("Commencement Date"); provided, however, in the event any improvements to be constructed by Landlord, as set forth on Exhibits "C-1" and "C-2", are not completed by the aforesaid Commencement Date, then the Commencement Date shall be deemed to be the date on which the improvements to be constructed by Landlord are substantially completed. Such improvements shall be deemed to be substantially completed upon the occurrence of the earlier of the following: (a) The date on which all improvements to be constructed by Landlord have been substantially completed except for: (i) punch list items which do not prevent Tenant from using the Premises for its intended use; (ii) such work as Landlord is required to perform but which is delayed because of fault or neglect of Tenant, acts of Tenant or Tenant's agents (including without limitation, delays caused by work done on the Premises by Tenant or Tenant's agents or by acts of Tenant's contractors or subcontractors) or delays caused by change orders requested by Tenant or required because of any errors or omissions in plans submitted by Tenant; and (iii) such work as Landlord is required to perform but cannot complete until Tenant performs necessary -4- portions of construction work it has elected or is required to do; or (b) The issuance of appropriate governmental approvals for occupancy of the Premises; or (c) The date Tenant opens for business in the Premises. If the Commencement Date is a date other than the date set forth in Paragraph 1.6, then the Ending Date set forth in paragraph 1.7, and any other certain dates specified herein shall be adjusted accordingly. When the Commencement Date, Ending Date and such other dates become ascertainable, Landlord and Tenant shall specify the same in writing, in the form of the attached Exhibit "D," which writing shall be deemed incorporated herein. Tenant's failure to execute and deliver the letter attached hereto as Exhibit "D" (subject to any legitimate disagreement by Tenant with the terms thereof, which both parties shall use reasonable efforts to resolve) shall be a Default by Tenant hereunder. The expiration of the Lease Term or sooner termination of this Lease is referred to herein as the "Lease Termination." 3.2 Delay of Commencement Date. Landlord shall not be liable for -------------------------- any damage or loss incurred by Tenant for Landlord's failure for whatever cause to deliver possession of the Premises by a particular date (including the Commencement Date), nor shall this Lease be void or voidable on account of such failure to deliver possession of the Premises; provided that if Landlord does not deliver possession of the Premises to Tenant by the date which is sixty (60) days from the date this Lease is executed by both parties, Tenant shall have the right to terminate this Lease by written notice delivered to Landlord within five (5) days thereafter, and Landlord and Tenant shall be relieved of their respective obligations hereunder; provided further that said sixty (60) day period shall be extended by the number of days work on the Premises is delayed due to fault or neglect of Tenant, acts of Tenant or Tenant's agents, or due to acts of God, labor disputes, strikes, fires, rainy or stormy weather, acts or failures to act of public agencies, inability to obtain labor or materials, earthquake, war, insurrection, riots and other causes beyond Landlord's reasonable control, excluding, however, delays caused solely by Landlord, its agents, employees, contractors or invitees. 3.3 Early Occupancy. If Tenant takes possession of the Premises --------------- prior to the Commencement Date, Tenant shall do so subject to all of the terms and conditions hereof and shall pay the Rentals provided for herein. 3.4 Tenant to Physically Occupy Premises. Tenant shall, no later ------------------------------------ than thirty (30) days after the Commencement Date, go into actual physical occupancy of the Premises and open the Premises for business in accordance with the uses specified in Paragraph 6 below; provided, however, the date of Tenant's physical -5- occupancy of the Premises shall in no event extend the Commencement Date, the Lease Termination date or the date the payment of Rentals hereunder commences. Time is of the essence. 4. Rent. ---- 4.1 Rent. Tenant shall pay to Landlord as rent for the Premises ---- ("Rent"), in advance, on the first day of each calendar month, commencing on the date specified in Paragraph 1.6 and continuing throughout the Lease Term (until adjusted pursuant to Paragraph 4.4 below) the Rent set forth in Paragraph 1.8 above. Rent shall be prorated, based on thirty (30) days per month, for any partial month during the Lease Term. Rent shall be payable without deduction, offset, prior notice or demand in lawful money of the United States to Landlord at the address herein specified for purposes of notice or to such other persons or such other places as Landlord may designate in writing. 4.2 Late Charge. Tenant hereby acknowledges that late payment by ----------- Tenant to Landlord of Rent will cause Landlord 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 on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, Tenant shall pay to Landlord, as Additional Rent, without the necessity of prior notice or demand, a late charge equal to five percent (5%) of any installment of Rent which is not received by Landlord within ten (10) days after the due date for such installment. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any installment of Rent or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay such installment of Rent when due, including without limitation the right to terminate this Lease. In the event any installment of Rent is not received by Landlord by the thirtieth (30th) day after the due date for such installment, such installment shall bear interest at the annual rate set forth in Paragraph 34 below, commencing on the thirty-first (31st) day after the due date for such installment and continuing until such installment is paid in full. 4.3 Additional Rent. All taxes, charges, costs and expenses and --------------- other sums which Tenant is required to pay hereunder (together with all interest and charges that may accrue thereon in the event of Tenant's failure to pay the same), and all damages, costs and expenses which Landlord may incur by reason of any Default by Tenant shall be deemed to be additional rent hereunder ("Additional Rent"). Additional Rent shall accrue commencing on the, Commencement Date. In the event of nonpayment by Tenant of any Additional Rent, Landlord shall have all the rights and remedies -6- with respect thereto as Landlord has for the nonpayment of Rent. The term "Rentals" as used in this Lease shall mean Rent and Additional Rent: 5. Security Deposit. Concurrently with Tenant's execution of this Lease, ---------------- Tenant shall deposit with Landlord a security deposit ("Security Deposit") in the amount set forth in Paragraph 1.11 above. The Security Deposit shall be held by Landlord as security for the faithful performance by Tenant of each and every term, covenant, or condition of this Lease applicable to Tenant, and not as prepayment of Rent. If Tenant shall at any time fail to keep or perform any term, covenant or condition of this Lease applicable to Tenant, including without limitation, the payment of Rentals or those provisions requiring Tenant to repair damage to the Premises caused by Tenant or to surrender the Premises in the condition required pursuant to Paragraph 35 below, Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligation under this Lease, use, apply or retain the whole or any part of the Security Deposit reasonably necessary for the payment of any amount which Landlord may spend by reason of Tenant's default or as necessary to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant's default. In the event Landlord uses or applies any portion of the Security Deposit, Tenant shall, within five (5) business days after written demand by Landlord, remit to Landlord sufficient funds to restore any Security Deposit to its original sum. Failure by Tenant to so remit funds shall be a Default by Tenant. Should Tenant comply with all of the terms, covenants and conditions of this Lease applicable to Tenant, the balance of the Security Deposit shall be returned to Tenant within fourteen (14) days after Lease Termination and surrender of the Premises by Tenant; provided, however, if any portion of the Security Deposit is to be applied to repair damages to the Premises caused by Tenant or Tenant's agents, to clean the Premises, or to remove alterations and restore the Premises pursuant to Paragraph 13.2 below, then the balance of the Security Deposit shall be returned to Tenant no later than thirty (30) days after the date Landlord receives possession of the Premises. 6. Use of Premises. --------------- 6.1 Permitted Uses. Tenant shall use the Premises and the Common -------------- Area only in conformance with applicable governmental or quasi-governmental laws, statutes, orders, regulations, rules, ordinances and other requirements now or hereafter in effect (collectively, "Laws") for the purposes set forth in Paragraph 1.9 above, and for no other purpose without the prior written consent of Landlord, which consent Landlord may withhold in its sole discretion. Tenant acknowledges and agrees that Landlord has selected or will be selecting tenants for the Building in order to produce a mix of tenant uses compatible and consistent with the design integrity of the Building and with other uses of the Building; provided, however, the selection of Building tenants shall be in Landlord's reasonable discretion and Landlord -7- in making such selection shall not be deemed to be warranting that any use of the Building made by any such tenant is compatible or consistent with the design integrity of the Building or other uses of the Building. Any change in use of the Premises or the Common Area without the prior written consent of Landlord shall be a Default by Tenant. Tenant and Tenant's agents shall comply with the provision of any Declaration of Covenants, Conditions, and Restrictions affecting the Premises and the Common Area. 6.2 Tenant to Comply with Legal Requirements. Tenant shall, at ---------------------------------------- its sole cost, promptly comply with all Laws relating to or affecting Tenant's particular use or occupancy of the Premises, including without limitation those relating to utility usage and load or number of permissible occupants or users of the Premises, whether or not the same are now contemplated by the parties; with the provisions of all recorded documents affecting the Premises or the Common Area insofar as the same relate to or affect Tenant's particular use or occupancy of the Premises or use of the Common Area; and with the requirements of any board of fire underwriters (or similar body now or hereafter constituted) relating to or affecting the use, occupational safety, occupancy, or condition of the Premises or the Common Area. Tenant's obligations pursuant to this paragraph shall include, without limitation, maintaining or restoring the Premises and making structural and nonstructural alterations and additions in compliance and conformity with all laws and recorded documents (including, without limitation, alterations or additions to the Premises, Building or Common Area that are required pursuant to the ADA), each relating to Tenant's particular use or occupancy of the Premises during the Lease Term or alterations made to the Premises by Tenant. At Landlord's option, Landlord may make the required alteration, addition or change, and Tenant shall pay the cost thereof as Additional Rent. The foregoing notwithstanding, Landlord shall make any alteration or addition required to bring the Premises or the Common Area into compliance with legal requirements in effect at the time the Premises, any improvements installed therein by Landlord (excluding the improvements identified on Exhibit "C-2"), or the Common Area, respectively, were originally constructed. With respect to any structural alterations or additions as may be hereafter required due to a change in laws and unrelated to Tenant's specific use of the Premises or the Common Area or Tenant's alterations to the Premises, Tenant shall not be responsible for the cost thereof. Tenant shall obtain prior to taking possession of the Promises any permits, licenses or other authorizations required for the lawful operation of its business at the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action or proceeding against Tenant, regardless of whether Landlord is a party thereto or not, that Tenant has violated such Law or recorded document relating to Tenant's particular use or occupancy of the Premises shall be conclusive of the fact of such violation by Tenant. Any alterations or additions undertaken by Tenant pursuant to this Paragraph 6.2 shall be subject to the requirements of Paragraph 13.1 below. -8- 6.3 Prohibited Uses. Tenant and Tenant's agents shall not commit or --------------- suffer to be committed any waste upon the Premises. Tenant and Tenant's agents shall not do or permit anything to be done in or about the Premises or Common Area which will in any way obstruct or interfere with the rights of any other tenants of the Building, other authorized users of the Common Area, or occupants of neighboring property, or injure or annoy them. Tenant and Tenant's agents shall not use or allow the Premises to be used for any unlawful, immoral or hazardous purpose or any purpose not permitted by this Lease, nor shall Tenant or Tenant's agents cause, maintain, or permit any nuisance in, on or about the Premises. Tenant and Tenant's agents shall not do or permit anything to be done in or about the Premises nor bring or keep anything in the Premises which will in any way increase the rate of any insurance upon any portion of the Project or any of its contents, or cause a cancellation of any insurance policy covering any portion of the Project or any of its contents, nor shall Tenant or Tenant's agents keep, use or sell or permit to be kept, used or sold in or about the Premises any articles which may be prohibited by a standard form policy of fire insurance. In the event the rate of any insurance upon any portion of the Project or any of its contents is increased because of Tenant's particular use of the Premises or that of Tenant's agents, Tenant shall pay, as Additional Rent, the full cost of such increase; provided, however this provision shall in no event be deemed to constitute a waiver of Landlord's right to declare a default hereunder by reason of the act or conduct of Tenant causing such increase or of any other rights or remedies of Landlord in connection therewith. Tenant and Tenant's agents shall not place any loads upon the floor, walls or ceiling of the Premises which would endanger the Building or the structural elements thereof or of the Premises, nor place any harmful liquids in the drainage system of the Building or Common Area. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Project except in enclosed trash containers designated for that purpose by Landlord. No materials, supplies, equipment, finished products (or semifinished products), raw materials, or other articles of any nature shall be stored upon, or be permitted to remain on, any portion of the Project outside the Premises. 6.4 Hazardous Materials. Neither Tenant nor Tenant's agents shall ------------------- permit the introduction, placement, use, storage, manufacture, transportation, release or disposition (collectively "Release") of any Hazardous Material(s) (defined below) on or about any portion of the Premises, Building or Project without the prior written consent of Landlord, which consent may be withheld in the sole and absolute discretion of Landlord without any requirement of reasonableness in the exercise of that discretion. Notwithstanding the immediately preceding sentence to the contrary, Tenant may use de minimis quantities of the types of materials which are technically classified as Hazardous Materials but commonly used in domestic or office use to the extent not in an amount, which, either individually or cumulatively, would be a "reportable quantity" under any applicable Law. Tenant covenants -9- that, at its sole cost and expense, Tenant will comply with all applicable Laws with respect to the Release by Tenant, its agents, employees, contractors or invitees of such permitted Hazardous Materials. Any Release beyond the scope allowed in this paragraph shall be subject to Landlord's prior consent, which may be withheld in Landlord's sole and absolute discretion, and shall require an amendment to the Lease in the event Landlord does consent which shall set forth the materials, scope of use, indemnification and any other matter required by Landlord in Landlord's sole and absolute discretion. Tenant shall indemnify, defend and hold Landlord and Landlord's agents harmless from and against any and all claims, losses, damages, liabilities, or expenses arising in connection with the Release of Hazardous Materials in violation of Hazardous Materials Laws by Tenant, Tenant's agents or any other person using the Premises with Tenant's knowledge and consent or authorization. Tenant's obligation to defend, hold harmless and indemnify pursuant to this Paragraph 6.4 shall survive Lease Termination. The foregoing indemnity shall not apply to, and Tenant shall not be responsible for, the presence of Hazardous Materials on, under, or about the Premises, Building, or Project to the extent caused by any third parties or by Landlord or Landlord's employees, agents, contractors or invitees. Notwithstanding anything to the contrary contained in this Lease, Landlord hereby represents and warrants to Tenant that, to the best of Landlord's knowledge, (i) the Premises, the Building, and Project are in compliance with all laws regarding Hazardous Materials ("Hazardous Materials Laws"); (ii) no asbestos-containing materials exist in or on the Premises, the Building, or Project; and (iii) any handling, transportation, storage or use of Hazardous Materials that occurred in the Premises, the Building, or Project prior to the Commencement Date is now in compliance with all Hazardous Materials Laws. Landlord further represents and warrants that, to the best of Landlord's knowledge, no litigation has been brought or threatened, nor any settlements reached with any governmental or private party, concerning the actual or alleged presence of Hazardous Materials on or about the Premises, Building, or Project, nor has Landlord received any notice of any violation, or alleged violation, of any Hazardous Materials Laws, pending claims or pending investigations with respect to the presence of Hazardous Materials on or about the Premises, Building, or Project. Landlord's representations and warranties set forth in this paragraph shall survive termination of this Lease. As used in this Lease, the term "Hazardous Materials" means any chemical, substance, waste or material which has been or is hereafter determined by any federal, state or local governmental authority to be capable of posing risk of injury to health or safety, including without limitation, those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," or "solid waste" under the Comprehensive Environmental Response, Compensation, and Liability -10- Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Hazardous Materials Transportation Act, as amended, and in the regulations promulgated pursuant to said laws; those substances defined as "hazardous wastes" in section 25117 of the California Health & Safety Code, or as "hazardous substances" in section 25316 of the California Health & Safety Code, as amended, and in the regulations promulgated pursuant to said laws; those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or designated by the Environmental Protection Agency (or any successor agency) as hazardous substances (see, e.g., --- ---- 40 CFR Part 302 and amendments thereto); such other substances, materials and wastes which are or become regulated or become classified as hazardous or toxic under any Laws, including without limitation the California Health & Safety Code, Division 20, and Title 26 of the California Code of Regulations; and any material, waste or substance which is (i) petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv) designated as a "hazardous substance" pursuant to section 311 of the Clean Water Act of 1977, 33 U.S.C. sections 1251 et seq. -- --- (33 U.S.C. (S)1321) or listed pursuant to section 307 of the Clean Water Act of 1977 (33 U.S.C. (S)1317), as amended; (v) flammable explosives; (vi) radioactive materials; or (vii) radon gas. 7. Taxes. ----- 7.1 Personal Property Taxes. Tenant shall cause Tenant's trade ----------------------- fixtures, equipment, furnishings, furniture, merchandise, inventory, machinery, appliances and other personal property installed or located on the Premises (collectively the "personal property") to be assessed and billed separately from the Land and the Building. Tenant shall pay before delinquency any and all taxes, assessments and public charges levied, assessed or imposed upon or against Tenant's personal property. If any of Tenant's personal property shall be assessed with the Land or the Building, Tenant shall pay to Landlord, as Additional Rent, the amounts attributable to Tenant's personal property within twenty (20) days after receipt of a written statement from Landlord setting forth the amount of such taxes, assessments and public charges attributable to Tenant's personal property. Tenant shall comply with the provisions of any Law which requires Tenant to file a report of Tenant's personal property located on the Premises. 7.2 Other Taxes Payable Separately by Tenant. Tenant shall pay (or ---------------------------------------- reimburse Landlord, as Additional Rent, if Landlord is assessed), prior to delinquency or within thirty (30) days after receipt of Landlord's statement thereof, any and all taxes, levies, assessments or surcharges payable by Landlord or Tenant and relating to this Lease or the Premises (other than Landlord's net income, succession, transfer, gift, franchise, estate or inheritance taxes, and Taxes, as that term is defined in Paragraph 7.3(a) below, payable as a Common Area Charge), whether or not now customary or within the contemplation of the parties hereto, whether or not now in force or which may hereafter become effective, including but not limited to taxes: -11- (a) Upon, allocable to, or measured by the area of the Premises or the Rentals payable hereunder, including without limitation any gross rental receipts, excise, or other tax levied by the state, any political subdivision thereof, city or federal government with respect to the receipt of such Rentals; (b) Upon or with respect to the use, possession occupancy, leasing, operation and management of the Premises or any portion thereof; (c) Upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises; or (d) Imposed as a means of controlling or abating environmental pollution or the use of energy or any natural resource (including without limitation gas, electricity or water), including, without limitation, any parking taxes, levies or charges or vehicular regulations imposed by any governmental agency. Tenant shall also pay, prior to delinquency, all privilege, sales, excise, use, business, occupation, or other taxes, assessments, license fees, or charges levied, assessed or imposed upon Tenant's business operations conducted at the Premises. 7.3 Common Taxes. ------------ (a) Definition of Taxes. The term "Taxes" as used in this Lease ------------------- shall collectively mean (to the extent any of the following are not paid by Tenant pursuant to Paragraphs 7.1 and 7.2 above) all real estate taxes and general and special assessments (including, but not limited to, assessments for public improvements or benefit); personal property taxes; taxes based on vehicles utilizing parking areas on the Land; taxes computed or based on rental income or on the square footage of the Premises or the Building (including without limitation any municipal business tax but excluding federal, state and municipal net income taxes); environmental surcharges; excise taxes; gross rental receipts taxes; sales and/or use taxes; employee taxes; water and sewer taxes, levies, assessments and other charges in the nature of taxes or assessments (including, but not limited to, assessments for public improvements or benefit); and all other governmental, quasi-governmental or special district impositions of any kind and nature whatsoever; regardless of whether any of the foregoing are now customary or within the contemplation of the parties hereto and regardless of whether resulting from increased rate and/or valuation, or whether extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing and which during the Lease Term are laid, levied, assessed or imposed upon Landlord and/or become a lien upon or chargeable against any portion of the Project under or by virtue of any present or future laws, statutes, ordinances, regulations, or other requirements of any governmental, quasi-governmental or special district authority whatsoever. The term "environmental -12- surcharges" shall include any and all expenses, taxes, charges or penalties imposed by the Federal Department of Energy, Federal Environmental Protection Agency, the Federal Clean Air Act, or any regulations promulgated thereunder, or imposed by any other local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy or any natural resource in regard to the use, operation or occupancy of the Project. The term "Taxes" shall include (to the extent the same are not paid by Tenant pursuant to Paragraphs 7.1 and 7.2 above), without limitation, all taxes, assessments, levies, fees, impositions or charges levied, imposed, assessed, measured, or based in any manner whatsoever upon or with respect to the use, possession, occupancy, leasing, operation or management of the Project or in lieu of or equivalent to any Taxes set forth in this Paragraph 7.3(a). Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to pay any portion of any tax or assessment (i) in excess of the amount which would be payable if the tax or assessment were paid in installments over the longest possible term; (ii) imposed on land and improvements other than the Project; and (iii) any increases in such tax or assessment occasioned by or relating to a voluntary or involuntary change of ownership or other conveyance of the Premises. (b) Common Area Charge. All Taxes which are levied or assessed ------------------ or which become a lien upon any portion of the Project or which become due or accrue during the Lease Term shall be a Common Area Charge, and Tenant shall pay as Additional Rent each month during the Lease, Term 1/12th of Tenant's percentage share of such Taxes, based on Landlord's estimate thereof, pursuant to Paragraph 12 below. Tenant's share of Taxes during any partial tax fiscal year(s) within the Lease Term shall be prorated according to the ratio which the number of days during the Lease Term or of actual occupancy of the Premises by Tenant, whichever is greater, during such year bears to 365. 8. Insurance; Indemnity; Waiver. ---------------------------- 8.1 Insurance by Landlord. --------------------- (a) Landlord shall, during the Lease Term, procure and keep in force the following insurance, the cost of which shall be a Common Area Charge, payable by Tenant pursuant to Paragraph 12 below: (i) Property Insurance. "All risk" property ------------------ insurance, including, without limitation, coverage for earthquake and flood; boiler and machinery (if applicable); sprinkler damage; vandalism; malicious mischief; full coverage plate glass insurance; and demolition, increased cost of construction and contingent liability from change in building laws on the Building and the Land, including any improvements or fixtures constructed or installed in the Building and on the Land -13- by Landlord. The annual insurance cost (including earthquake insurance premium costs) shall not increase more than ten percent (10%) per annum from the 4-1-94 to 3-31-95 insurance premium of $13,672.00. Such insurance shall be in the full amount of the replacement cost of the foregoing, with reasonable deductible amounts, which deductible amounts shall be a Common Area Charge, payable by Tenant pursuant to Paragraph 12, but the amount of such deductible shall not exceed two (2) times the deductible for Landlord's "all-risk" property insurance. Such insurance shall also include rental income insurance, insuring that one hundred percent (100%) of the Rentals (as the same may be adjusted hereunder) will be paid to Landlord for a period of up to twelve (12) months if the Premises are destroyed or damaged, or such longer period as may be required by any beneficiary of a deed of trust or any mortgagee of any mortgage affecting the Premises. Such insurance shall not cover any leasehold improvements installed in the Premises by Tenant at its expense, or Tenant's equipment, trade fixtures, inventory, fixtures or personal property located on or in the Premises; (ii) Liability Insurance. Comprehensive general ------------------- liability (lessor's risk) insurance against any and all claims for personal injury, death or property damage occurring in or about the Building or the Land. Such insurance shall have a combined single limit of not less than Three Million Dollars ($3,000,000) per occurrence and Five Million Dollars ($5,000,000) aggregate; and (iii) Other. Such other insurance as Landlord deems ----- necessary and prudent. 8.2 Insurance by Tenant. Tenant shall, during the Lease Term, at ------------------- Tenant's sole cost and expense, procure and keep in force the following insurance: (a) Personal Property Insurance. "All risk" property insurance, --------------------------- including, without limitation, coverage for boiler and machinery (if applicable); sprinkler damage; vandalism; malicious mischief; and demolition, increased cost of construction and contingent liability from changes in building laws on all leasehold improvements installed in the Premises by Tenant at its expense (if any), and on all equipment, trade fixtures, inventory, fixtures and personal property located on or in the Premises, including improvements or fixtures hereinafter constructed or installed on the Premises. Such insurance shall be in an amount equal to the full replacement cost of the aggregate of the foregoing and shall provide coverage comparable to the coverage in the standard ISO all risk form, when such form is supplemented with the coverages required above. (b) Liability Insurance. Comprehensive general liability ------------------- insurance for the mutual benefit of Landlord and Tenant, against any and all claims for personal injury, death or property damage occurring in or about the Premises and Common Area or -14- arising out of Tenant's or Tenant's agents' use of the Common Area, use or occupancy of the Premises or Tenant's operations on the Premises. Such insurance shall have a combined single limit of not less than One Million Dollars ($1,000,000) per occurrence and One Million Dollars ($1,000,000) aggregate. Such insurance shall contain a cross-liability (severability of interests) clause and an extended ("broad form") liability endorsement, including blanket contractual coverage. Such liability insurance shall be primary and not contributing to any insurance available to Landlord, and Landlord's insurance (if any) shall be in excess thereto. Such insurance shall specifically insure Tenant's performance of the indemnity, defense and hold harmless agreements contained in Paragraph 8.4, although Tenant's obligations pursuant to Paragraph 8.4 shall not be limited to the amount of any insurance required of or carried by Tenant under this Paragraph 8.2(b). Tenant shall be responsible for insuring that the amount of insurance maintained by Tenant is sufficient for Tenant's purposes. (c) Other. Such other insurance as required by law, including, ----- without limitation, workers' compensation insurance. (d) Form of the Policies. The policies required to be maintained -------------------- by Tenant pursuant to Paragraphs 8.2(a), (b), and (c) above shall be with companies, on forms, with deductible amounts (if any), and loss payable clauses reasonably satisfactory to Landlord, shall include Landlord and the beneficiary or mortgagee of any deed of trust or mortgage encumbering the Premises and/or the Land as additional insureds, and shall provide that such parties may, although additional insureds, recover for any loss suffered by Tenant's negligence. Certified copies of policies or certificates of insurance shall be delivered to Landlord prior to the Commencement Date; a new policy or certificate shall be delivered to Landlord at least ten (10) business days prior to the expiration date of the old policy. Tenant shall have the right to provide insurance coverage which it is obligated to carry pursuant to the terms hereof in a blanket policy, provided such blanket policy expressly affords coverage to the Premises and Common Area and to Tenant as required by this Lease. Tenant shall obtain a written obligation on the part of Tenant's insurer(s) to notify Landlord and any beneficiary or mortgagee of a deed of trust or mortgage encumbering the Premises and/or the Land in writing of any delinquency in premium payments and at least thirty (30) days prior to any cancellation or modification of any policy. Tenant's policies shall provide coverage on an occurrence basis and not on a claims made basis. In no event shall the limits of any policies maintained by Tenant be considered as limiting the liability of Tenant under this Lease. 8.3 Failure by Tenant to Obtain Insurance. If Tenant does not take ------------------------------------- out the insurance required pursuant to Paragraph 8.2 or keep the same in full force and effect, Landlord may, but shall not be obligated to, take out the necessary insurance and pay the premium therefor, and Tenant shall repay to Landlord, as Additional -15- Rent, the amount so paid promptly upon demand. In addition, Landlord may recover from Tenant and Tenant agrees to pay, as Additional Rent, any and all reasonable expenses (including attorneys' fees) and damages which Landlord may sustain by reason of the failure of Tenant to obtain and maintain such insurance, it being expressly declared that the expenses and damages of Landlord shall not be limited to the amount of the premiums thereon. 8.4 Indemnification. Tenant shall indemnify, hold harmless, and --------------- defend Landlord with competent counsel reasonably satisfactory to Landlord (except for Landlord's negligence or willful misconduct, or that of its agents, employees, contractors or invitees) against all claims, losses, damages, expenses or liabilities for injury or death to any person or for damage to or loss of use of any property arising out of any occurrence in, on or about the Building, Common Area or Land, if caused or contributed to by Tenant or Tenant's agents, or arising out of any occurrence in, upon or at the Premises or on account of the use, condition, occupational safety or occupancy of the Premises. Tenant's indemnification, defense and hold harmless obligations under this Lease shall include and apply to reasonable attorneys' fees, investigation costs, and other costs actually incurred by Landlord. Tenant shall further indemnify, defend and hold harmless Landlord from and against any and all claims, losses, damages, liabilities or expenses arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease. The provisions of this Paragraph 8.4 shall survive Lease Termination with respect to any damage, injury, death, breach or default occurring prior to such termination. This Lease is made on the express condition that Landlord shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause, in any way connected with the condition, use, occupational safety or occupancy of the Premises specifically including, without limitation, any liability for injury to the person or property of Tenant or Tenant's agents, except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees, contractors or invitees. Notwithstanding anything to the contrary contained in this Lease, Landlord shall not be released from, and shall indemnify, hold harmless and defend Tenant for and against, any and all claims, losses, damages, expenses, or liabilities for bodily injury or death to any person or for damage to any property to the extent arising out of the negligence or wilful misconduct of Landlord or its agents or employees; provided, however, such indemnification obligation of Landlord shall not extend to or cover any claim by Tenant for lost profits or loss of business. 8.5 Claims by Tenant. Landlord shall not be liable to Tenant, and ---------------- Tenant waives all claims against Landlord, for injury or death to any person, damage to any property, or loss of use of any property in any portion of the Project by and from all causes, including without limitation, any defect in any portion of the Project and/or any damage or injury resulting from fire, steam, electricity, gas, water or rain, which may leak or flow from or -16- into any part of the Premises, or from breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether the damage or injury results from conditions arising upon the Premises or upon other portions of the Project or from other sources. Neither Landlord nor Tenant shall be liable for any damages arising from any act or negligence of any other tenant or user of the Project. Tenant or Tenant's agents shall immediately notify Landlord in writing of any known defect in the Project. The provisions of this Paragraph 8.5 shall not apply to any damage or injury caused by Landlord's willful misconduct or negligence, or that of its agents, employees, contractors or invitees. 8.6 Mutual Waiver of Subrogation. Landlord hereby releases Tenant, ---------------------------- and Tenant hereby releases Landlord, and their respective officers, agents, employees and servants, from any and all claims or demands of damages, loss, expense or injury to the Project, or to the furnishings, fixtures, equipment, inventory or other property of either Landlord or Tenant in, about or upon the Project, which is caused by or results from perils, events or happenings which are the subject of insurance carried by the respective parties pursuant to this Paragraph 8 and in force at the time of any such loss, whether due to the negligence of the other party or its agents and regardless of cause or origin; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss, to the extent such insurance is not prejudiced thereby, and to the extent insured against. 9. Utilities. Tenant shall pay during the Lease Term and prior to --------- delinquency all charges for water, gas, light, heat, power, electricity, telephone or other communication service, janitorial service, trash pickup, sewer and all other services supplied to or consumed on the Premises (collectively the "Services") and all taxes, levies, fees or surcharges therefor. Tenant shall arrange for Services to be supplied to the Premises and shall contract for all of the Services in Tenant's name prior to the Commencement Date. The Commencement Date shall not be delayed by reason of any failure by Tenant to so contract for Services. In the event that any of the Services are not separately billed or metered to the Premises, or if any of the Services are not separately metered as of the Commencement Date, the cost of such Services shall be a common Area Charge and Tenant shall pay, as Additional Rent, Tenant's proportionate share of such cost to Landlord as provided in Paragraph 12 below, except that if any meter services less than the entire Building, Tenant's proportionate share of the costs measured by such meter shall be based upon the square footage of the gross leasable area in the Premises as a percentage of the total square footage of the gross leasable area of the portion of the Building serviced by such meter. If Landlord determines that Tenant is using a disproportionate amount of any commonly metered Services or an amount in excess of the customary amount of any Services ordinarily furnished for use of the Premises in accordance with the uses set -17- forth in Paragraph 6 above, then Landlord may elect to periodically charge Tenant, as Additional Rent, a sum equal to Landlord's estimate of the cost of Tenant's excess use of any or all such Services. The lack or shortage of any Services due to any cause whatsoever shall not affect any obligation of Tenant hereunder, and Tenant shall faithfully keep and observe all the terms, conditions and covenants of this Lease and pay all Rentals due hereunder, all without diminution, credit or deduction. 10. Repairs and Maintenance. ----------------------- 10.1 Landlord's Responsibilities. Subject to the provisions of --------------------------- Paragraph 15 below, Landlord shall maintain in reasonably good order and repair the structural roof, roof membrane and roof surface, structural and exterior walls (including painting thereof) and foundations of the Building. In addition, Landlord shall maintain the service contract (covering periodic inspection and servicing) for the heating and air conditioning systems of the Premises. Tenant shall give prompt written notice to Landlord of any known maintenance work required to be made by Landlord pursuant to this Paragraph 10.1. The costs of (i) repairs and maintenance of the roof surface and roof membrane, (ii) regular servicing of the heating and air conditioning systems of the Premises, and (iii) painting the exterior of the Premises, which are the obligation of Landlord hereunder shall be a Common Area Charge and Tenant shall pay such costs to Landlord as Additional Rent, as provided in Paragraph 12 below. The costs of maintenance, repair and replacement of the structural parts of the Premises (including foundations, floor slab, load bearing walls and roof structure), which are the obligation of Landlord hereunder shall be at the cost and expense of Landlord and shall not be a Common Area Charge, except for any repairs required because of the wrongful act of Tenant or Tenant's agents, which repairs shall be made at the expense of Tenant and as Additional Rent. 10.2 Tenant's Responsibilities. Except as expressly provided in ------------------------- Paragraph 10.1 above, and subject to the provisions of Paragraph 2.3 hereof, Tenant shall, at its sole' cost, maintain the entire Premises and every part thereof, including without limitation, the windows, skylights, window frames, plate glass, freight docks, doors and related hardware, interior walls and partitions, and the electrical, plumbing, lighting, heating and air conditioning systems in good order, condition and repair. Tenant's obligations with respect to the heating and air conditioning systems of the Premises shall include the replacement of components thereof. If Tenant fails to make repairs or perform maintenance work required of Tenant hereunder within fourteen (14) days after notice from Landlord specifying the need for such repairs or maintenance work, Landlord or Landlord's agents may, in addition to all other rights and remedies available hereunder or by law and without waiving any alternative remedies, enter into the Premises and make such repairs and/or perform such maintenance work. If Landlord makes such repairs and/or performs such maintenance work, Tenant shall reimburse Landlord upon demand and as Additional Rent, -18- for the cost of such repairs and/or maintenance work. Landlord shall have no liability to Tenant for any damage, inconvenience or interference with the use of the Premises by Tenant or Tenant's agents as a result of Landlord performing any such repairs or maintenance. Tenant shall reimburse Landlord, on demand and as Additional Rent, for the cost of damage to the Project caused by Tenant or Tenant's agents. Tenant expressly waives the benefits of any statute now or hereafter in effect (including without limitation the provisions of subsection 1 of Section 1932, Section 1941 and Section 1942 of the California Civil Code and any similar law, statute or ordinance now or hereafter in effect) which would otherwise afford Tenant the right to make repairs at Landlord's expense (or to deduct the cost of such repairs from Rentals due hereunder) or to terminate this Lease because of Landlord's failure to keep the Premises in good and sanitary order. 11. Common Area. ----------- 11.1 In General. Subject to the terms and conditions of this Lease ---------- and such rules and regulations as Landlord may from time to time prescribe, Tenant and Tenant's agents shall have, in common with other tenants of the Building and other permitted users, the nonexclusive right to use during the Lease Term the access roads, parking areas, sidewalks, landscaped areas and other facilities on the Land or in the Building designated by Landlord for the general use and convenience of the occupants of the Building and other authorized users, which areas and facilities are referred to herein as the "Common Area." This right to use the Common Area shall terminate upon Lease Termination. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of the Common Area, Notwithstanding anything to the contrary contained in this Lease, if Landlord, whether voluntarily of by mandate of public agency with jurisdiction over the Project, makes any alteration, addition or change to the exterior of the Building or the Common Areas (unless such alteration or addition is required due to an alteration or addition made by Tenant to the Premises), Landlord will make the alteration, addition or change at its sole cost and expense, and Tenant shall not be obligated to reimburse Landlord for any part of such expense. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of all or any portion of the Common Area and to amend such rules and regulations from time to time with or without advance notice, as Landlord may deem appropriate for the best interests of the occupants of the Building and other authorized users. Any amendments to the rules and regulations shall be effective as to Tenant, and binding on Tenant, upon delivery of a copy of such rules and regulations to Tenant. Tenant and Tenant's agents shall observe such rules and regulations and any failure by Tenant or Tenant's agents to observe and comply with the rules and regulations shall be a Default by Tenant. Landlord shall not be responsible for the nonperformance of the rules and regulations by any tenants or occupants of the Building or other authorized users, nor shall Landlord be liable to Tenant by reason of the -19- noncompliance with or violation of the rules and regulations by any other tenant or user. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to comply with any rule or regulation unless the same applies nondiscriminatorily to all occupants of the Project, and does not unreasonably interfere with Tenant's use of the Premises or Tenant's parking rights. 11.2 Parking Areas. Tenant is allocated and Tenant and Tenant's ------------- employees and invitees shall have the nonexclusive right to use not more than the number of parking spaces set forth in Paragraph 1.13, the location of which may be designated from time to time by Landlord. Neither Tenant nor Tenant's agents shall at any time use more parking spaces than the number so allocated to Tenant or park or permit the parking of their vehicles in any portion of the Land not designated by Landlord as a nonexclusive parking use. Tenant and Tenant's agents shall not have the exclusive right to use any specific parking space. Notwithstanding the number of parking spaces designated for Tenant's nonexclusive use, in the event by reason of any Law relating to or affecting parking on the Land, or any other cause beyond Landlord's reasonable control, Landlord is required to reduce the number of parking spaces on the Land, Landlord shall have the right to proportionately reduce the number of Tenant's parking spaces and the nonexclusive parking spaces of other tenants in the Building. Landlord reserves the right to promulgate such reasonable rules and regulations relating to the use of such parking areas on the Land as Landlord may deem appropriate. Landlord furthermore reserves the right, after having given Tenant reasonable notice, to have any vehicles owned by Tenant or Tenant's agents which are parked in violation of the provisions of this Paragraph 11.2 or in violation of Landlord's rules and regulations relating to parking, to be towed away at Tenant's cost. In the event Landlord elects or is required by any law to limit or control parking on the Land, by validation of parking tickets or any other method, Tenant agrees to participate in such validation or other program under such reasonable rules and regulations as are from time to time established by Landlord. Landlord shall have the right to close, at reasonable times, all or any portion of the parking areas for any reasonable purpose, including without limitation, the prevention of a dedication thereof, or the accrual of rights of any person or public therein. Tenant and Tenant's agents shall not at any time park or permit the parking of (i) trucks or other vehicles (whether owned by Tenant or other persons) adjacent to any loading areas so as to interfere in any manner with the use of such areas, (ii) Tenant's or Tenant's agents' vehicles or trucks, or the vehicles or trucks of Tenant's suppliers or others, in any portion of the Common Area not designated by Landlord for such use by Tenant, or (iii) any inoperative vehicles or equipment on any portion of the Common Area. 11.3 Maintenance by Landlord. Landlord shall operate, manage and ----------------------- maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such -20- maintenance shall be at the reasonable discretion of Landlord. The cost of such maintenance, operation and management shall be a "Common Area Charge," and Tenant shall pay to Landlord, as Additional Rent, Tenant's share of such costs as provided in Paragraph 12 below. 12. Common Area Charges. ------------------- 12.1 Definition. "Common Area Charge" or "Common Area Charges" as ---------- used in this Lease shall mean and include all items identified in other paragraphs of this Lease as a Common Area Charge and the total cost paid or incurred by Landlord for the operation, maintenance, repair, and management of the Project which costs shall include, without limitation: the cost of Services and utilities supplied to the Project (to the extent the same are not separately charged or metered to tenants of the Building); water; sewage; trash removal; fuel; electricity; heat; lighting systems; fire protection systems; storm drainage and sanitary sewer systems; HVAC including air conditioning (to the extent the heating and air conditioning systems in the Building are not maintained by tenants of the Building at such tenants' sole cost and expense); repairing or replacing the roof membrane and roof surface (including repair of leaks and resurfacing); property and liability insurance covering the Building and the Land and any other insurance carried by Landlord pursuant to Paragraph 8 above; window cleaning; cleaning, sweeping, striping, resurfacing of parking and driveway areas; cleaning the Common Area following storms or other severe weather; cleaning and repairing of sidewalks, curbs, stairways; costs related to irrigation systems and Project signs; fees for licenses and permits required for the operation of the Project; the cost of complying with Laws, including, without limitation, maintenance, alterations and repairs required in connection therewith (subject to the provisions of Paragraph 12.3 hereof); costs related to landscape maintenance; and the cost of contesting the Validity or applicability of any governmental enactments which may affect Common Area Charges. If the Project contains more than one (1) building at any time during the Lease Term, then the term "Common Area Charges" shall mean and include all of the Common Area Charges allocable to the Building and a proportionate share (based on the square footage of gross leasable area in the Building as a percentage of the total of square footage of gross leasable area of the buildings in the Project at the time in question) of all Common Area Charges which are related to the Project in general and are not allocated to any one building in the Project. Common Area Charges shall also include a management fee to Landlord in an amount equal to ten percent (10%) of the total Common Area Charges. The cost of (i) capital repair items (i.e., items which Landlord is required to capitalize and not expense in the current year for federal income tax purposes), (ii) replacement of the roof membrane or roof surface, (iii) resurfacing the parking lot, (iv) repainting the exterior of the Building, and (v) structural alterations or additions required due to a change in laws and unrelated to Tenant's specific use of the Premises or the Common Area, shall be amortized at ten percent (10%) over the useful life of the repair -21- or item, and be paid monthly by Tenant from the date of installation or repair through Lease Termination. The specific examples of Common Area Charges stated in this Paragraph 12.1 are in no way intended to and shall not limit the costs comprising Common Area Charges, nor shall such examples be deemed to obligate Landlord to incur such costs or to provide such services or to take such actions except as Landlord may be expressly required in other portions of this Lease, or except as Landlord, in its reasonable discretion, may elect. All costs incurred by Landlord in good faith for the operation, maintenance, repair and management of the Project shall be deemed conclusively binding on Tenant. Notwithstanding anything to the contrary contained in this Lease, within thirty (30) days after receipt by Tenant of Landlord's statement of Common Area Charges prepared pursuant to Paragraph 12.2 hereof for any prior calendar year during the Term, Tenant or its authorized representative shall have the right to inspect the books of Landlord during the business hours of Landlord at Landlord's office in the Building or, at Landlord's option, such other location as Landlord reasonably may specify, for the purpose of verifying the information contained in the statement. Unless Tenant asserts specific errors within thirty (30) days after receipt of the statement, the statement shall be deemed correct as between Landlord and Tenant, except as to individual components subsequently determined to be in error by future audit. 12.2 Payment of Common Area Charges by Tenant. Tenant shall pay to ---------------------------------------- Landlord, as Additional Rent and without deduction or offset, an amount equal to Tenant's percentage share (stated in Paragraph 1.10 above) of the Common Area Charges. Payment of Common Area Charges by Tenant shall be made by whichever of the following methods is from time to time designated by Landlord, and Landlord reasonably may change the method of payment at any time. Tenant's share of Common Area Charges actually incurred or paid by Landlord but not theretofore billed to Tenant, as invoiced by Landlord shall be payable by Tenant within ten (10) days after receipt of Landlord's invoice, but not more often than once each calendar month. Alternatively, Tenant's share of Common Area Charges shall be based upon Landlord's estimate of Common Area Charges and Tenant's share shall be payable in equal monthly installments in advance on the first day of each calendar month commencing with the month following receipt of Landlord's estimate (and subject to Landlord's right to change the method of payment) Within ninety (90) days after the end of each calendar year (or at Lease Termination) Landlord shall furnish Tenant a statement showing the actual Common Area Charges for the period to which Landlord's estimate pertains and shall concurrently either bill Tenant for the balance due (payable upon demand by Landlord) or credit Tenant's account for the excess previously paid. Notwithstanding the foregoing provisions of this Paragraph 12, Landlord and Tenant agree that if Landlord incurs any costs for insurance, Services, repairs or maintenance exclusively for or to the Premises or for less than all the tenants of the Building and such costs are Common Area Charges, or if any improvements installed in the Premises by Tenant or Landlord are valued by the -22- assessor disproportionately higher than those of any other tenants in the Building, then Tenant's share of such Common Area Charges shall be equitably increased by Landlord to reflect the portion of any such costs or taxes incurred by Landlord in regard to the Premises, and Tenant shall pay the same to Landlord as Additional Rent. 12.3 Exclusions From Common Area Charges. Notwithstanding anything to ----------------------------------- the contrary contained in this Lease, in no event shall Tenant have any obligation to perform, to pay directly, or to reimburse Landlord for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, commissions, charges, disbursements, attorneys' fees, experts' fees, costs and expenses (collectively, "Costs"). (a) Losses Caused by Others and Construction Defects. Costs ------------------------------------------------ occasioned by the act, omission or violation of Law by Landlord, any other occupant of the Project, or their respective agents, employees or contractors, or Costs to correct any construction defect in the Premises (other than alterations constructed by Tenant), Building or Project, or costs arising out of the failure to construct the Building, Premises, tenant improvements (other than the improvements identified on Exhibit "C- 2") or Common Areas in accordance with Laws and private restrictions applicable at the time of construction thereof. (b) Condemnation and Insurance Costs. Costs occasioned by the -------------------------------- exercise of the power of eminent domain, or increases in insurance Costs caused by the activities of other occupant(s) of the Project. (c) Reimbursable Expenses. Costs for which Landlord has a right of --------------------- reimbursement from others, or Costs which Tenant pays directly to a third person. (d) Utilities or Services. Costs (i) arising from the --------------------- disproportionate use of any utility or service supplied by Landlord to any other occupant of the Project; or (ii) associated with utilities and services of a type not provided to Tenant. (e) Leasing Expenses. Costs incurred in connection with negotiations ---------------- or disputes with other occupant(s) of the Project, and Costs arising from the violation by Landlord or any occupant of the Project (other than Tenant) of the terms and conditions of any lease or other agreement. (f) Reserves. Depreciation, amortization or other expense reserves. -------- (g) Mortgages. Interest, charges and fees incurred on debt, payments --------- or mortgages and rent under ground leases. -23- (h) Hazardous Materials. Costs incurred to investigate the presence ------------------- of any Hazardous Material, Costs to respond to any claim of Hazardous Material contamination or damage, Costs to remove any Hazardous Material from the Premises, Building or Project or to remediate any Hazardous Material contamination, and any judgments or other Costs incurred in connection with any Hazardous Material exposure or release, except to the extent such Costs are caused by or incurred by reason of the storage, use or disposal of the Hazardous Material in question by Tenant, its agents, employees, contractors or invitees. (i) Management. Wages, salaries, compensation and labor burden for ---------- any employee not stationed on the Project on a full-time basis, or any fee, profit or compensation retained by Landlord or its affiliates for management and administration of the Project in excess of ten percent (10%) of Common Area Charges. (j) Amortization of Capital Improvements Required by Law. Costs for ---------------------------------------------------- capital improvements required by Law that do not relate solely to Tenant's particular use or occupancy of the Premises, and Costs of retrofitting any part of the Project, other than the Premises, in order to comply with the ADA in connection with the leasing or alteration of portions of the Project other than the Premises. 13. Alterations and Improvements. ---------------------------- 13.1 In General. Tenant shall not make, or permit to be made, ---------- any alterations, changes, enlargements, improvements or additions (collectively "Alterations") in excess of Five Thousand Dollars ($5,000) in, on, about or to the Premises, or any part thereof, without the prior written consent of Landlord (which shall not be unreasonably withheld or delayed) and without acquiring and complying with the conditions of all permits required for such Alterations by any governmental authority having jurisdiction thereof. The term "Alterations" as used in this Paragraph 13 shall also include all heating, lighting, electrical (including all wiring, conduit outlets, drops, buss ducts, main and subpanels), air conditioning and partitioning in the Premises made by Tenant regardless of how affixed to the Premises. As a condition to the giving of its consent, Landlord may impose such reasonable requirements as Landlord reasonably may deem necessary in its sole discretion, including without limitation, the manner in which the work is done; a right of approval of the contractor by whom the work is to be performed; the times during which the work is to be accomplished; the requirement that Tenant post a completion bond in an amount and form reasonably satisfactory to Landlord; and the requirement that Tenant reimburse Landlord, as Additional Rent, for Landlord's actual costs incurred in reviewing any proposed Alteration, whether or not Landlord's consent is granted. In the event Landlord consents to the making of any Alterations by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense, in accordance with the plans and specifications approved by Landlord and in a manner causing Landlord and Landlord's agents and -24- other tenants of the Building the least interference and inconvenience practicable under the circumstances. Tenant shall give written notice to Landlord five days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises, and prior to the commencement of any work of improvement on the Premises. Any Alterations to the Premises made by Tenant shall be made in accordance with applicable Laws and in a first-class workmanlike manner. In making any such Alterations, Tenant shall, at Tenant's sole cost and expense, file for and secure and comply with any and all permits or approvals required by any governmental departments or authorities having jurisdiction thereof and any utility company having an interest therein. In no event shall Tenant make any structural changes to the Premises or make any changes to the Premises which would weaken or impair the structural integrity of the Building. 13.2 Removal Upon Lease Termination. At the time Tenant requests ------------------------------ Landlord's consent, Tenant shall request a decision from Landlord in writing as to whether Landlord will require Tenant, at Tenant's expense, to remove any such Alterations and restore the Premises to their prior condition at Lease Termination. In the event Tenant fails to earlier obtain Landlord's written decision as to whether Tenant will be required to remove any Alteration, or in the event Landlord elects to defer such decision, then no less than ninety (90) nor more than one hundred twenty (120) days prior to the expiration of the Lease Term, Tenant by written notice to Landlord shall request Landlord to inform Tenant whether or not Landlord desires to have any Alterations made to the Premises by Tenant removed at Lease Termination. Following receipt of such notice, Landlord may elect to have all or a portion of Tenant's Alterations removed from the Premises at Lease Termination, and Tenant shall, at its sole cost and expense, remove at Lease Termination such Alterations designated by Landlord for removal and repair all damage to the Project arising from such removal. In the event Tenant fails to so request Landlord's decision or fails to remove any Alterations designated by Landlord for removal, Landlord may remove any Alterations made to the Premises by Tenant and repair all damage to the Premises and Common Area arising from such removal, and may recover from Tenant all reasonable costs and expenses incurred thereby. Tenant's obligation to pay such costs and expenses to Landlord shall survive Lease Termination. Unless Landlord elects to have Tenant remove any such Alterations, all such Alterations, except for moveable furniture and trade fixtures of Tenant not affixed to the Premises, shall become the property of Landlord upon Lease Termination (without any payment therefor) and remain upon and be surrendered with the Premises at Lease Termination. 13.3 Landlord's Improvements. All fixtures, improvements or ----------------------- equipment which are installed, constructed on or attached to the Premises, Building or Common Area by Landlord shall be a part of the realty and belong to Landlord. -25- 14. Default and Remedies. -------------------- 14.1 Events of Default. The term "Default by Tenant" as used ----------------- in this Lease shall mean the occurrence of any of the following events: (a) Tenant's failure to pay when due any Rentals; (b) Commencement and continuation for at least sixty (60) days of any case, action or proceeding by, against or concerning Tenant under any federal or state bankruptcy, insolvency or other debtor's relief law, including without limitation, (i) a case under Title 11 of the United States Code concerning Tenant, whether under Chapter 7, 11, or 13 of such Title or under any other Chapter, or (ii) a case, action or proceeding seeking Tenant's financial reorganization or an arrangement with any of Tenant's creditors; (c) Voluntary or involuntary appointment of a receiver, trustee, keeper or other person who takes possession for more than sixty (60) days of substantially all of Tenant's assets or of any asset used in Tenant's business on the Premises, regardless of whether such appointment is as a result of insolvency or any other cause; (d) Execution of an assignment for the benefit of creditors of substantially all assets of Tenant available by law for the satisfaction of judgment creditors; (e) Commencement of proceedings for winding up or dissolving (whether voluntary or involuntary) the entity of Tenant, if Tenant is a corporation or a partnership; (f) Levy of a writ of attachment or execution on Tenant's interest under this Lease, if such writ continues for a period of thirty (30) days; (g) Transfer or attempted Transfer of this Lease or the Premises by Tenant contrary to the provisions of Paragraph 24 below; or (h) Breach by Tenant of any term, covenant, condition, warranty, or other provision contained in this Lease or of any other obligation owing or due to Landlord. 14.2 Remedies. Upon any Default by Tenant, Landlord shall -------- have the following remedies, in addition to all other rights and remedies provided by law, to which Landlord may resort cumulatively, or in the alternative: 14.2.1 Termination. Upon any Default by Tenant, ----------- Landlord shall give written notice to Tenant of such default and shall have the right (but not the obligation) to -26- terminate this Lease and Tenant's right to possession of the Premises if (i) such default is in the payment of Rentals and is not cured within five (5) days after any such notice, or, (ii) with respect to the defaults referred to in subparagraphs 14.1(d), (e), (g) and (h), and such default is not cured within thirty (30) days after any such notice (or if a default under subparagraph 14.1(h) cannot be reasonably cured within thirty (30) days, if Tenant does not commence to cure the default within the thirty (30) day period or does not diligently and in good faith prosecute the cure to completion), or, (iii) with respect to the defaults specified in subparagraphs 14.1(b), (c) and (f) such default is not cured within the respective time periods specified in those subparagraphs. The parties agree that any notice given by Landlord to Tenant pursuant to this Paragraph 14.2.1 shall be sufficient notice for purposes of California Code of Civil Procedure Section 1161 and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding. Upon termination of this Lease, Landlord shall have the right to recover from Tenant: (a) The worth at the time of award of the unpaid Rentals which had been earned at the time of termination; (b) The worth at the time of award of the amount by which the Rentals which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (c) The worth at the time of award (computed by discounting at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent) of the amount by which the Rentals for the balance of the Lease Term after the time of award exceed the amount of such rental loss that Tenant proves could be reasonably avoided; (d) Any other amounts necessary to compensate Landlord for all detriment proximately caused by the Default by Tenant or which in the ordinary course of events would likely result, including without limitation the following: (i) Expenses in retaking possession of the Premises; (ii) Expenses for cleaning, repairing or restoring the Premises; (iii) Any unamortized real estate brokerage commission paid in connection with this Lease; (iv) Expenses for removing, transporting, and storing any of Tenant's property left at the Premises (although Landlord shall have no obligation to remove, -27- transport, or store any such property); (v) Expenses of reletting the Premises, including without limitation, brokerage commissions and attorneys' fees; (vi) Attorneys' fees and court costs; and (vii) Costs of carrying the Premises such as repairs, maintenance, taxes and insurance premiums, utilities and security precautions (if any). (e) The "worth at the time of award" of the amounts referred to in subparagraphs (a) and (b) of this Paragraph 14.2.1 is computed by allowing interest at an annual rate equal to the greater of: ten percent (10%); or five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the Default by Tenant, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended, not to exceed the maximum rate allowable by law. 14.2.2 Continuance of Lease. Upon any Default by Tenant and -------------------- unless and until Landlord elects to terminate this Lease pursuant to Paragraph 14.2.1 above, this Lease shall continue in effect after the Default by Tenant and Landlord may enforce all its rights and remedies under this Lease, including without limitation, the right to recover payment of Rentals as they become due. Neither efforts by Landlord to mitigate damages caused by a Default by Tenant nor the acceptance of any Rentals shall constitute a waiver by Landlord of any of Landlord's rights or remedies, including the rights and remedies specified in Paragraph 14.2.1 above. 15. Damage or Destruction. --------------------- 15.1 Definition of Terms. For the purposes of this Lease, the ------------------- term: (a) "Insured Casualty" means damage to or destruction of the Premises from a cause actually insured against, or required by this Lease to be insured against, for which the insurance proceeds paid or made available to Landlord are sufficient to rebuild or restore the Premises under then existing building codes to the condition existing immediately prior to the damage or destruction; and (b) "Uninsured Casualty" means damage to or destruction of the Premises from a cause not actually insured against, or not required to be insured against, or from a cause actually insured against but for which the insurance proceeds paid or made available to Landlord are for any reason insufficient to rebuild or restore the Premises under then existing building codes to the condition existing immediately prior to the damage or destruction, or from a cause actually insured against but for which the insurance proceeds are not paid or made available to Landlord -28- within ninety (90) days of the event of damage or destruction. 15.2 Insured Casualty. ---------------- 15.2.1 Rebuilding Required. In the event of an Insured Casualty ------------------- where the extent of damage or destruction is less than twenty-five percent (25%) of the then full replacement cost of the Premises, Landlord shall rebuild or restore the Premises to the condition existing immediately prior to the damage or destruction, provided the damage or destruction was not a result of a negligent or willful act of Tenant, and that there exist no governmental codes or regulations that would interfere with Landlord's ability to so rebuild or restore. 15.2.2 Landlord's Election. In the event of an Insured Casualty ------------------- where the extent of damage or destruction is equal to or greater than twenty- five percent (25%) of the then full replacement cost of the Premises, Landlord may, at its option and at its sole discretion, rebuild or restore the Premises to the condition existing immediately prior to the damage or destruction, or terminate this Lease. Landlord shall notify Tenant in writing within sixty (60) days after the event of damage or destruction of Landlord's election to either rebuild or restore the Premises or terminate this Lease. 15.2.3 Continuance of Lease. If Landlord is required to rebuild -------------------- or restore the Premises pursuant to Paragraph 15.2.1 or if Landlord elects to rebuild or restore the Premises pursuant to Paragraph 15.2.2, this Lease shall remain in effect and Tenant shall have no claim against Landlord for compensation for inconvenience or loss of business during any period of repair or restoration. 15.3 Uninsured Casualty. ------------------ 15.3.1 Landlord's Election. In the event of an Uninsured ------------------- Casualty, Landlord may, at its option and at its sole discretion (i) rebuild or restore the Premises as soon as reasonably possible at Landlord's expense (unless the damage or destruction was caused by a negligent or willful act of Tenant, in which event Tenant shall pay all costs of rebuilding or restoring), in which event this Lease shall continue in full force and effect or (ii) terminate this Lease, in which event Landlord shall give written notice to Tenant within sixty (60) days after the event of damage or destruction of Landlord's election to terminate this Lease as of the date of the event of damage or destruction, and if the damage or destruction was caused by a negligent or willful act of Tenant, Tenant shall be liable therefor to Landlord. 15.3.2 Tenant's Ability to Continue Lease. If Landlord elects ---------------------------------- to terminate this Lease and the extent of damage or destruction is less than twenty-five percent (25%) of the then full replacement cost of the Premises or the proceeds paid or made available to Landlord are for any reason insufficient to rebuild -29- or restore the Premises under then existing building codes to the condition existing immediately prior to the damage or destruction, and if there exist no governmental codes or regulations that would interfere with Landlord's ability to so repair or restore, then Tenant may nevertheless cause the Lease to continue in effect by (i) notifying Landlord in writing within ten (10) days after Landlord's notice of termination of Tenant's agreement to pay all costs of rebuilding or restoring not covered by insurance, and (ii) providing Landlord with reasonable security for or assurance of such payment. Tenant shall pay to Landlord in cash no later than thirty (30) days prior to the date of commencement of construction the reasonable estimated cost of rebuilding or restoring. In the event Tenant fails to pay such cost to Landlord by the date specified, Landlord may immediately terminate the Lease and recover from Tenant all reasonable costs incurred by Landlord in preparation for construction. If the actual cost of rebuilding or restoring exceeds the estimated cost of such work, Tenant shall pay the difference to Landlord in cash upon notification by Landlord of the final cost. If the cost of rebuilding or restoring is less than the estimated cost of such work, Tenant shall be entitled to a refund of the difference upon completion of the rebuilding or restoring and determination of final cost. 15.4 Tenant's Election. Notwithstanding anything to the contrary ----------------- contained in this Paragraph 15, Tenant may elect to terminate this Lease in the event the Premises are damaged or destroyed and, in the reasonable opinion of Landlord's architect or construction consultants, the restoration of the Premises cannot be substantially completed within one hundred eighty (180) days after the event of damage or destruction. Tenant's election shall be made by written notice to Landlord within ten (10) days after Tenant receives from Landlord the estimate of the time needed to complete repair or restoration of the Premises. If Tenant does not deliver said notice within said ten (10) day period, Tenant may not later terminate this Lease even if substantial completion of the rebuilding or restoration occurs subsequent to said one hundred eighty (180) day period, provided that Landlord is proceeding with diligence to rebuild or restore the Premises. If Tenant delivers said notice within said ten (10) day period, this Lease shall terminate as of the date of the event of damage or destruction. 15.5 Damage or Destruction Near End of Lease Term. Notwithstanding -------------------------------------------- anything to the contrary contained in this Paragraph 15, in the event the Premises are damaged or destroyed in whole or in part (regardless of the extent of damage) from any cause during the last twelve (12) months of the Lease Term, Landlord or Tenant may, at its option, terminate this Lease as of the date of the event of damage or destruction by giving written notice to the other of its election to do so within thirty (30) days after the event of such damage or destruction. For purposes of this Paragraph 15.5, if Tenant has been granted an option to extend or renew the Lease Term pursuant to another provision of this Lease, then the damage or destruction shall be deemed to have occurred during the last twelve (12) months of the Lease Term if -30- Tenant fails to exercise its option to extend or renew within twenty (20) days after the event of damage or destruction. 15.6 Termination of Lease. If the Lease is terminated pursuant to -------------------- this Paragraph 15, the unused balance of the Security Deposit shall be refunded to Tenant. The current Rent shall be proportionately reduced during the period following the event of damage or destruction until the date on which Tenant surrenders the Premises, based upon the extent to which the damage or destruction interferes with Tenant's business conducted in the Premises, as reasonably determined by Landlord, to the extent such loss is covered as an insured peril by the insurance carried by Landlord pursuant to Paragraph 8.1. All other Rentals due hereunder shall continue unaffected during such period. The proceeds of insurance carried Tenant pursuant to Paragraph 8.2 shall be paid to Landlord and Tenant, as their interests appear. 15.7 Abatement of Rentals. If the Premises are to be rebuilt or -------------------- restored pursuant to this Paragraph 15, the then current Rentals shall be proportionately reduced during the period of repair or restoration, based upon the extent to which the making of repairs interferes with Tenant's business conducted in the Premises, as reasonably determined by Tenant and Landlord, to the extent such loss is covered as an insured peril by the insurance carried, or required to be carried hereunder, by Landlord pursuant to Paragraph 8.1. 15.8 Liability for Personal Property. In no event shall Landlord have ------------------------------- any liability for, nor shall it be required to repair or restore, any injury or damage to any Alterations to the Premises made by Tenant, trade fixtures, equipment, merchandise, furniture, or any other property installed by Tenant or at the expense of Tenant. If Landlord or Tenant do not elect to terminate this Lease pursuant to this Paragraph 15, Tenant shall be obligated to promptly rebuild or restore the same to the condition existing immediately prior to the damage or destruction in accordance with the provisions of Paragraph 13.1. 15.9 Waiver of Civil Code Remedies. Landlord and Tenant acknowledge ----------------------------- that the rights and obligations of the parties upon damage or destruction of the Premises are as set forth herein; therefore Tenant hereby expressly waives any rights to terminate this Lease upon damage or destruction of the Premises, except as specifically provided by this Lease, including without limitation any rights pursuant to the provisions of Subdivision 2 of Section 1932 and Subdivision 4 of Section 1933 of the California Civil Code, as amended from time to time, and the provisions of any similar law hereinafter enacted, which provisions relate to the termination of the hiring of a thing upon its substantial damage or destruction. 15.10 Damage or Destruction to the Building. The foregoing ------------------------------------- notwithstanding, in the event the Building is damaged or destroyed to the extent of more than thirty-three and one-third -31- percent (33 1/3%) of the then replacement cost thereof, Landlord may elect to terminate this Lease, whether or not the Premises are injured. 16. Condemnation. ------------ 16.1 Definition of Terms. For the purposes of this Lease, the ------------------- term: (a) "Taking" means a taking of the Premises, Common Area or Building or damage related to the exercise of the power of eminent domain and includes, without limitation, a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (b) "Total Taking" means the Taking of the entire Premises or so much of the Premises, Building or Common Area as to prevent or substantially impair the use thereof by Tenant for the uses herein specified; provided, however, that in no event shall the Taking of less than twenty percent (20%) of the Premises or fifty percent (50%) of the Building and Common Area be considered a Total Taking; (c) "Partial Taking" means the Taking of only a portion of the Premises, Building or Common Area which does not constitute a Total Taking; (d) "Date of Taking" means the date upon which the title to the Premises, Building or Common Area or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (e) "Award" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. 16.2 Rights. The parties agree that in the event of a Taking ------ all rights between them or in and to an Award shall be as set forth herein. 16.3 Total Taking. In the event of a Total Taking during the ------------ Lease Term: (a) the rights of Tenant under this Lease and the leasehold estate of Tenant in and to the Premises shall cease and terminate as of the Date of Taking; (b) Landlord shall refund to Tenant any prepaid Rent and the unused balance of the Security Deposit; (c) Tenant shall pay Landlord any Rentals due Landlord under the Lease, prorated as of the Date of Taking; (d) to the extent the Award is not payable to the beneficiary or mortgagee of a deed of trust or mortgage affecting the Premises, Tenant shall receive from the Award those portions of the Award attributable to trade fixtures of Tenant; and (e) the remainder of the Award shall be paid to and be the property of Landlord. Nothing in this Paragraph 16.3 shall be deemed to deny Tenant its right to recover all awards made by the condemning authority for moving costs, relocation costs and costs attributable to goodwill and leasehold improvements installed by Tenant. 16.4 Partial Taking. In the event of a Partial Taking during -------------- the Lease Term: (a) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the portion of the Premises taken shall cease and terminate as of the Date of Taking; (b) from and after the Date of Taking the Rent shall be an amount -32- equal to the proportion that the gross square footage of the Premises, as reduced, bears to the gross square footage of the Building, as reduced; (c) to the extent the Award is not payable to the beneficiary or mortgagee of a deed of trust or mortgage affecting the Premises, Tenant shall receive from the Award the portions of the Award attributable to trade fixtures of Tenant; and (d) the remainder of the Award shall be paid to and be the property of Landlord. Each party waives the provisions of California Code of Civil Procedure Section 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a Partial Taking. Nothing contained in this Paragraph 16.4 shall be deemed to deny Tenant its right to recover awards made by the condemning authority for moving cots, relocation costs, and costs attributable to goodwill and leasehold improvements installed by Tenant. 17. Liens. ----- 17.1 Premises to Be Free of Liens. Tenant shall pay for all ---------------------------- labor and services performed for, and all materials used by or furnished to Tenant, Tenant's agents, or any contractor employed by Tenant with respect to the Premises. Tenant shall indemnify, defend and hold Landlord harmless from and keep the Project free from any liens, claims, demands, encumbrances, or judgments, including all costs, liabilities and attorneys' fees with respect thereto, created or suffered by reason of any labor or services performed for, or materials used by or furnished to Tenant or Tenant's agents or any contractor employed by Tenant with respect to the Premises. Landlord shall have the right, at all times, to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper for the protection of Landlord and the Premises, Building, Common Area and Land, and any other party having an interest therein, from mechanics' and materialmen's liens, including without limitation a notice of nonresponsibility. In the event Tenant is required to post an improvement bond with a public agency in connection with any work performed by Tenant on or to the Premises, Tenant shall include Landlord as an additional obligee. 17.2 Notice of Lien; Bond. Should any claims of lien be filed -------------------- against, or any action be commenced affecting the Premises, Tenant's interest in the Premises or any other portion of the Project, Tenant shall give Landlord notice of such lien or action within three (3) days after Tenant receives notice of the filing of the lien or the commencement of the action. In the event that Tenant shall not, within twenty (20) days following the imposition of any such lien, cause such lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord shall deem proper, including payment of the claim giving rise to such lien or posting of a proper bond. All such sums paid by Landlord and all expenses incurred by Landlord in connection therewith, including attorneys' fees and costs, shall -33- be payable to Landlord by Tenant as Additional Rent on demand. 18. Landlord's Right of Access to Premises. Landlord reserves and -------------------------------------- shall have the right and Tenant and Tenant's agents shall permit Landlord and Landlord's agents to enter the Premises at any reasonable time for the purpose of (i) inspecting the Premises, (ii) performing Landlord's maintenance and repair responsibilities set forth herein, (iii) posting notices of nonresponsibility, (iv) placing upon the Premises at any time "For Sale" signs, (v) placing on the Premises ordinary "For Lease" signs at any time within ninety (90) days prior to Lease Termination, or at any time Tenant is in uncured default hereunder, or at such other times as agreed to by Landlord and Tenant, (vi) protecting the Premises in the event of an emergency and (vii) exhibiting the Premises to prospective purchasers, lenders or tenants. In the event of an emergency, Landlord shall have the right to use any and all means which Landlord reasonably may deem proper to gain access to the Premises. Any entry to the Premises by Landlord or Landlord's agents in accordance with this Paragraph 18 or any other provision of this Lease shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of the Premises, or an eviction of Tenant from the Premises or any portion thereof nor give Tenant the right to abate the Rentals payable under this Lease. Except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees, contractors or invitees, Tenant hereby waives any claims for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned by Landlord's or Landlord's agents' entry into the Premises as permitted by this Paragraph 18 or any other provision of this Lease. Notwithstanding anything to the contrary contained in this Lease, Landlord and Landlord's agents, except in the case of emergency, shall provide Tenant with twenty-four (24) hours' notice prior to entry of the Premises. Any entry by Landlord and Landlord's agents shall not impair Tenant's operations more than reasonably necessary, and Tenant shall have the right to have an employee accompany Landlord at all times that Landlord is present on the Premises. 19. Landlord's Right to Perform Tenant's Covenants. Except as ---------------------------------------------- otherwise expressly provided herein, if Tenant shall at any time fail to make any payment or perform any other act required to be made or performed by Tenant under this Lease, Landlord may upon ten (10) days written notice to Tenant, but shall not be obligated to and without waiving or releasing Tenant from any obligation under this Lease, make such payment or perform such other act to the extent that Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All reasonable sums so paid by Landlord and all penalties, interest and reasonable costs in connection therewith shall be due and payable by Tenant as Additional Rent upon demand. -34- 20. Lender Requirements. ------------------- 20.1 Subordination. This Lease, at Landlord's option, shall ------------- be subject and subordinate to the lien of any mortgages or deeds of trust (including all advances thereunder, renewals, replacements, modifications, supplements, consolidations, and extensions thereof) in any amount(s) whatsoever now or hereafter placed on or against or affecting the Premises, Building or Land, or Landlord's interest or estate therein without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination. If any mortgagee or beneficiary shall elect to have this Lease prior to the lien of its mortgage or deed of trust, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage or deed of trust, whether this Lease is dated prior or subsequent to the date of such mortgage or deed of trust or the date of the recording thereof. 20.2 Subordination Agreements. Tenant shall execute and ------------------------ deliver, without charge therefor, such further instruments evidencing subordination of this Lease to the lien of any mortgages or deeds of trust affecting the Premises, Building or Land as may be required by Landlord within ten (10) days following Landlord's request therefor; provided that such mortgagee or beneficiary under such mortgage or deed of trust agrees in writing that this Lease shall not be terminated or modified in any material way in the event of any foreclosure if Tenant is not in default under this Lease. Failure of Tenant to execute such instruments evidencing subordination of this Lease shall constitute a Default by Tenant hereunder. 20.3 Approval by Lenders. Tenant recognizes that the ------------------- provisions of this Lease may be subject to the approval of any financial institution that may make a loan secured by a new or subsequent deed of trust or mortgage affecting the Premises, Building or Land. If the financial institution should require, as a condition to such financing, any modifications of this Lease in order to protect its security interest in the Premises including without limitation, modification of the provisions relating to damage to and/or condemnation of the Premises, Tenant agrees to execute the appropriate amendments; provided, however, that no modification shall substantially change the size, location or dimension of the Premises, or increase the Rentals payable by Tenant hereunder, or reduce or materially change Tenant's other rights hereunder. If Tenant refuses to execute any such amendment, Landlord may, in Landlord's reasonable discretion, terminate this Lease. 20.4 Attornment. In the event of foreclosure or the exercise ---------- of the power of sale under any mortgage or deed of trust made by Landlord and covering the Premises, Building or Land, Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease, provided such purchaser expressly agrees in writing to be bound by -35- the terms of the Lease, including, but not limited to, the quiet enjoyment provisions of Paragraph 40. 20.5 Estoppel Certificates and Financial Statements. ----------------------------------------------- (a) Delivery by Tenant. Tenant shall, within ten (10) ------------------ business days following request by Landlord therefor and without charge, execute and deliver to Landlord any and all documents, estoppel certificates, and current financial statements of Tenant reasonably requested by Landlord in connection with the sale or financing of the Premises, Building or Land, or reasonably requested by any lender making a loan affecting the Premises, Building or Land. Landlord may require that Tenant in any estoppel certificate shall (i) certify that this Lease is unmodified and in full force and effect (or, if modified, state the nature of such modification and certify that this Lease, as so modified, is in full force and effect) and has not been assigned, (ii) certify the date to which Rentals are paid in advance, if any, (iii) acknowledge that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specify such defaults if claimed, (iv) evidence the status of this Lease as may be required either by a lender making a loan to Landlord to be secured by a deed of trust or mortgage covering the Premises, Building or Land or a purchaser of the Premises, Building or Land from Landlord, (v) warrant that in the event any beneficiary of any security instrument encumbering the Premises, Building or Land forecloses on the security instrument or sells the Premises, Building or Land pursuant to any power of sale contained in such security instrument, such beneficiary shall not be liable for the Security Deposit, unless the Security Deposit actually has been received by the beneficiary from Landlord; (vi) certify the date Tenant entered into occupancy of the Premises and that Tenant is conducting business at the Premises, (vii) certify that all improvements to be constructed on the Premises by Landlord have been substantially completed except for punch list items which do not prevent Tenant from using the Premises for its intended use, and (viii) certify such other matters relating to the Lease and/or Premises as may reasonably be requested by a lender making a loan to Landlord or a purchaser of the Premises, Building or Land from Landlord. Any such estoppel certificate may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises, Building or Land. Any financial statements of Tenant shall include an opinion of a certified public accountant (if available) and a balance sheet and profit and loss statement for the most recent fiscal year, or a reasonable substitute for the form of such financial information, all prepared in accordance with generally accepted accounting principles consistently applied. (b) Nondelivery by Tenant. Tenant's failure to deliver an --------------------- estoppel certificate as required pursuant to Paragraph 20.5(a) above shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord and has not been assigned, (ii) there are now no uncured defaults in Landlord's performance, (iii) -36- no Rentals have been paid in advance except those that are set forth in this Lease, (iv) no beneficiary of any security instrument encumbering the Premises, Building or Land shall be liable for the Security Deposit in the event of a foreclosure or sale under such security instrument, unless the Security Deposit actually has been received by the beneficiary from Landlord; (v) the improvements to be constructed on the Premises by Landlord have been substantially completed except for punch list items which do not prevent Tenant from using the Premises for its intended use, and (vi) Tenant has entered into occupancy of the Premises on such date as may be represented by Landlord and is open and conducting business at the Premises. Tenant's failure to deliver any financial statements, estoppel certificates or other documents as required pursuant to Paragraph 20.5(a) above shall be a Default by Tenant. 21. Holding Over. This Lease shall terminate without further notice at ------------ the expiration of the Lease Term. It is the desire of Landlord either to enter into a new lease with Tenant for the Premises prior to the termination hereof or to have Tenant vacate the Premises upon expiration of the Lease Term pursuant to Paragraph 35 below. Therefore, any holding over by Tenant after Lease Termination shall not constitute a renewal or extension of the Lease Term, nor give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after Lease Termination with the consent of Landlord, shall be construed to be a tenancy from month to month, at one hundred twenty-five percent (125%) of the monthly Rent for the month preceding Lease Termination in addition to all Additional Rent payable hereunder, and shall otherwise be on the terms and conditions herein specified insofar as applicable. If Tenant remains in possession of the Premises after Lease Termination without Landlord's consent, Tenant shall indemnify, defend and hold Landlord harmless from and against any loss, damage, expense, claim or liability resulting from Tenant's failure to surrender the Premises, including without limitation, any claims made by any succeeding tenant based on delay in the availability of the Premises. 22. Notices. Any notice required or desired to be given under this Lease ------- shall be in writing, and all notices shall be given by personal delivery or mailing. All notices personally given on Tenant may be delivered to any person apparently in charge at the Premises, on any corporate officer or agent of Tenant if Tenant is a corporation, or on any one signatory party if more than one party signs this Lease on behalf of Tenant; any notice so given shall be binding upon all signatory parties as if served upon each such party personally. Any notice given pursuant to this Paragraph 22 shall be deemed to have been given when personally delivered, or if mailed, when seventy-two (72) hours have elapsed from the time when such notice was deposited in the United States mail, certified or registered mail and postage prepaid, addressed to the party at the last address given for purposes of notice pursuant to the provisions of this Paragraph 22. At the date of execution of this Lease, the addresses of Landlord and Tenant are set forth in Paragraph 1.12 above. -37- 23. Attorneys' Fees. In the event either party hereto shall bring any ---------------- action or legal proceeding for damages for an alleged breach of any provision of this Lease, to recover Rentals, to enforce an indemnity, defense or hold harmless obligation, to terminate the tenancy of the Premises, or to enforce, protect, interpret, or establish any term, condition, or covenant of this Lease or right or remedy of either party, the prevailing party shall be entitled to recover, as a part of such action or proceeding, reasonable attorneys' fees and court costs, including reasonable attorneys' fees and costs for appeal, as may be fixed by the court or jury. Notwithstanding anything to the contrary contained in this Lease, "prevailing party" as used in this paragraph shall include the party who dismisses an action for recovery hereunder in exchange for sums allegedly due, performance of covenants allegedly breached or considerations substantially equal to the relief sought in the action. 24. Assignment, Subletting and Hypothecation. ---------------------------------------- 24.1 In General. Tenant shall not voluntarily sell, assign or ---------- transfer all or any part of Tenant's interest in this Lease or in the Premises or any part thereof, sublease all or any part of the Premises, or permit all or any part of the Premises to be used by any person or entity other than Tenant or Tenant's employees, except as specifically provided in this Paragraph 24. 24.2 Voluntary Assignment and Subletting. ----------------------------------- (a) Notice to Landlord. Tenant shall, by written notice, ------------------ advise Landlord of Tenant's desire on a stated date (which date shall not be less than thirty (30) days nor more than ninety (90) days after the date of Tenant's notice) to assign this Lease or to sublet all or any part of the Premises for any part of the Lease Term. Said notice shall state that the notice constitutes an offer to terminate the Lease or Tenant's interest in the portion of the Premises specified pursuant to Paragraph 24.2(b) if the notice applies to a proposed assignment of the Lease or Tenant's interest therein, a proposed sublease of all or any part of the Premises for more than fifty percent (50%) of the remainder of the Lease Term, or a proposed sublease of more than fifty percent (50%) of the Premises for any period. Tenant's notice shall state the name, legal composition and address of the proposed assignee or subtenant, and Tenant shall provide the following information to Landlord with said notice: a true and complete copy of the proposed assignment agreement or sublease; an audited financial statement of the proposed assignee or subtenant prepared in accordance with generally accepted accounting principles within one year prior to the proposed effective date of the assignment or sublease; the nature of the proposed assignee's or subtenant's business to be carried on in the Premises; the payments to be made or other consideration to be given on account of the assignment or sublease; a current financial statement of Tenant; and such other pertinent information as may be requested -38- by Landlord, all in sufficient detail to enable Landlord to evaluate the proposed assignment or sublease and the prospective assignee or subtenant. Tenant's notice shall not be deemed to have been served or given until such time as Tenant has provided Landlord with all information reasonably requested by Landlord pursuant to this Paragraph 24.2. Tenant shall immediately notify Landlord of any modification to the proposed terms of such assignment or sublease. Tenant may withdraw its notice at any time prior to or after exercise by Landlord of Landlord's right to terminate as described in Paragraph 24.2(b). (b) Offer to Terminate. If Tenant notifies Landlord of ------------------ its desire to assign this Lease or any interest herein, to sublet all or any part of the Premises for more than fifty percent (50%) of the remainder of the Lease Term, or to sublet more than fifty percent (50%) of the Premises for any period, Tenant's notice shall constitute an offer to terminate this Lease or Tenant's interest in the portion of the Premises specified and Landlord shall have the right, to be exercised by giving written notice to Tenant within thirty (30) days after receipt of Tenant's notice, to terminate the Lease (i) entirely, in the event of a proposed assignment or a sublease of the entire Premises for the remainder of the Lease Term, (ii) as to the portion of the Premises which is the subject of a proposed sublease for more than fifty percent (50%) of the remainder of the Lease Term, or (iii) as to the portion of the Premises which is the subject of a proposed sublease of more than fifty percent (50%) of the Premises for any period, as specified in Tenant's notice. For purposes of this Paragraph 24.2(b), (i) the term of a proposed sublease shall include all options to extend or renew, and (ii) a proposed sublease shall be deemed to be for the remainder of the Lease Term if the term of the proposed sublease will expire within one year prior to the end of the Lease Term. If Tenant's notice specifies all of the Premises and Landlord elects to terminate within ten (10) days after receipt of Landlord's election, Tenant shall have the right to rescind its request to assign or sublet, and this Lease shall continue in full force and effect. If Tenant does not rescind its request, this Lease shall terminate on the date stated in the notice (given by Tenant pursuant to Paragraph 24.2(a), subject to any obligations which have accrued and are unfulfilled as of such date. If Tenant's notice specifies less than all of the Premises and Landlord elects to terminate, within ten (10) days after receipt of Landlord's election, Tenant shall have the right to rescind its request to assign or sublet, and this Lease shall continue in full force and effect. If Tenant does not rescind its request, this Lease shall terminate on the date stated with respect to that portion of the Premises, and Rent and Tenant's percentage share of Common Area Charges shall be adjusted, based upon the number of gross square feet retained by Tenant after the termination, compared to the total number of gross square feet in the entire Premises excluding any areas of the Premises designated in the proposed sublease for ingress and egress and common areas, if any. The Lease as so amended shall continue thereafter in full force and effect. Landlord and Tenant shall execute an amendment -39- to this Lease specifying the new Premises, the adjusted Rent, and Tenant's adjusted percentage share of Common Area Charges; provided, however, that failure by either party to execute such an amendment shall not affect the validity of this Lease. (c) Landlord's Consent. If Landlord does not exercise its Right ------------------ to terminate pursuant to Paragraph 24.2(b) within thirty (30) days after receipt of Tenant's notice or if a proposed sublease is not subject to the provisions of Paragraph 24.2(b), Landlord shall not unreasonably withhold or delay its consent to the proposed assignment or subletting, on the terms and conditions specified in said notice. If Tenant's notice fails to state that it constitutes an offer to terminate the Lease as may be required pursuant to Paragraph 24.2(a), such notice shall be deemed insufficient for the purposes of this Paragraph 24.2, and Landlord may withhold its consent to the proposed assignment or subletting in Landlord's absolute discretion. Without otherwise limiting the criteria upon which Landlord may withhold its consent to any proposed assignment or sublease, if Landlord withholds its consent where Tenant is in default at the time of the giving of Tenant's notice or at any time thereafter, or where the net worth of the proposed assignee or subtenant (according to generally accepted accounting principles) is less than the greater of (i) the net worth of Tenant immediately prior to the assignment or sublease (ii) or the net worth of Tenant at the time this Lease is executed, such withholding of consent shall be presumptively reasonable. Fifty percent (50%) of any and all rent paid by an assignee or subtenant in excess of the Rentals to be paid under this Lease (prorated in the event of a sublease of less than the entire Premises), after Tenant's deduction therefrom of all reasonable costs to effect the assignment or subletting, including without limitation, brokerage commissions, attorneys' fees, and the cost of leasehold improvements or alterations installed or redecorating performed by Tenant for the sublessee, shall be paid directly to Landlord, as Additional Rent, at the time and place specified in this Lease. For the purposes of this Paragraph 24, the term "rent" shall include any consideration of any kind received, or to be received, by Tenant from an assignee or subtenant, if such sums are related to Tenant's interest in this Lease or in the Premises, including, but not limited to key money, bonus money, and payments (in excess of the fair market value thereof) for Tenant's assets, fixtures, trade fixtures, inventory, accounts, goodwill, equipment, furniture, general intangibles, and any capital stock or other equity ownership interest of Tenant. Any assignment or subletting without Landlord's consent shall be voidable at Landlord's option, and shall constitute a Default by Tenant. Landlord's consent to any one assignment or sublease shall not constitute a waiver of the provisions of this Paragraph 24 as to any subsequent assignment or sublease nor a consent to any subsequent assignment or sublease; further, Landlord's consent to an assignment or sublease shall not release Tenant from Tenant's obligations under this Lease, and Tenant shall remain jointly and severally liable with the assignee or subtenant. -40- (d) Assumption of Obligations. In the event Landlord consents to ------------------------- any assignment, such consent shall be conditioned upon the assignee expressly assuming and agreeing to be bound by each of Tenant's covenants, agreements and obligations contained in this Lease, pursuant to a written assignment and assumption agreement in a form reasonably approved by Landlord. Landlord's consent to any assignment or sublease shall be evidenced by Landlord's signature on said assignment and assumption agreement or on said sublease or by a separate written consent. In the event Landlord consents to a proposed assignment or sublease, such assignment or sublease shall be valid and the assignee or subtenant shall have the right to take possession of the Premises only if an executed original of the assignment or sublease is delivered to Landlord, and such document contains the same terms and conditions as stated in Tenant's notice to Landlord given pursuant to Paragraph 24.2(a) above, except for any such modifications to which Landlord has consented in writing. 24.3 Collection of Rent. Tenant hereby irrevocably gives to and ------------------ confers upon Landlord, as security for Tenant's obligations under this Lease, the right, power and authority to collect all rents from any assignee or subtenant of all or any part of the Premises as permitted by this Paragraph 24, or otherwise, and Landlord, as assignee of Tenant, or a receiver for Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this Lease; provided, however, that until the occurrence of any Default, subject to applicable cure periods, by Tenant or except as provided by the provisions of Paragraph 24.2(c) above, Tenant shall have the right to collect such rent. Upon the occurrence of any Default by Tenant, Landlord may at any time without notice in Landlord's own name sue for or otherwise collect such rent, including rent past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorneys' fees, toward Tenant's obligations under this Lease. Landlord's collection of such rents shall not constitute an acceptance by Landlord of attornment by such subtenants; in the event of a Default by Tenant, Landlord shall have all rights provided by this Lease and by law, and Landlord may, upon reentry and taking possession of the Premises, eject all parties in possession or eject some and not others, or eject none, as Landlord shall determine in Landlord's sole discretion. 24.4 No Bonus Value. It is the intent of the parties hereto that this -------------- Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value, nor to serve as a vehicle whereby Tenant may profit by a future assignment or sublease of this Lease or the right to use or occupy the Premises as a result of any favorable terms contained herein or any future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive property of Landlord. -41- 24.5 Corporations and Partnerships. If Tenant is a partnership, ----------------------------- any withdrawal or substitution (whether voluntary, involuntary, or by operation of law and whether occurring at one time or over a period of time) of any partner(s) owning fifty percent (50%) or more (cumulatively) of the partnership, any assignment(s) of fifty percent (50%) or more (cumulatively) of any interest in the capital or profits of the partnership, or the dissolution of the partnership shall be deemed an assignment of this Lease requiring the prior written consent of Landlord. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, any sale or transfer (or cumulative sales or transfers) of the capital stock of Tenant in excess of fifty percent (50%), or any sale (or cumulative sales) of all of the assets of Tenant shall be deemed an assignment of this Lease requiring the prior written consent of Landlord. Any such withdrawal or substitution of partners or assignment of any interest in or dissolution of a partnership tenant, and any such sale of stock or assets of a corporate tenant without the prior written consent of Landlord shall be a Default by Tenant hereunder. The foregoing notwithstanding, the sale or transfer of any or all of the capital stock of a corporation, the capital stock of which is now or hereafter becomes publicly traded, shall not be deemed an assignment of this Lease. Notwithstanding anything to the contrary contained in this Lease, Tenant, without Landlord's prior written consent (but with notice to Landlord), may sublet the Premises or assign this Lease to (i) a subsidiary, affiliate, division or corporation controlled by or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, nonbankruptcy reorganization or government action; or (iii) a purchaser of substantially all of Tenant's assets located at the Premises, provided that in either of the latter two instances the successor or purchaser has a net worth not less than the net worth of Tenant at the time that Tenant executes this Lease (each, a "Permitted Assignee"). Notwithstanding that a Transfer is made to a Permitted Assignee, Tenant shall not be released from any of its obligations under this Lease and such Permitted Assignee shall be required to assume all of Tenant's obligations hereunder as a condition to such transfer being permitted without Landlord's prior written consent. 24.6 Reasonable Provisions. Tenant expressly agrees that the --------------------- provisions of this Paragraph 24 are not unreasonable standards or conditions for purposes of Section 1951.4(b)(2) of the California Civil Code, as amended from time to time, under bankruptcy laws, or for any other purpose. 24.7 Attorneys' Fees. Tenant shall pay, as Additional Rent, --------------- Landlord's reasonable attorneys' fees for reviewing, investigating, processing and/or documenting any requested assignment or sublease, whether or not Landlord's consent is granted. -42- 24.8 Involuntary Transfer. No interest of Tenant in this Lease -------------------- shall be assignable involuntarily or by operation of law, including, without limitation, the transfer of this Lease by testacy or intestacy. Each of the following acts shall be considered an involuntary assignment: (a) If Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or a proceeding under any bankruptcy law is instituted in which Tenant is the bankrupt; or, if Tenant is a Partnership or consists of more than one person or entity, if any partner of the partnership or other person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; (b) Levy of a writ of attachment or execution on this Lease; (c) Appointment of a receiver with authority to take possession of the Premises in any proceeding or action to which Tenant is a party; or (d) Foreclosure of any lien affecting Tenant's interest in the Premises, which lien was not consented to by Landlord pursuant to Paragraph 24.9. An involuntary assignment shall constitute a Default by Tenant and Landlord shall have the right to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant. In the event the Lease it not terminated, the provisions of Paragraph 24.2(c) regarding rents paid by an assignee or subtenant and Paragraph 24.4 shall apply. If a writ of attachment or execution is levied on this Lease, or if any involuntary proceeding in bankruptcy is brought against Tenant or a receiver is appointed, Tenant shall have sixty (60) days in which to cause the attachment or execution to be removed, the involuntary proceeding dismissed, or the receiver removed. 24.9 Hypothecation. Tenant shall not hypothecate, mortgage or ------------- encumber Tenant's interest in this Lease or in the Premises or otherwise use this Lease as a security device in any manner without the consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Consent by Landlord to any such hypothecation or creation of a lien or mortgage shall not constitute consent to an assignment or other transfer of this Lease following foreclosure of any permitted lien or mortgage. 24.10 Binding on Successors. The provisions of this Paragraph --------------------- 24 expressly apply to all heirs, successors, sublessees, assignees and transferees of Tenant. 25. Successors. Subject to the provisions of Paragraph 24 ---------- above and Paragraph 30.2(a) below, the covenants, conditions, and agreements contained in this Lease shall be binding on the parties -43- hereto and on their respective heirs, successors and assigns. 26. Landlord Default; Mortgagee Protection. Landlord shall not be in -------------------------------------- default under this Lease unless Tenant shall have given Landlord written notice of the breach and, within thirty (30) days after notice, Landlord has not cured the breach or, if the breach is such that it cannot reasonably be cured under the circumstances within thirty (30) days, has not commenced diligently to prosecute the cure to completion. Any money judgment obtained by Tenant based upon Landlord's breach of this Lease shall be satisfied only out of the proceeds of the sale or disposition of Landlord's interest in the Premises (whether by Landlord or by execution of judgment). In the event of any default on the part of Landlord under this Lease, Tenant shall give notice by registered or certified mail to any beneficiary of a deed of trust or any mortgagee of a mortgage affecting the Premises, Building or Land whose address shall have been furnished to Tenant, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure. 27. Exhibits. All exhibits attached to this Lease shall be deemed to be -------- incorporated herein by the individual reference to each such exhibit, and all such exhibits shall be deemed to be a part of this Lease as though set forth in full in the body of the Lease. 28. Surrender of Lease Not Merger. The voluntary or other surrender ----------------------------- of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subleases or subtenants, or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenants. 29. Waiver. The waiver by Landlord of any breach of any term, ------ covenant or condition herein contained (or the acceptance by Landlord of any performance by Tenant after the time the same shall become due) shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach thereof or of any other term, covenant or condition herein contained, unless otherwise expressly agreed to by Landlord in writing. The acceptance by Landlord of any sum less than that which is required to be paid by Tenant shall be deemed to have been received only on account of the obligation for which it is paid (or for which it is allocated by Landlord, in Landlord's reasonable discretion, if Tenant does not designate the obligation as to which the payment should be credited), and shall not be deemed an accord and satisfaction notwithstanding any provisions to the contrary written on any check or contained in any letter of transmittal. The acceptance by Landlord of any sum tendered by a purported assignee or transferee of Tenant shall not be deemed a consent by Landlord to any assignment or transfer of Tenant's interest herein. No custom or practice which may arise between the parties hereto in -44- the administration of the terms of this Lease shall be construed as a waiver or diminution of Landlord's right to demand performance by Tenant in strict accordance with the terms of this Lease. 30. General. ------- 30.1 Captions and Headings. The captions and paragraph --------------------- headings used in this Lease are for convenience of reference only. They shall not be construed to limit or extend the meaning of any part of this Lease, and shall not be deemed relevant in resolving any question of interpretation or construction of any paragraph of this Lease. 30.2 Definitions. ----------- (a) Landlord, The term Landlord as used in this Lease, -------- so far as the covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title to the Premises. In the event of any transfer(s) of such interest, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall have no further liability under this Lease to Tenant except as to matters of liability which have accrued and are unsatisfied as of the date of such transfer, it being intended the covenants and obligations contained in this Lease on the part of Landlord shall be binding on Landlord and its successors and assigns only during and in respect of their respective period of ownership of the fee; provided that any funds in the possession of Landlord or the then grantor and as to which Tenant has an interest, less any deductions permitted by law or this Lease, shall be turned over to the grantee. The covenants and obligations contained in this Lease on the part of Landlord shall, subject to the provisions of this Paragraph 30.2(a), be binding upon each Landlord and such Landlord's heirs, personal representatives, successors and assigns only during its respective period of ownership. Except as provided in this Paragraph 30.2(a), this Lease shall riot be affected by any transfer of Landlord's interest in the Premises, and Tenant shall attorn to any transferee of Landlord provided that all of Landlord's obligations hereunder are assumed in writing by such transferee. (b) Agents. For purposes of this Lease and without ------ otherwise affecting the definition of the word "agent" or the meaning of an "agency," the term "agents" shall be deemed to include the agents, employees, officers, directors, servants, invitees, contractors, successors, representatives, subcontractors, guests, customers, suppliers or partners, of the respective party, Tenant or Landlord. (C) Interpretation of Terms. The words "Landlord" and ----------------------- "Tenant" as used herein shall include the plural as well as the singular. Words in the neuter gender include the masculine and feminine and words in the masculine or feminine gender include the neuter. -45- 30.3 Copies. Any executed copy of this Lease shall be deemed an ------ original for all purposes. 30.4 Time of Essence. Time is of the essence as to each and every --------------- provision in this Lease requiring performance within a specified time. 30.5 Severability. In case any one or more of the provisions ------------ contained herein shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. However, if Tenant's obligation to pay the Rentals is determined to be invalid or unenforceable, this Lease at the option of Landlord shall terminate. 30.6 Governing Law. This Lease shall be construed and enforced in ------------- accordance with the laws of the State of California. 30.7 Joint and Several Liability. If Tenant is more than one person --------------------------- or entity, each such person or entity shall be jointly and severally liable for the obligations of Tenant hereunder, If Tenant is a husband and wife, the obligations hereunder shall extend to their sole and separate property as well as community property. 30.8 Construction of Lease Provisions. Although printed provisions of -------------------------------- this Lease were prepared by Landlord, this Lease shall not be construed either for or against Tenant or Landlord, but shall be construed in accordance with the general tenor of the language to reach a fair and equitable result. 30.9 Tenant's Financial Statements. Tenant hereby warrants that all ----------------------------- financial statements delivered by Tenant to Landlord are true, correct, and complete, and prepared in accordance with generally accepted accounting principles. Tenant acknowledges and agrees that Landlord is relying on such financial statements in accepting this Lease, and that a breach of Tenant's warranty as to such financial statements shall constitute a Default by Tenant. Notwithstanding anything to the contrary contained in this Lease, Landlord shall keep confidential all such financial information received from Tenant, except that Landlord may provide such financial information to Landlord's lenders or prospective lenders with respect to the Project. 30.10 Withholding of Landlord's Consent. Notwithstanding any other --------------------------------- provision of this Lease where Tenant is required to obtain the consent (whether written or oral) of Landlord to do any act, or to refrain from the performance of any act, Tenant agrees that if Tenant is in default with respect to any term, condition, covenant or provision of this Lease, then Landlord -46- shall be deemed to have acted reasonably in withholding its consent if said consent is, in fact, withheld. 31. Signs. Tenant shall not place or permit to be placed any sign or ----- decoration on the Land or the exterior of the Building or that would be visible from the exterior of the Building or Premises, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. In no event shall any such sign revolve, rotate, move or create the illusion of revolving, rotating or moving or be internally illuminated and there shall be no exterior spotlighting or other illumination on any such sign. Tenant, upon written notice by Landlord, shall immediately remove any of Tenant's signs or decorations that are visible from the exterior of the Building or Premises or that Tenant has placed or permitted to be placed on the Land or the exterior of the Building without the prior written consent of Landlord. If Tenant fails to so remove such sign or decoration within five (5) days after Landlord's written notice, Landlord may enter the Premises and remove such sign or decoration and Tenant shall pay Landlord, as Additional Rent upon demand, the cost of such removal. All signs placed on the Premises, Building or Land by Tenant shall comply with all recorded documents affecting the Premises, including but not limited to any Declaration of Conditions, Covenants and Restrictions; the sign criteria attached hereto as Exhibit "E" if applicable (as the same may be amended from time to time); and applicable statutes, ordinances, rules and regulations of governmental agencies having jurisdiction thereof. At Landlord's option, Tenant shall at Lease Termination remove any sign which it has placed on the Premises, Land or the Building, and shall, at its sole cost, repair any damage caused by the installation or removal of such sign. Notwithstanding the foregoing, Landlord hereby grants to Tenant all signage rights currently enjoyed by other tenants of the Project. 32. Landlord as Party Defendant. If, by reason of any act or --------------------------- omission by Tenant or Tenant's agents, Landlord is made a party defendant concerning this Lease, or any portion of the Project, Tenant shall indemnify Landlord against all liability actually incurred by Landlord as a party defendant, including all damages, costs and reasonable attorneys' fees. 33. Landlord Not a Trustee. Landlord shall not be deemed to be a ---------------------- trustee of any funds paid to Landlord by Tenant (or held by Landlord for Tenant) pursuant to this Lease, including without limitation the Security Deposit. Landlord shall not be required to keep any such funds separate from Landlord's general funds or segregated from any funds paid to Landlord by (or held by Landlord for) other tenants of the Building. Any funds held by Landlord pursuant to this Lease shall not bear interest. 34. Interest. Any payment due from Tenant to Landlord, except for -------- Rent received by Landlord within thirty (30) days after the same is due, shall bear interest from the date due until paid, at an annual rate equal to the greater of: ten percent (10%); or -47- five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the due date, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended. In addition, Tenant shall pay all costs and reasonable attorneys' fees incurred by Landlord in the collection of such amounts. 35. Surrender of Premises. On the last day of the Lease Term or upon --------------------- the sooner termination of this Lease, Tenant shall, to the reasonable satisfaction of Landlord, surrender the Premises to Landlord in good condition (reasonable wear and tear, acts of God, casualty, condemnation, Hazardous Materials other than those stored, used or disposed of by Tenant, its agents, employees, contractors or invitees, and alterations concerning which Landlord has not reserved the right to require removal excepted) with all originally painted interior walls washed, or repainted if marked or damaged and other interior walls cleaned and repaired or replaced, all carpets cleaned and in good condition, the air conditioning, ventilating and heating equipment inspected, serviced and repaired by a reputable and licensed service firm (unless Landlord has elected to maintain heating and air conditioning systems pursuant to Paragraph 10.1 above), and all floors cleaned and waxed. Tenant shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Tenant. Furthermore, Tenant shall immediately repair all damage to the Project caused by any such removal. If the Premises are not so surrendered at Lease Termination Tenant shall indemnify, defend and hold Landlord harmless from and against any loss, damage, expense, claim or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 36. No Partnership or Joint Venture. Nothing in this Lease shall be ------------------------------- construed as creating a partnership or joint venture between Landlord, Tenant, or any other party, or cause Landlord to be responsible for the debts or obligations of Tenant or any other party. 37. Entire Agreement. Any agreements, warranties, or representations ---------------- not expressly contained herein, or in the Addendum hereto, shall in no way bind either Landlord or Tenant, and Landlord and Tenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Lease, This Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, whether written or oral, between Landlord and its agents and Tenant and its agents with respect to the Project or this Lease. This Lease constitutes the entire agreement between the parties hereto and no addition to, or modification of, any term or provision of this Lease shall be effective until and unless set forth in a written -48- instrument signed by both Landlord and Tenant. 38. Submission of Lease. Submission of this instrument for Tenant's ------------------- examination or execution does not constitute a reservation of space nor an option to lease. This instrument shall not be effective until executed by both Landlord and Tenant, Execution of this Lease by Tenant shall constitute an offer by Tenant to lease the Premises, which offer shall be deemed accepted by Landlord when this Lease is executed by Landlord and delivered to Tenant. 39. Quiet Enjoyment. Landlord covenants and agrees with Tenant that --------------- upon Tenant paying Rentals and performing its covenants and conditions under the Lease, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises for the Lease Term, subject, however, to the terms of this Lease and of any mortgages or deeds of trust affecting the Premises, and the rights reserved by Landlord hereunder. Any purchaser upon any foreclosure or exercise of the power of sale under any mortgage or deed of trust made by Landlord and covering the Premises, Building or Land to whom Tenant attorns pursuant to Paragraph 20.4 above shall be bound by the terms of this Paragraph 40. 40. Building Plans. Tenant acknowledges that any plan of the Project -------------- which may have been displayed or furnished to Tenant or which may be a part of Exhibit "A" or Exhibit "B" is tentative; Landlord may change the exterior of the Project buildings and the shape, size, location, number, and extent of Project buildings or improvements shown on any such plan and eliminate or add any ovements to the Project in Landlord's sole discretion and at Landlord's sole cost without right of reimbursement of Tenant. 41. Authority. The undersigned parties hereby warrant that they have --------- proper authority and are empowered to execute this Lease on behalf of the Landlord and Tenant, respectively. If Tenant is a corporation (or partnership), each individual (executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the bylaws of said corporation (or on behalf of said partnership in accordance with the partnership agreement of such partnership), and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. if Tenant is a corporation, Tenant shall, upon execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. In the event Tenant should fail to deliver such resolution to Landlord upon execution of this Lease, Landlord shall not be deemed to have waived its right to require delivery of such resolution, and at any time during the Lease Term Landlord may request Tenant to deliver the same, and Tenant agrees it shall thereafter promptly deliver such resolution to Landlord. If Tenant is a corporation, Tenant warrants that: -49- (a) Tenant is a valid and existing corporation; (b) Tenant is qualified to do business in California; (c) All fees and all franchise and corporate taxes are paid to date, and will be paid when due; (d) All required forms and reports will be filed when due; and (e) The signers of this Lease are properly authorized to execute this Lease. 42. Addendum, Paragraphs 44 through 46 are added hereto and made a -------- part of this Lease. IN WITNESS WHEREOF, the parties have executed this Lease effective as of the date set forth below. LANDLORD: TENANT REALTEC PROPERTIES I, L.P., SYMPHONIX DEVICES, INC., a a California limited partnership California corporation By /s/ Thomas Masters By /s/ Harry S. Robbins -------------------------------- --------------------------------- Thomas Masters Harry S. Robbins Title General Partner Title President/CEO ----------------------------- ------------------------------ Date 7/28/94 Date 7/28/94 ------------------------------ ------------------------------- -50- ADDENDUM to that certain Lease Agreement dated July 28, 1994, by and between REALTEC PROPERTIES I, L.P., a California limited partnership, as Landlord, and SYMPHONIX DEVICES, INC, a California corporation, as Tenant, for the premises commonly known as 3047 Orchard Drive, San Jose, CA 95134. 44. Option to Extend Lease Term. In consideration for Tenant not --------------------------- having been in material default under this Lease more than twice within any one (1) year period during the Lease Term, Landlord hereby grants to Tenant two (2) options to extend the Lease Term for a period of one (1) year each ("Extended Term"), on the following terms and conditions: (a) Tenant must give Landlord notice in writing of its exercise of the option to extend the Lease Term no earlier than six (6) months nor later than four (4) months before the date the Lease Term would end but for said exercise. Time is of the essence. (b) Tenant may not extend the Lease Term pursuant to the option granted by this Paragraph 44 if Tenant has been in default in the performance of any of the material terms and conditions of the Lease more than twice within any one (1) year period during the Lease Term, or if Tenant shall have assigned or otherwise transferred its interest in this Lease and/or the Premises (other than to a "Permitted Assignee" pursuant to Paragraph 24.5 hereof) whether or not Landlord's consent to such assignment or transfer has been given. If Tenant is in default under this Lease on the date that the Extended Term is to commence, then Landlord may elect to terminate this Lease, notwithstanding any notice given by Tenant of an exercise of its option to extend. (c) All terms and conditions of this Lease shall apply during the Extended Term, except that the Rent for the Extended Terms shall be determined in accordance with Paragraph 45 below. (d) Once Tenant delivers notice of its exercise of the option to extend the Lease Term, Tenant may not withdraw such exercise and, subject to the provisions of this Paragraph 44, such notice shall operate to extend the Lease Term. Upon the extension of the Lease Term pursuant to this Paragraph 44, the term, "Lease Term" as used in this Lease shall thereafter include the Extended Term and the Lease Termination date shall be the expiration date of the Extended Term. 45. Rent During the Extended Term. If Tenant elects to extend the ----------------------------- Lease Term pursuant to Paragraph 44 above, the annual Rent for the Extended Term shall be an amount equal to the fair market value of the Premises (together with any applicable cost of living or other rental adjustments) in relation to market conditions at the time of the extension (including, but not limited to, rental rates for comparable space with comparable tenant improvements and taking into consideration any adjustments to rent -51- based upon direct costs (operating expenses) and taxes, load factors, financing charges, and/or cost of living or other rental adjustments; the relative strength of the tenants, the size of the space; and any other factors which affect market rental values at the time of extension, and provided further, that the annual Rent for the Extended Term shall in no event be lower than the Rent for the last Lease Year of the original term. Tenant acknowledges that Landlord shall not be obligated or requested to pay any leasing commissions during or for the Extended Term. The Rent for the Extended Term shall be determined as follows: (a) Mutual Agreement. After timely receipt by Landlord of ---------------- Tenant's notice of exercise of the option to extend the Lease Term, Landlord and Tenant shall have a period of thirty (30) days in which to agree on the Rent for the Extended Term. If Landlord and Tenant agree on said Rent during that period, they shall immediately execute an amendment to this Lease stating the Rent for the Extended Term. If Landlord and Tenant are unable to agree on the Rent for the Extended Term as aforesaid, the provisions of paragraph 45(b) below shall apply. (b) Appraisal. Within five (5) days after the expiration of the --------- thirty (30) day period described in Paragraph 45(a) above, each party, at its cost and by giving notice to the other party, shall appoint an M.A.l. real estate appraiser, with at least five (5) years' full-time commercial appraisal experience in the area in which the Premises are located to appraise and set the fair market rental value of the Premises. If a party does not appoint an appraiser within five (5) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the fair market rental value. The cost of such appraiser shall be borne equally by the parties. If two appraisers are appointed by the parties as provided in this paragraph, the two appraisers shall meet promptly and attempt to set the fair market value rental value. If they are unable to agree with twenty (20) days after the last appraiser has been appointed, then the two appraisers shall attempt to select a third appraiser meeting the qualifications stated in Paragraph 45(b) above within ten (10) working days after the last day the two appraisers are given to set the fair market rental value. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days notice to the other party, may apply to the presiding judge of the Superior Court of Santa Clara County for selection of a third appraiser who meets the qualifications stated above. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser's fees. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within twenty (20) days after the selection of the third appraiser, the majority of the appraisers shall set the fair market rental value. If the majority of the appraisers are unable to set the fair market rental value within said twenty (20) day period, the three appraisals shall be added together and the total divided by three; the resulting quotient shall be the fair market rental value and shall -52- be deemed incorporated herein, provided, however, that if any appraisal differs from the median appraisal by an amount equal to more than ten percent (10%) of such median appraisal, that appraisal shall be disregarded, and the average of the remaining appraisals (or the remaining appraisal) shall be the fair market rental value. In establishing the fair market rental value, the appraiser or appraisers shall consider the reasonable market rental value for the current use of the Premises (including, but not limited to, renal rates for comparable space with comparable tenant improvements and any adjustments to rent based upon direct costs (operating expenses) and taxes, load factors, financing charges, and/or cost of living or other rental adjustments; the relative strength of the tenants; and of size of the space); without regard to the existence of this Lease but taking into consideration the absolute nature of this Lease. 46. Right of Notice. Subject to any prior rights of other tenants of --------------- the Project, if at any time during the Lease Term, as the same may be extended, any space in the Project becomes available, Landlord shall notify Tenant of the availability of such space in the same manner and at the same time that Landlord notifies (or would notify) other tenants of the Project of the availability of such space. 53 EXHIBIT "A" Site Plan [ILLUSTRATION OF SITE PLAN] -54- EXHIBIT "B" Floor Plan [ILLUSTRATION OF FLOOR PLAN] -55- [LETTERHEAD OF REALTEC APPEARS HERE] July 28, 1994 Mr. Harry Robbins SYMPHONIX DEVICES, INC. 3047 Orchard Parkway San Jose, CA 95134 Dear Harry: Notwithstanding Paragraph 2.2 of the Lease between Symphonix Devices, Inc. ("Tenant") and Realtec Properties I, L.P. ("Landlord") for 3047 Orchard Parkway, San Jose, California ("Premises") dated July 28, 1994, or any other pertinent paragraph of said Lease, in the event that construction of the tenant improvements by Landlord identified in Exhibit C-1 and C-2 of said Lease triggers compliance with Title 24 of the Americans with Disabilities Act of 1990, all costs associated with said compliance shall be borne solely by the Landlord. The tenant improvements shown on Exhibit C-2 shall not be required to be restored to their original condition by Tenant upon termination of the Lease term or option to extend terms. Landlord warrants that all Heating Ventilating Air Conditioning (HVAC) equipment shall be in working order upon Lease commencement. LANDLORD: Realtec Properties I.L.P By: /s/ Thomas P. Masters ----------------------------------- Thomas P. Masters Title: General Partner Date: July 28, 1994 TENANT: Symphonix Devices, Inc. By: /s/ Harry S. Robbins ----------------------------------- Harry S. Robbins Title Pres/CEO --------------------------------- Date July 28, 1994 -56- [LETTERHEAD OF REALTEC APPEARS HERE] August 17, 1994 Mr. Harry Robbins SYMPHONIX DEVICES, INC. 3047 Orchard Parkway San Jose, CA 95134 RE: Lease Commencement ------------------ Dear Mr. Robbins: In regard to that certain Lease dated July 28, 1994, by and between REALTEC PROPERTIES I, a California limited partnership, as Landlord ("Landlord"), and SYMPHONIX DEVICES INC., a California corporation, as Tenant ("Tenant"), this letter will confirm our understanding and agreements relative to the Lease commencement date. Notwithstanding anything to the contrary contained in the Lease, it is agreed that the Lease commenced on August 18, 1994 and shall end on August 17, 1997. Please acknowledge receipt of this letter and your Agreement of Approval of the foregoing, by signing the enclosed copy of this letter and returning the same to us. Very truly yours, REALTEC PROPERTIES I, a California limited partnership /s/ Kathryn Rhinehart Kathryn Rhinehart Property Manager ACCEPTED AND AGREED: SYMPHONIX DEVICES, INC., a California corporation By: /s/ Harry Robbins Dated: 8/17/94 -------------------------------- ------------------------- -57- FIRST AMENDMENT to that lease dated July 28, 1994 by and between REALTEC PROPERTIES I, L.P., a California limited partnership ("Landlord") and SYMPHONIX DEVICES, INC., a California corporation ("Tenant") for the Premises known as 3047 Orchard Parkway, San Jose, California. Pursuant to Addendum paragraph 44, "Option to Extend Lease Term" Tenant has, in writing, opted to extend the lease term for a period of one year. LANDLORD AND TENANT AGREE TO THE FOLLOWING: 1. The extended term shall commence August 18, 1997 and terminate August 17, 1998. 2. Rent during the extended term shall be Sixteen Thousand Seven Hundred Seventy-six and no/100 ($16,776.00) Dollars. 3. Tenant hereby surrenders its second Option to Extend Lease Term for one year, which is contained in Addendum paragraph 44. Tenant shall have no options to extend beyond August 17, 1998. 4. Except as amended by the terms of this Amendment, the Lease shall remain unmodified and in full force and effect on the terms, covenants and conditions set forth therein. IN WITNESS WHEREOF, the parties have executed this First Amendment to Lease effective as of the date set forth below. LANDLORD: TENANT: REALTEC PROPERTIES I, L.P. SYMPHONIX DEVICES, INC., a A California limited partnership California corporation By: /s/ Thomas P. Masters By: /s/ Harry S. Robbins ----------------------------- ----------------------------- Thomas P. Masters Harry S. Robbins Title: General Partner Title: President and CEO Date: 4/17/97 Date: 4/14/97 -------- -------- EX-10.9 14 1997 LEASE AGREEMENT Exhibit 10.9 SUMMARY OF BASIC LEASE TERMS ---------------------------- SECTION TERMS (LEASE REFERENCE) A. Lease Reference Date: October 27, 1997 ------------------------------------- (Introduction) B. Landlord: Silicon Valley Properties, LLC -------- (Introduction) a Delaware limited liability company C. Tenant: Symphonix Devices, Inc., a California ------ (Introduction) corporation D. Premises: That area consisting of 30,460 square feet -------- ((S)1.21) of gross leasable area the address of which is 2331 Zanker Road, San Jose, California 95131, within the Building as outlined in Exhibit A. --------- E. Project: The land and improvements shown on Exhibit A ------- --------- ((S)1.22) consisting of Five (5) buildings the aggregate gross leasable area of which is 203,500 square feet. F. Building: The building in which the Premises are -------- ((S)1.7) located known as 2331-2333 Zanker road, Building E, San Jose, California 95131 containing 46,860 square feet of gross leasable area. G. Tenant's Share: 14.97% of the Project (30,460/203,500) -------------- ((S) 1.29) 65.00% of the Building (30,460/46,860) H. Tenant's Allocated Parking Stalls: 121 stalls. --------------------------------- ((S) 4.5) I. INTENTIONALLY DELETED ((S) 1.26) J. Lease Term: 60 calendar months (plus the partial month ---------- ((S) 1.18) following the Commencement Date if such date is not the first day of a month. SEE ADDENDUM NO. --------------- 1 TO LEASE FOR EXTENSION PROVISIONS. ----------------------------------- K. Base Monthly Rent: See following rental structure (based on ----------------- ((S)3.1)) 5% annual increases): 01/01/98-12/31/98: $1.50 per square foot-$45,690.00 per month 01/01/99-12/31/99: $1.58 per square foot-$47,974.50 per month 01/01/00-12/31/00: $1.65 per square foot-$50,373.23 per month 01/01/01-12/31/01: $1.74 per square foot-$52,891.89 per month 01/01/02-12/31/02: $1.82 per square foot-$55,536.48 per month L. Prepaid Rent: $45,690.00 ------------ ((S) 3.3) M. Security Deposit: $299,216.48 ---------------- ((S) 3.5) SEE ADDENDUM NO. 1 TO LEASE FOR LETTER OF CREDIT PROVISIONS. ------------------------------------------------------------ N. Permitted Use: General administrative office, marketing, ------------- ((S) 4.1) research and development, light manufacturing, distribution, and warehousing of medical and related devices or such other industries reasonably approved in writing by Landlord. O. Permitted Tenant's Alterations limit: $10,000.00 ------------------------------------ ((S) 5.2) P. Tenant's Liability Insurance Minimum: $2,000,000.00 ------------------------------------ ((S) 9.1) 1 Q. Landlord's Address: 2290 North First Street, Suite 108 ------------------ ((S) 1.3) San Jose, California 95131 R. Tenant's Address: 3047 Orchard Parkway ----------------- ((S) 1.3) San Jose, California 95134 S. Retained Real Estate Brokers: Colliers Parrish ---------------------------- ((S) 15.13) International, Inc. T. Lease: This Lease includes the summary of the Basic Lease ----- ((S) 1.17) Terms, the Lease, and the following exhibits and addenda, Exhibit A (site plan of the Project --------- containing description of the Premises), Exhibit B (Improvement Agreement), Exhibit C --------- --------- (Intentionally Deleted), Exhibit D (Acknowledgment --------- of Commencement Date), Exhibit E (Intentionally --------- Deleted), Exhibit F (sign criteria), Exhibit G --------- --------- (Intentionally Deleted), Exhibit H (Hazardous --------- Materials Questionnaire), and Addendum No. 1, all of which are attached hereto and incorporated herein by this reference. The foregoing Summary is hereby incorporated into and made a part of this Lease. Each reference in this Lease to any term of the Summary shall mean the respective information set forth above and shall be construed to incorporate all of the terms provided under the particular paragraph pertaining to such information. In the event of any conflict between the Summary and the Lease, the Summary shall control. LANDLORD: TENANT: SILICON VALLEY PROPERTIES, L.L.C. a Delaware limited liability company SYMPHONIX DEVICES, INC. a California corporation By: Divco SVP Group, LLC, a Delaware limited liability company By: ______________________ Its Manager Harry Robbins Title: President By: __________________________ Name: Scott Smithers Dated: October __, 1997 Its: President Dated: October __, 1997 2 LEASE This Lease is dated as of the lease reference date specified in Section A --------- of the Summary and is made by and between the party identified as Landlord in Section B of the Summary and the party identified as Tenant in Section C of the - --------- --------- Summary. ARTICLE 1 --------- DEFINITIONS ----------- 1.1 General: Any initially capitalized term that is given a special ------- meaning by this Article 1, the Summary, or by any other provision of this Lease (including the exhibits attached hereto) shall have such meaning when used in this Lease or any addendum or amendment hereto unless otherwise clearly indicated by the context. 1.2 Additional Rent: The term "Additional Rent" is defined in (P)3.2. --------------- 1.3 Address for Notices: The term "Address for Notices" shall mean the ------------------- addresses set forth in Sections Q and R of the Summary; provided, however, that ---------------- after the Commencement Date, Tenant's Address for Notices shall be the address of the Premises. 1.4 Agents: The term "Agents" shall mean the following: (i) with respect ------ to Landlord or Tenant, the agents, employees and contractors of such party; and (ii) in addition with respect to Tenant, Tenant's subtenants and their respective agents, employees and contractors. 1.5 Agreed Interest Rate: The term "Agreed Interest Rate" shall mean -------------------- that interest rate determined as of the time it is to be applied that is equal to the lesser of (i) 5% in excess of the discount rate established by the Federal Reserve Bank of San Francisco as it may be adjusted from time to time, or (ii) the maximum interest rate permitted by Law. 1.6 Base Monthly Rent: The term "Base Monthly Rent" shall mean the fixed ----------------- monthly rent payable by Tenant pursuant to (P)3.1 which is specified in Section ------- K of the Summary. - - 1.7 Building: The term "Building" shall mean the building in which the -------- Premises are located which Building is identified in Section F of the Summary, --------- the gross leasable area of which is referred to herein as the "Building Gross Leasable Area." 1.8 Commencement Date: The term "Commencement Date" is the date the ----------------- Lease Term commences, which term is defined in (P)2.2. 1.9 Common Area: The term "Common Area" shall mean all areas and ----------- facilities within the Project that are not designated by Landlord for the exclusive use of Tenant or any other lessee or other occupant of the Project, including the parking areas, access and perimeter roads, pedestrian sidewalks, landscaped areas, trash enclosures, recreation areas and the like. 1.10 Common Operating Expenses: The term "Common Operating Expenses" is ------------------------- defined in (P)8.2. 1.11 Consumer Price Index: INTENTIONALLY DELETED. -------------------- 1.12 Effective Date: The term "Effective Date" shall mean the date the -------------- last signatory to this Lease whose execution is required to make it binding on the parties hereto shall have executed this Lease. 1.13 Event of Tenant's Default: The term "Event of Tenant's Default" is ------------------------- defined in (P)13.1. 1.14 Hazardous Materials: The terms "Hazardous Materials" and "Hazardous ------------------- Materials Laws" are defined in (P)7.2E. 1.15 Insured and Uninsured Peril: The terms "Insured Peril" and --------------------------- "Uninsured Peril" are defined in (P)11.2E. 1.16 Law: The term "Law" shall mean any judicial decision, statute, --- constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal or other government agency or authority having jurisdiction over the parties to this Lease or the Premises, or both, in effect either at the Effective Date or any time during the Lease Term. 1.17 Lease: The term "Lease" shall mean the Summary and all elements of ----- this Lease identified in Section T of the Summary, all of which are attached --------- hereto and incorporated herein by this reference. 1.18 Lease Term: The term "Lease Term" shall mean the term of this Lease ---------- which shall commence on the Commencement Date and continue for the period specified in Section J of the Summary. --------- 1 1.19 Lender: The term "Lender" shall mean any beneficiary, mortgagee, ------ secured party, lessor, or other holder of any Security Instrument. 1.20 Permitted Use: The term "Permitted Use" shall mean the use specified ------------- in Section N of the Summary. --------- 1.21 Premises: The term "Premises" shall mean that building area -------- described in Section D of the Summary that is within the Building. --------- 1.22 Project: The term "Project" shall mean that real property and the ------- improvements thereon which are specified in Section E of the Summary, the --------- aggregate gross leasable area of which is referred to herein as the "Project Gross Leasable Area." 1.23 Private Restrictions: The term "Private Restrictions" shall mean all -------------------- recorded covenants, conditions and restrictions, private agreements, reciprocal easement agreements, and any other recorded instruments affecting the use of the Premises which (i) exist as of the Effective Date, or (ii) are recorded after the Effective Date and are approved by Tenant. 1.24 Real Property Taxes: The term "Real Property Taxes" is defined in ------------------- (P)8.3. 1.25 Scheduled Commencement Date: The term "Scheduled Commencement Date" --------------------------- shall mean the date specified in Section I of the Summary. --------- 1.26 Security Instrument: The term "Security Instrument" shall mean ------------------- any underlying lease, mortgage or deed of trust which now or hereafter affects the Project, and any renewal, modification, consolidation, replacement or extension thereof. 1.27 Summary: The term "Summary" shall mean the Summary of Basic ------- Lease Terms executed by Landlord and Tenant that is part of this Lease. 1.28 Tenant's Alterations: The term "Tenant's Alterations" shall mean -------------------- all improvements, additions, alterations, and fixtures installed in the Premises by Tenant at its expense which are not Trade Fixtures and are not Tenant Improvements (as defined in Exhibit B attached hereto). --------- 1.29 Tenant's Share: The term "Tenant's Share" shall mean the -------------- percentage obtained by dividing Tenant's Gross Leasable Area by the Building Gross Leasable Area (as defined in section 1.7 above) or the Project Gross Leasable Area (as defined in section 1.22 above), as applicable, which as of the Effective Date is the percentage identified in Section G of the Summary. --------- 1.30 Trade Fixtures: The term "Trade Fixtures" shall mean (i) -------------- Tenant's inventory, furniture, signs, equipment, any clean room equipment constructed, installed or placed in the Premises by or for Tenant and any personal property or furnishings of Tenant in the Premises, and (ii) anything affixed to the Premises by Tenant at its expense for purposes of trade, manufacture, ornament or domestic use (except replacement of similar work or material originally installed by Landlord) which can be removed without material injury to the Premises. Tenant shall be entitled to remove its Trade Fixtures at any time during the Term (or any Extension Period as defined in Addendum No. 1) of this Lease, including, without limitation, upon the termination of the Lease Term or any Extension Period, as applicable, and any damage caused by such removal by Tenant or Tenant's Agents shall be immediately repaired and restored by Tenant at its expense. ARTICLE 2 --------- DEMISE, CONSTRUCTION, AND ------------------------- ACCEPTANCE ---------- 2.1 Demise of Premises: Landlord hereby leases to Tenant, and Tenant ------------------ leases from Landlord, for the Lease Term upon the terms and conditions of this Lease, the Premises together with (i) the non-exclusive right to use the number of Tenant's Allocated Parking Stalls within the Common Area (subject to the limitations set forth in (P)4.5), and (ii) the non-exclusive right to use the Common Area for ingress to and egress from the Premises. Landlord reserves the use of the exterior walls, the roof and the area beneath and above the Premises, together with the right to install, maintain, use, and replace ducts, wires, conduits and pipes leading through the Premises in locations which will not materially interfere with Tenant's use of the Premises. 2.2 Commencement Date: Pursuant to Exhibit B attached hereto, Tenant ----------------- --------- is constructing all of the Tenant Improvements (including, without limitation, the Special Work and Electrical Upgrade as defined in Exhibit B). Accordingly, --------- concurrent with the complete execution and delivery of this Lease and receipt by Landlord of the Security Deposit and prepaid rent (the "Delivery Date"), Landlord shall deliver possession of the Premises to Tenant for the purpose of Tenant constructing the Tenant Improvements. The Lease Term and the obligation of Tenant to pay Base Monthly Rent and Additional Rent shall not commence until the Commencement Date. The "Commencement Date" shall be the earlier of : (i) the date the Tenant Improvements have been Substantially Completed, or (ii) January 1, 1998, subject to any delays caused by any "Landlord Delay" or Force Majeure Delay (as such terms are defined in Exhibit B attached hereto). --------- Promptly after the Commencement Date, Landlord and 2 Tenant shall execute a written acknowledgment of the date of commencement in the form attached hereto as Exhibit D, appropriately completed --------- 2.3 Delivery of Possession: If this Lease provides that Landlord must ---------------------- deliver possession of the Premises to Tenant on a certain date, then if Landlord is unable to deliver possession of the Premises to Tenant on or before such date for any reason whatsoever, this Lease shall not be void or voidable for a period of 30 days thereafter, and Landlord shall not be liable to Tenant for any loss or damage resulting therefrom, except that the outside date of January 1, 1998 specified in section 2.2 for the Commencement Date shall be delayed one (1) day for each day after the Delivery Date that possession is not delivered to Tenant as provided in section 2.2 above. Tenant acknowledges that it has had an opportunity to conduct, and has conducted, such inspections of the Premises as it deems necessary to evaluate its condition. Except as otherwise specifically provided herein, Tenant agrees to accept possession of the Premises in its then existing condition, "as-is", including all patent defects. 2.4 Early Occupancy: If Tenant enters or permits its contractors to --------------- enter the Premises prior to the Commencement Date, it shall do so upon all of the terms of this Lease (including its obligations regarding indemnity and insurance) except those regarding the obligation to pay Base Monthly Rent and Additional Rent, which shall commence on the Commencement Date. 2.5 Acceptance of Premises: Landlord represents and warrants that as of ---------------------- the Effective Date (a) the roof, all structural portions of the Premises, plumbing, electrical (including all outlets), sprinklers and heating and air conditioning system for the Premises are in good working order and repair. If there is a breach of the foregoing representation and warranty within sixty (60) days after the Commencement Date and Tenant provides written notice to Landlord within said sixty (60) day period specifying the nature of the breach, then Landlord, at its expense, shall promptly rectify such breach in a manner reasonably determined by Landlord. The failure of Tenant to provide written notice of such breach of the warranties set forth above within the specified time periods shall be conclusively deemed that no such breach occurred. Tenant's acceptance of the Premises shall not be deemed a waiver of Tenant's right to have latent defects in the roof structure, foundation, footings, floor slab and exterior and load bearing walls repaired at Landlord's expense; provided that Tenant shall give notice to Landlord promptly after Tenant has knowledge of such defect or such defect becomes reasonably apparent. Landlord agrees to assign to Tenant during the Lease Term any warranty from any vendor with respect to the Premises which is applicable to the Premises and will reduce Tenant's maintenance obligations under this Lease, subject to Landlord's right to retain an interest in such warranty if Tenant does not enforce such warranty. Such assignment is made without representation or warranty as to the assignability, existence or validity of any such warranty. ARTICLE 3 --------- RENT ---- 3.1 Base Monthly Rent: Commencing on the Commencement Date and ----------------- continuing throughout the Lease Term, Tenant shall pay to Landlord the Base Monthly Rent set forth in Section K of the Summary. --------- 3.2 Additional Rent: Commencing on the Commencement Date and --------------- continuing throughout the Lease Term, Tenant shall pay the following as additional rent (the "Additional Rent"): (i) any late charges or interest due Landlord pursuant to (P)3.4; (ii) Tenant's Share of Common Operating Expenses as provided in (P)8.1; (iii) Landlord's share of any Subrent received by Tenant upon certain assignments and sublettings as required by (P)14.1; (iv) any legal fees and costs due Landlord pursuant to (P)15.9; and (v) any other charges due Landlord pursuant to this Lease. 3.3 Payment of Rent: Concurrently with the execution of this Lease by --------------- both parties, Tenant shall pay to Landlord the amount set forth in Section L of --------- the Summary as prepayment of rent for credit against the first installment(s) of Base Monthly Rent. All rent required to be paid in monthly installments shall be paid in advance on the first day of each calendar month during the Lease Term. If Section K of the Summary provides that the Base Monthly Rent is to be --------- increased during the Lease Term and if the date of such increase does not fall on the first day of a calendar month, such increase shall become effective on the first day of the next calendar month. All rent shall be paid in lawful money of the United States, without any abatement, deduction or offset whatsoever (except as specifically provided in (P)11.4 and (P)12.3), and without any prior demand therefor. Rent shall be paid to Landlord at its address set forth in Section Q of the Summary, or at such other place as Landlord may --------- designate from time to time. Tenant's obligation to pay Base Monthly Rent and Tenant's Share of Common Operating Expenses shall be prorated at the commencement and expiration of the Lease Term. 3.4 Late Charge and Interest on Rent in Default: If any Base Monthly ------------------------------------------- Rent or Additional Rent is not received by Landlord from Tenant within three business days after Landlord has notified Tenant in writing that payment of such rent has not been received by Landlord, then Tenant shall immediately pay to Landlord a late charge equal to 5% of such delinquent rent as liquidated damages for Tenant's failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rent or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay any rent due under this Lease in a timely fashion, including any right to terminate this Lease pursuant to (P)13.2B. If any rent remains delinquent for a period in excess of 30 days then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not paid when due at the Agreed Interest Rate following the date such amount became due until paid. 3 3.5 Security Deposit: On the Effective Date, Tenant shall deposit ---------------- with Landlord the amount set forth in Section M of the Summary as security for --------- the performance by Tenant of its obligations under this Lease, and not as prepayment of rent (the "Security Deposit"). Landlord may from time to time apply such portion of the Security Deposit as is reasonably necessary for the following purposes: (i) to remedy any default by Tenant in the payment of rent or in the performance of any obligation; (ii) to clean the Premises upon termination of the Lease if Tenant is required to so clean the Premises and fails to do so to the extent required under this Lease; and (iii) to remedy any other default of Tenant. In the event the Security Deposit or any portion thereof is so used, Tenant agrees to pay to Landlord promptly upon demand an amount in cash sufficient to restore the Security Deposit to the full original amount. Landlord shall not be deemed a trustee of the Security Deposit, may use the Security Deposit in business, and shall not be required to segregate it from its general accounts. Tenant shall not be entitled to any interest on the Security Deposit. If Landlord transfers the Premises during the Lease Term, Landlord may pay the Security Deposit to any transferee of Landlord's interest in conformity with the provisions of California Civil Code Section 1950.7 and/or any successor statute, in which event the transferring Landlord will be released from all liability for the return of the Security Deposit. ARTICLE 4 --------- USE OF PREMISES --------------- 4.1 Limitation on Use: Tenant shall use the Premises solely for the ----------------- Permitted Use specified in Section N of the Summary. Tenant shall not do --------- anything in or about the Premises which will (i) cause structural injury to the Building, or (ii) cause damage to any part of the Building except to the extent reasonably necessary for the installation of Tenant's Trade Fixtures and Tenant's Alterations, and then only in a manner which has been first approved by Landlord in writing. Tenant shall not operate any equipment within the Premises which will (i) materially damage the Building or the Common Area, (ii) overload existing electrical systems or other mechanical equipment servicing the Building, (iii) impair the efficient operation of the sprinkler system or the heating, ventilating or air conditioning ("HVAC") equipment within or servicing the Building, or (iv) damage, overload or corrode the sanitary sewer system. Tenant shall not attach, hang or suspend anything from the ceiling, roof, walls or columns of the Building or set any load on the floor in excess of the load limits for which such items are designed nor operate hard wheel forklifts within the Premises. Any dust, fumes, or waste products generated by Tenant's use of the Premises shall be contained and disposed so that they do not (i) create an unreasonable fire or health hazard, (ii) damage the Premises, or (iii) result in the violation of any Law. Except as approved by Landlord, Tenant shall not change the exterior of the Building or install any equipment or antennas on or make any penetrations of the exterior or roof of the Building. Tenant shall not commit any waste in or about the Premises, and Tenant shall keep the Premises in a neat, clean, attractive and orderly condition, free of any nuisances. If Landlord designates a standard window covering for use throughout the Building, Tenant shall use this standard window covering to cover all windows in the Premises. Tenant shall not conduct on any portion of the Premises or the Project any sale of any kind, including any public or private auction, fire sale, going-out-of-business sale, distress sale or other liquidation sale. 4.2 Compliance with Regulations: Tenant shall not use the Premises in --------------------------- any manner which violates any Laws or Private Restrictions which affect the Premises. Tenant shall abide by and promptly observe and comply with all Laws and Private Restrictions. Tenant shall not use the Premises in any manner which will cause a cancellation of any insurance policy covering any improvements installed by Landlord at its expense or which poses an unreasonable risk of damage or injury to the Premises. Tenant shall not sell, or permit to be sold in or about the Premises any article which may be prohibited by the standard form of fire insurance policy. Tenant shall comply with all reasonable requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters, which are necessary to maintain the insurance coverage carried by either Landlord or Tenant pursuant to this Lease, to the extent necessary due to Tenant's particular use of the Premises or Tenant's Alterations. Notwithstanding the foregoing, Landlord represents and warrants to its knowledge that as of the Effective Date: (a) the Private Restrictions do not prohibit the permitted uses set forth in Section N of the Summary of Basic Lease Terms, and (b) Landlord is not in receipt of notice of a violation of any Law pertaining to the Premises (provided that Landlord has informed Tenant that ADA must be completed as part of Landlord's "Special Work" as defined in Exhibit B attached hereto which shall be at Landlord's sole cost and expenses as provided in Exhibit B, and that due to the age of the Building there may be work required to comply with existing Laws in connection with the construction of the Tenant Improvements). 4.3 Outside Areas: No materials, supplies, tanks or containers, ------------- equipment, finished products or semi-finished products, raw materials, inoperable vehicles or articles of any nature shall be stored upon or permitted to remain outside of the Premises except in fully fenced and screened areas outside the Building which have been designed for such purpose and have been approved in writing by Landlord for such use by Tenant. 4.4 Signs: Tenant shall not place on any portion of the Premises any ----- sign, placard, lettering in or on windows, banner, displays or other advertising or communicative material which is visible from the exterior of the Building without the prior written approval of Landlord. All such approved signs shall strictly conform to all Laws, Private Restrictions, and Landlord's sign criteria attached as Exhibit F, and shall be installed at the expense of Tenant. Tenant --------- shall maintain such signs in good condition and repair. 4.5 Parking: Tenant is allocated and shall have the non-exclusive ------- right to use not more than the number of Tenant's Allocated Parking Stalls contained within the Project described in Section H of the Summary for its use --------- and the use of Tenant's Agents, the location of which may be designated from time to time by Landlord; provided, however, that Landlord agrees that it will exercise its rights under this section in a non-discriminatory 4 manner so as not to unreasonably relocate such parking spaces in an unreasonable location. Tenant shall not at any time use more parking spaces than the number so allocated to Tenant or park its vehicles or the vehicles of others in any portion of the Project designated by Landlord as an exclusive parking area. Tenant shall not have the exclusive right to use any specific parking space. If Landlord grants to any other tenant the exclusive right to use any particular parking space(s), Tenant shall not use such spaces. Landlord reserves the right, after having given Tenant reasonable notice, to have any vehicles owned by Tenant or Tenant's Agents utilizing parking spaces in excess of the parking spaces allowed for Tenant's use to be towed away at Tenant's cost. All trucks and delivery vehicles shall be (i) parked at the rear of the Building, (ii) loaded and unloaded in a manner which does not interfere with the businesses of other occupants of the Project, and (iii) permitted to remain on the Project only so long as is reasonably necessary to complete loading and unloading. In the event Landlord elects or is required by any Law to limit or control parking in the Project, whether by validation of parking tickets or any other method of assessment, Tenant agrees to participate in such validation or assessment program under such reasonable rules and regulations as are from time to time established by Landlord. However, the parties hereby acknowledge and agree that Tenant's parking rights described in Section H of the Summary and Section 4.5 of this Lease are included in the Base Monthly Rent, and under no circumstances, including, without limitation, Landlord's institution of a validation or assessment program, shall Tenant be required to pay Landlord or Landlord's Agents any additional amount for said parking rights. 4.6 Rules and Regulations: Landlord may from time to time promulgate --------------------- reasonable and nondiscriminatory rules and regulations applicable to all occupants of the Project for the care and orderly management of the Project and the safety of its tenants and invitees. Such rules and regulations shall be binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees to abide by such rules and regulations, provided that such rules and regulations do not unreasonably interfere with tenant's use of or access to the Premises or Tenant's parking rights and do not materially increase Tenant's obligations or decrease Tenant's rights under this Lease. If there is a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible for the violation by any other tenant of the Project of any such rules and regulations. ARTICLE 5 --------- TRADE FIXTURES AND ALTERATIONS ------------------------------ 5.1 Trade Fixtures: Throughout the Lease Term, Tenant may provide and -------------- install, and shall maintain in good condition, any Trade Fixtures required in the conduct of its business in the Premises. All Tenant's Trade Fixtures and personal property installed in the Premises at Tenant's expense ("Tenant's Property") shall at all times remain Tenant's property and Tenant shall be entitled to all depreciation, amortization and other tax benefits with respect thereto. At any time Tenant may remove Tenant's Property (including the clean room equipment) from the Premises, provided Tenant repairs all damage caused by such removal. Landlord shall have no lien or other interest whatsoever in any item of Tenant's Property, or any portion thereof or interest therein located in the Premises or elsewhere, and Landlord hereby waives all such liens and interests. Within twenty (20) days following Tenant's request, Landlord shall execute documents in a form reasonably acceptable to Landlord and Tenant to evidence Landlord's waiver of any right, title, lien or interest in Tenant's Property located in the Premises. 5.2 Tenant's Alterations: Construction by Tenant of Tenant's -------------------- Alterations (not including the Tenant Improvements) shall be governed by the following: A. Tenant shall not construct any Tenant's Alterations or otherwise alter the Premises without Landlord's prior written approval. Landlord shall not unreasonably withhold its approval for any of Tenant's Alterations, unless any of Tenant's Alterations will affect (i) the roof, foundation or structural parts of the Building, (ii) the heating, air-conditioning or ventilation or life safety systems (except in the event of an emergency), (iii) the Common Areas or portions of the Building outside of the Premises, or (iv) require any additional work in addition to Tenant's proposed Tenant's Alteration in the Building or Project to comply with any Law (and Tenant is unwilling to pay for such additional work), in which case Landlord may withhold its approval in its sole and absolute discretion.. Tenant shall be entitled, without Landlord's prior approval, to make Tenant's Alterations (i) which do not affect the structural or exterior parts or water tight character of the Building, and (ii) the reasonably estimated cost of which, including, without limitation, the cost of all demolition of any part of the Premises removed or materially altered in connection with such Tenant's Alterations, together do not exceed the Permitted Tenant Alterations Limit specified in Section O of the Summary per work of --------- improvement. In the event Landlord's approval for any Tenant's Alterations is required, Tenant shall not construct the Tenant's Alteration until Landlord has approved in writing the plans and specifications therefor, if any are required for obtaining any permits, and such Tenant's Alterations shall be constructed substantially in compliance with such approved plans and specifications by a licensed contractor first approved by Landlord, which approval shall not be unreasonably withheld or delayed. If Landlord's consent is required for any Tenant's Alteration and Landlord does not notify Tenant in writing of its approval or disapproval within fifteen (15) days following receipt by Landlord of Tenant's request for approval and supporting plans and specifications (if any are required), then Landlord shall be deemed to have disapproved the proposed Tenant's Alteration, unless Tenant provides a second notice requesting such consent and Landlord fails to respond within five (5) days after Landlord's receipt of such second notice, in which case Landlord shall be deemed to have approved of the proposed Tenant's Alteration. All Tenant's Alterations constructed by Tenant shall be constructed by a licensed contractor in accordance with all Laws using new materials of good quality. 5 B. Tenant shall not commence construction of any Tenant's Alterations until (i) all required governmental approvals and permits have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant has given Landlord at least five days' prior written notice of its intention to commence such construction, and (iv) if reasonably requested by Landlord, Tenant has obtained contingent liability and broad form builders' risk insurance in an amount reasonably satisfactory to Landlord if there are any perils relating to the proposed construction not covered by insurance carried pursuant to Article 9. C. All Tenant's Alterations shall remain the property of Tenant during the Lease Term but shall not be altered or removed from the Premises. At the expiration or sooner termination of the Lease Term, all Tenant's Alterations shall be surrendered to Landlord as part of the realty and shall then become Landlord's property, and subject to Articles 11 and 12 of this Lease, Landlord shall have no obligation to reimburse Tenant for all or any portion of the value or cost thereof; provided, however, that if Landlord requires Tenant to remove any Tenant's Alterations, Tenant shall so remove such Tenant's Alterations prior to the expiration or sooner termination of the Lease Term. Notwithstanding the foregoing, Tenant shall not be obligated to remove any Tenant's Alterations with respect to which the following is true: (i) Tenant was required, or elected, to obtain the approval of Landlord to the installation of the Tenant's Alteration in question; (ii) at the time Tenant requested Landlord's approval, Tenant requested of Landlord in writing that Landlord inform Tenant of whether or not Landlord would require Tenant to remove such Tenant's Alteration at the expiration of the Lease Term; and (iii) at the time Landlord granted its approval, it did not inform Tenant that it would require Tenant to remove such Tenant's Alteration at the expiration of the Lease Term. 5.3 Alterations Required by Law: Tenant shall make any alteration, --------------------------- addition or change of any sort to the Premises that is required by any Law because of (i) Tenant's particular use or change of use of the Premises; (ii) Tenant's application for any permit or governmental approval; or (iii) Tenant's construction or installation of any Tenant's Alterations or Trade Fixtures. Any other alteration, addition, or change required by Law which is not the responsibility of Tenant pursuant to the foregoing shall be made by Landlord (subject to Landlord's right to reimbursement from Tenant specified in (P)5.4). 5.4 Amortization of Certain Capital Improvements: Tenant shall pay -------------------------------------------- Additional Rent in the event Landlord reasonably elects or is required to make any of the following kinds of capital improvements to the Project and the cost thereof is not reimbursable as a Common Operating Expense: (i) capital improvements required to be constructed in order to comply with any Law (excluding any Hazardous Materials Law) not in effect or applicable to the Project as of the Effective Date; (ii) modification of existing or construction of additional capital improvements or building service equipment for the purpose of reducing the consumption of utility services or Common Operating Expenses of the Project; and (iii) replacement of capital improvements or building service equipment existing as of the Effective Date when required because of normal wear and tear to the extent it affects the Building or Common Area. The amount of Additional Rent Tenant is to pay with respect to each such capital improvement shall be determined as follows: A. All costs paid by Landlord to construct such improvements shall be amortized over the useful life of such improvement (as reasonably determined by Landlord in accordance with generally accepted accounting principles) with interest on the unamortized balance at the then prevailing market rate Landlord would pay if it borrowed funds to construct such improvements from an institutional lender, and Landlord shall inform Tenant of the monthly amortization payment required to so amortize such costs, and shall also provide Tenant with the information upon which such determination is made. The parties hereby agree that if the existing HVAC system for the Premises (other than the changes and additions to the HVAC system completed as part of the Tenant Improvements) is replaced during the Lease Term, the useful life for such replacement shall be 15 years. B. As Additional Rent, Tenant shall pay at the same time the Base Monthly Rent is due an amount equal to Tenant's Share of that portion of such monthly amortization payment fairly allocable to the Building (as reasonably determined by Landlord) for each month after such improvements are completed until the first to occur of (i) the expiration of the Lease Term (as it may be extended), or (ii) the end of the term over which such costs were amortized. 5.5 Mechanic's Liens: Tenant shall keep all or any portion of Project ---------------- free from any liens, and shall pay when due all bills, arising out of any work performed, materials furnished, or obligations incurred by Tenant or Tenant's Agents relating to all or any portion of the Project. If any claim of lien described in the preceding sentence is recorded (except those caused by Landlord or Landlord's Agents), Tenant shall bond against or discharge the same within 10 days after the same has been recorded against all or any portion of the Project. Should any lien be filed against all or any portion of the Project or any action be commenced affecting title to all or any portion of the Project, the party receiving notice of such lien or action shall immediately give the other party written notice thereof. 5.6 Taxes on Tenant's Property: Tenant shall pay before delinquency -------------------------- any and all taxes, assessments, license fees and public charges levied, assessed or imposed against Tenant or Tenant's estate in this Lease or the property of Tenant situated within the Premises which become due during the Lease Term. If any tax or other charge is assessed by any governmental agency because of the execution of this Lease, such tax shall be paid by Tenant. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. ARTICLE 6 --------- 6 REPAIR AND MAINTENANCE ---------------------- 6.1 Tenant's Obligation to Maintain: Except as otherwise provided in ------------------------------- (P)6.2, (P)11.1, and (P)12.3, Tenant shall be responsible for the following during the Lease Term: A. Tenant shall clean and maintain in good order, condition, and repair and replace when necessary the Premises and every part thereof, through regular inspections and servicing, including, but not limited to: (i) all plumbing and sewage facilities (including all sinks, toilets, faucets and drains), and all ducts, pipes, vents or other parts of the HVAC or plumbing system; (ii) all fixtures, interior walls, floors, carpets and ceilings; (iii) all windows, doors, entrances, plate glass, showcases and skylights (including cleaning both interior and exterior surfaces); (iv) all electrical facilities and all equipment (including all lighting fixtures, lamps, bulbs, tubes, fans, vents, exhaust equipment and systems); and (v) any automatic fire extinguisher equipment in the Premises. B. With respect to utility facilities serving the Premises (including electrical wiring and conduits, gas lines, water pipes, and plumbing and sewage fixtures and pipes), Tenant shall be responsible for the maintenance and repair of any such facilities which serve only the Premises, including all such facilities that are within the walls or floor, or on the roof of the Premises, and any part of such facility that is not within the Premises, but only up to the point where such facilities join a main or other junction (e.g., sewer main or electrical transformer) from which such utility services are distributed to other parts of the Project as well as to the Premises. Tenant shall replace any damaged or broken glass in the Premises (including all interior and exterior doors and windows) with glass of the same kind, size and quality. Tenant shall repair any damage to the Premises (including exterior doors and windows) caused by vandalism or any unauthorized entry. C. Tenant shall (i) maintain and repair when necessary all HVAC equipment which services only the Premises, and shall keep the same in good condition through regular inspection and servicing, and (ii) maintain continuously throughout the Lease Term a service contract for the maintenance of all such HVAC equipment with a licensed HVAC repair and maintenance contractor approved by Landlord, which contract provides for the periodic inspection and servicing of the HVAC equipment at least once every 90 days during the Lease Term. Notwithstanding anything to the contrary in this Lease, if the HVAC units or system for the Premises (excluding any HVAC units for the clean room) needs to be replaced during the Lease Term or Extended Period of this Lease, Landlord shall replaced such units and/or system at its cost and expense, but Tenant shall pay Landlord a portion of such cost in accordance with sections 5.4A and B of this Lease unless the need for such replacement is due to Tenant's willful misconduct or intentional misuse. If the HVAC units or system for the clean room need to be replaced during the Lease Term or Extended Period, Tenant shall be solely responsible for the cost to replace such units or system. Tenant shall maintain continuously throughout the Lease Term a service contract for the washing of all windows (both interior and exterior surfaces) in the Premises with a contractor approved by Landlord, which contract provides for the periodic washing of all such windows at least once every 90 days during the Lease Term. Tenant shall furnish Landlord with copies of all such service contracts, which shall provide that they may not be canceled or changed without at least 30 days' prior written notice to Landlord. If Tenant fails to maintain such service contact for the maintenance of the HVAC at any time during the Lease Term or if Tenant assigns this Lease to an unaffiliated party, Landlord reserves the right after at least 30 days written notice to Tenant to elect to obtain such HVAC service contract at Tenant's expense, unless Tenant cures such failure within said 30-day period. D. All repairs and replacements required of Tenant shall be promptly made with new materials of like kind and quality. If the work affects the structural parts of the Building or if the item of repair or replacement affects or involves the HVAC or life safety system, then Tenant shall first obtain Landlord's written approval of the scope of the work, plans therefor if any, materials to be used, and the contractor, except in cases of an emergency, where no consent shall be required. E. Notwithstanding anything to the contrary in this Lease, Landlord shall perform and construct, and Tenant shall have no responsibility to perform or construct any repair, maintenance, restoration, replacement, renewal or improvement (i) necessitated by the gross negligence or willful misconduct of Landlord or Landlord's Agents, (ii) to the structural portions of the Project (which for purposes hereof shall mean the roof structure, foundation, floor slab, footings, exterior and load bearing walls) or (iii) which is treated as a "capital expenditure" under generally accepted accounting principles as determined by Landlord in its reasonable discretion in accordance with generally accepted accounting principles; provided, however that Tenant shall pay Landlord a portion of the expense for any such repair or replacement of any non- structural portion of the Premises or Building in accordance with Sections 5.4A and B of this Lease. 6.2 Landlord's Obligation to Maintain: Landlord shall repair, --------------------------------- maintain and operate the Common Area and repair and maintain the roof, exterior and structural parts of the building(s) located on the Project so that the same are kept in good order and repair. If there is building service equipment and/or utility facilities serving portions of the Common Area and/or both the Premises and other parts of the Building, Landlord shall maintain and operate (and replace when necessary) such equipment. Landlord shall not be responsible for repairs required by an accident, fire or other peril or for damage caused to any part of the Project by any act or omission of Tenant or Tenant's Agents except as otherwise required by this Lease or except due to the gross negligence or willful misconduct of Landlord or Landlord's Agents. Landlord may engage contractors of its choice to perform the obligations required of it by this Article, and the necessity of any expenditure to perform such obligations shall be at the sole discretion of Landlord. 7 6.3 Control of Common Area: Landlord shall at all times have exclusive ---------------------- control of the Common Area. Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any abatement of rent, to: (i) close any part of the Common Area to whatever extent required in the opinion of Landlord's counsel to prevent a dedication thereof or the accrual of any prescriptive rights therein; (ii) temporarily close the Common Area to perform maintenance or for any other reason deemed sufficient by Landlord; (iii) change the shape, size, location and extent of the Common Area; (iv) eliminate from or add to the Project any land or improvement, including multi-deck parking structures; (v) make changes to the Common Area including, without limitation, changes in the location of driveways, entrances, passageways, doors and doorways, elevators, stairs, restrooms, exits, parking spaces, parking areas, sidewalks or the direction of the flow of traffic and the site of the Common Area; (vi) remove unauthorized persons from the Project; and/or (vii) change the name or address of the Building or Project. Tenant shall keep the Common Area clear of all obstructions created or permitted by Tenant. In exercising any such rights regarding the Common Area, (i) Landlord shall make a reasonable effort to minimize any disruption to Tenant's business, and (ii) Landlord shall not exercise its rights to control the Common Area in a manner that would materially interfere with Tenant's use of the Premises. Landlord shall have no obligation to provide guard services or other security measures for the benefit of the Project. Tenant assumes all responsibility for the protection of Tenant and Tenant's Agents from acts of third parties; provided, however, that nothing contained herein shall prevent Landlord, at its sole option, from providing security measures for the Project. Notwithstanding the foregoing, Tenant shall at all times during the Lease Term have reasonable access to and from the Premises and the parking lot in the Common Areas. ARTICLE 7 --------- WASTE DISPOSAL AND UTILITIES ---------------------------- 7.1 Waste Disposal: Tenant shall store its waste either inside the -------------- Premises or within outside trash enclosures that are fully fenced and screened in compliance with all Private Restrictions, and designed for such purpose. All entrances to such outside trash enclosures shall be kept closed, and waste shall be stored in such manner as not to be visible from the exterior of such outside enclosures. Tenant shall cause all of its waste to be regularly removed from the Premises at Tenant's sole cost. Tenant shall keep all fire corridors and mechanical equipment rooms in the Premises free and clear of all obstructions at all times. 7.2 Hazardous Materials: Landlord and Tenant agree as follows with ------------------- respect to the existence or use of Hazardous Materials on the Project: A. Any handling, transportation, storage, treatment, disposal or use of Hazardous Materials by Tenant and Tenant's Agents after the Effective Date in or about the Project shall strictly comply with all applicable Hazardous Materials Laws. Tenant shall not be required to comply with any Laws pertaining to Hazardous Materials, except to the extent necessitated due to Tenant's or any of Tenant's Agents use, generation or storage of Hazardous Materials during the Lease Term. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees, court costs, remediation costs, investigation costs, and other expenses to the extent such result from or arise in any manner whatsoever out of the use, storage, treatment, transportation, release, or disposal of Hazardous Materials on or about the Project by Tenant or Tenant's Agents after the Effective Date. B. If Tenant or Tenant's Agents use, storage, treatment, transportation , release or disposal of any Hazardous Materials after the Effective Date results in contamination of water or soil resulting in a level of contamination greater than the levels established as acceptable by any governmental agency having jurisdiction over such contamination, then Tenant shall promptly take any and all action necessary to investigate and remediate such contamination if required by Law or as a condition to the issuance or continuing effectiveness of any governmental approval which relates to the use of the Project or any part thereof to the extent required under applicable Hazardous Materials Laws and subject to the reasonable approval of Landlord. Under no circumstance shall Tenant be liable for any liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees, court costs, remediation costs, investigation costs, and other expenses of every type and nature, directly or indirectly arising out of or in connection with (i) any pre-existing condition at the Project that may be in violation of the Hazardous Materials Laws, or (ii) any use of Hazardous Materials by any other tenant in the Project or any third party other than Tenant or Tenant's Agents, or (iii) any migration of any Hazardous Materials from neighboring property in, to, under or about the Building or Project. C. Landlord and Tenant shall each give written notice to the other as soon as reasonably practicable after each knows of (i) any communication received from any governmental authority concerning Hazardous Materials which relates to the Project, and (ii) any contamination of the Project by Hazardous Materials which constitutes a violation of any Hazardous Materials Law. Tenant may use (a) small quantities of household chemicals such as adhesives, lubricants, and cleaning fluids in order to conduct its business at the Premises and (b) such other Hazardous Materials as are necessary and used in the management and operation of the business of the original party signing this Lease as Tenant as of the Commencement Date, which materials in either case were or are used in the manner for which they were designed and in such amounts as may be necessary for the operation of such business at the Property. If Tenant assigns this Lease or sublets any space, then any such assignee's or sublessee's use of Hazardous Materials in the normal and customary operation of its business shall be subject to the prior 8 written approval of Landlord. At any time during the Lease Term, Tenant shall, within thirty (30) days after written request therefor received from Landlord, disclose in writing all Hazardous Materials that are being used by Tenant on the Project, the nature of such use, and the manner of storage and disposal. D. Landlord may cause testing wells to be installed on the Project, and may cause the ground water to be tested to detect the presence of Hazardous Material by the use of such tests as are then customarily used for such purposes. If Tenant so requests, Landlord shall supply Tenant with copies of such test results. The cost of such tests and of the installation, maintenance, repair and replacement of such wells shall be paid by Tenant to the extent such testing and costs are necessitated due to a release or emission of Hazardous Materials by Tenant or Tenant's Agents during the Lease Term in violation of applicable Hazardous Materials Laws or due to a failure by Tenant to comply with any of the provisions of section 7.2 and its subsections. E. As used herein, the term "Hazardous Material," means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term "Hazardous Material," includes, without limitation, petroleum products, asbestos, PCB's, and any material or substance which is (i) listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42 U.S.C. 6903), or (iii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response; Compensation and Liability Act, 42 U.S.C. 9601 et seq. (42 U.S.C. 9601). As used herein, the term "Hazardous Material Law" shall mean any statute, law, ordinance, or regulation of any governmental body or agency (including the U.S. Environmental Protection Agency, the California Regional Water Quality Control Board, and the California Department of Health Services) which regulates the use, storage, release or disposal of any Hazardous Material. F. The obligations of Landlord and Tenant under this (P)7.2 shall survive the expiration or earlier termination of the Lease Term. The rights and obligations of Landlord and Tenant with respect to issues relating to Hazardous Materials are exclusively established by this (P)7.2. In the event of any inconsistency between any other part of this Lease and this (P)7.2, the terms of this (P)7.2 shall control. G. Landlord represents and warrants to the best of its actual knowledge, without independent investigation or the imputation of knowledge from any other party, that as of the Effective Date, Landlord (i) is not in receipt of notice of a violation nor is Landlord aware of any violation of any applicable Hazardous Materials Laws as of the date hereof with respect to the Premises or Building, (ii) no Hazardous Material is present on the Premises, Building or Project in violation of any applicable Hazardous Materials Laws, (iii) no underground storage tanks or asbestos-containing building materials are present in the Premises or Building in violation of any Hazardous Materials Laws, and (iv) no action, proceeding or claim is pending or threatened regarding the Premises, Building or Project concerning the presence of any Hazardous Materials. Landlord covenants and agrees that it shall not deposit or dispose of any Hazardous Materials in the Building or Project in violation of the applicable Hazardous Materials Laws. Under no circumstances shall Landlord be liable to Tenant for any Hazardous Use by any tenant in the Project or any third party or as a result of any migration of any Hazardous Materials from adjacent property in, to, under or about the Building or Project. The foregoing representation and warranty is made by Landlord, but shall not be applicable to any lender under any mortgage or deed of trust now or hereafter encumbering the Building or Project or any such lender that acquires the Building or Project through foreclosure, trustee sale or deed in lieu thereof or by person acquiring the Building or Project from such lender. 7.3 Utilities: Tenant shall promptly pay, as the same become due, all --------- charges for water, gas, electricity, telephone, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the Lease Term, including, without limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fee (excluding any connection fees or hook-up fees which relate to making the existing electrical, gas, and water service available to the Premises as of the Commencement Date), and (ii) penalties for discontinued or interrupted service cause by Tenant or any of Tenant's Agents. If any utility service is not separately metered to the Premises, then Tenant shall pay its pro rata share of the cost of such utility service with all others served by the service not separately metered. However, if Landlord determines that Tenant is using a disproportionate amount of any utility service not separately metered, then Landlord at its election may (i) periodically charge Tenant, as Additional Rent, a sum equal to Landlord's reasonable estimate of the cost of Tenant's excess use of such utility service, or (ii) install a separate meter (at Tenant's expense) to measure the utility service supplied to the Premises. 7.4 Compliance with Governmental Regulations: Landlord and Tenant shall ---------------------------------------- comply with all rules, regulations and requirements promulgated by national, state or local governmental agencies or utility suppliers concerning the use of utility services, including any rationing, limitation or other control. Tenant shall not be entitled to terminate this Lease nor to any abatement in rent by reason of such compliance. ARTICLE 8 --------- COMMON OPERATING EXPENSES ------------------------- 8.1 Tenant's Obligation to Reimburse: As Additional Rent, Tenant shall -------------------------------- pay Tenant's Share (specified in Section G of the Summary) of all Common --------- Operating Expenses; provided, however, if the Project contains more 9 than one building, then Tenant shall pay Tenant's Share of all Common Operating Expenses fairly allocable to the Building, including (i) all Common Operating Expenses paid with respect to the maintenance, repair, replacement and use of the Building, and (ii) a proportionate share (based on the Building Gross Leasable Area as a percentage of the Project Gross Leasable Area) of all Common Operating Expenses which relate to the Project in general and are not fairly allocable to any one building that is part of the Project. Tenant shall pay such share of the actual Common Operating Expenses incurred or paid by Landlord but not theretofore billed to Tenant within 10 days after receipt of a written bill therefor from Landlord, on such periodic basis as Landlord shall designate, but in no event more frequently than once a month. Alternatively, Landlord may from time to time require that Tenant pay Tenant's Share of Common Operating Expenses in advance in estimated monthly installments, in accordance with the following: (i) Landlord shall deliver to Tenant Landlord's reasonable estimate of the Common Operating expenses it anticipates will be paid or incurred for the Landlord's fiscal year in question; (ii) during such Landlord's fiscal year Tenant shall pay such share of the estimated Common Operating Expenses in advance in equal monthly installments over such fiscal year as required by Landlord, which shall be due with the installments of Base Monthly Rent; and (iii) within 90 days after the end of each Landlord's fiscal year, Landlord shall furnish to Tenant a statement in reasonable detail of the actual Common Operating Expenses paid or incurred by Landlord during the just ended Landlord's fiscal year and thereupon there shall be an adjustment between Landlord and Tenant, with payment to Landlord or credit by Landlord against the next installment of Base Monthly Rent, as the case may require, within 10 days after delivery by Landlord to Tenant of said statement, so that Landlord shall receive the entire amount of Tenant's Share of all Common Operating Expenses for such Landlord's fiscal year and no more. If Tenant overpays Tenant's Share of Common Operating Expenses during the last year of the Lease Term, Landlord shall promptly reimburse said excess to Tenant. Tenant shall have the right at its expense, exercisable upon reasonable prior written notice to Landlord, to inspect at Landlord's office during normal business hours Landlord's books and records as they relate to Common Operating Expenses. Such inspection must be within 30 days of Tenant's receipt of Landlord's annual statement for the same, and shall be limited to verification of the charges contained in such statement. Tenant may not withhold payment of such bill pending completion of such inspection. 8.2 Common Operating Expenses Defined: The term "Common Operating --------------------------------- Expenses" shall mean the following: A. All costs and expenses paid or incurred by Landlord in doing the following (including payments to independent contractors providing services related to the performance of the following): (i) maintaining, cleaning, repairing and resurfacing the roof (including repair of leaks) and the exterior surfaces (including painting) of all buildings located on the Project; (ii) maintenance of the liability, fire and property damage insurance covering the Project carried by Landlord pursuant to (P)9.2 (including the prepayment of premiums for coverage of up to one year); (iii) maintaining, repairing, operating and replacing when necessary HVAC equipment, utility facilities and other building service equipment for the Building and Common Area, if any; (iv) providing utilities to the Common Area (including lighting, trash removal and water for landscaping irrigation); (v) complying with all applicable Laws and Private Restrictions to the extent that such requirements are not applicable to or required at the Building, Common Areas or Project as of the Effective Date (but noncompliance with any Law in effect as of the Effective Date which is permitted or not required to be rectified or corrected under applicable Law because such improvements were in compliance with applicable Law as of the date they were constructed shall not be considered a violation of Law applicable to the Building, Common Areas or Project under this section and therefore shall be included in the Common Operating Expenses); (vi) operating, maintaining, repairing, cleaning, painting the Building and Common Area and restriping and resurfacing the Common Area, to the extent required under this Lease; (vii) replacement or installation of lighting fixtures, directional or other signs and signals, irrigation systems, trees, shrubs, ground cover and other plant materials, and all landscaping in the Common Area; and (viii) providing security to the Building or Common Area of the Project; B. The following costs: (i) Real Property Taxes as defined in (P)8.3; and (ii) that portion of all compensation (including benefits and premiums for workers' compensation and other insurance) paid to or on behalf of employees of Landlord but only to the extent they are involved in the performance of the work described by (P)8.2A that is fairly allocable to the Project; C. Fees for management services rendered by either Landlord or a third party manager engaged by Landlord (which may be a party affiliated with Landlord), except that the total amount charged for management services and included in Tenant's Share of Common Operating Expenses shall not exceed the monthly rate of 5% of the Base Monthly Rent. D. All additional costs and expenses incurred by Landlord with respect to the operation, protection, maintenance, repair and replacement of the Building or Common Areas of the Project which would be considered a current expense (and not a capital expenditure) pursuant to generally accepted accounting principles; provided, however, that Common Operating Expenses shall not include any of the following: (i) payments on any loans or ground leases affecting the Project; (ii) depreciation of any buildings or any major systems of building service equipment within the Project; (iii) leasing commissions; (iv) the cost of tenant improvements installed for the exclusive use of other tenants of the Project; and (v) any cost incurred in complying with Hazardous Materials Laws, which subject is governed exclusively by (P)7.2. E. Notwithstanding anything contained in this Lease, Common Operating Expenses shall not include and in no event shall Tenant have any obligation to perform or to pay directly, or to reimburse Landlord for, all or any portion of the following costs and expenses: 10 (1) Costs occasioned by the violation of any Law by Landlord or Landlord's Agents or by the gross negligence or willful misconduct of Landlord or Landlord's Agents; (2) Costs occasioned by fire, acts of God, or other casualties or by the exercise of the power of eminent domain; (3) Costs to correct any construction defect in the structural portions of the Building or Project, which for purposes hereof shall mean the foundation, footings, floor slab, exterior and load bearing walls and roof structure (as opposed to the roof covering or membrane), or the costs to comply with any Private Restrictions or Laws relating to the Building or Project for work or improvements required under the Private Restrictions or Laws prior to the Effective Date; (4) Depreciation, amortization (except as permitted above) or other expense reserves; (5) Interest, charges and fees incurred on debt, payments on mortgages and rent under ground leases; (6) The amount of the deductible under any insurance policy; provided however, that if Tenant or any Tenant's Agents causes the damage, loss or claim, then Tenant shall be solely responsible for payment of the applicable deductible to Landlord; provided further, however, that in no event shall Tenant be required to pay any deductibles for earthquake or flood insurance maintained in connection with the Project, Building or Premises; (7) Costs incurred in connection with the presence of any Hazardous Material, except to the extent caused by the storage, use or disposal of the Hazardous Material in question by Tenant or Tenant's Agents; (8) Costs to the extent for which Landlord has a right of reimbursement from another tenant at the Project, another source or a vendor under any warranty, except for warranty claims that Landlord determines in its commercially reasonable discretion not to pursue or does not collect; (9) Costs for which Tenant reimburses Landlord directly or which Tenant pays directly to a third person; (10) Costs relating to improvements and equipment that should be capitalized under generally accepted accounting principles, except for Tenant's Share of the amortized cost (with interest) of such improvement or equipment to the extent provided in this Lease; and (11) Costs relating to the repair, maintenance and replacement of the structural elements of the Premises, Building, Common Areas or Project. F. Since the Project consists of five (5) separate buildings including the Building, certain Common Operating Costs may pertain to a particular building and other Common Operating Costs to the Project as a whole. Common Operating Costs applicable to any particular building within the Project shall be allocated and charged to the building in question whose tenants shall be responsible for payment of their respective proportionate shares in the pertinent building and other Common Operating Costs applicable to the Project shall be allocated and charged to each building in the Project based on the ratio that each building's gross leasable area bears to the total gross leasable area of all buildings in the Project, with the tenants in each building in the Project being responsible for paying their respective proportionate shares of such costs. Landlord shall in good faith attempt to allocate such Common Operating Costs to the buildings (including the Building) or Project, as the case may be. 8.3 Real Property Taxes Defined: The term "Real Property Taxes" shall --------------------------- mean all taxes, assessments, levies, and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any existing or future general or special assessments for public improvements, services or benefits, and any increases resulting from reassessments resulting from a change in ownership, new construction for additional buildings at the Project, or any other cause), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of all or any portion of the Project (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein, the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located on the Project, the gross receipts, income, or rentals from the Project, or the use of parking areas, public utilities, or energy within the Project, or Landlord's business of leasing the Project. If at any time during the Lease Term the method of taxation or assessment of the Project prevailing as of the Effective Date shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Project or Landlord's interest therein, or (ii) on or measured by the gross receipts, income or rentals from the Project, on Landlord's business of leasing the Project, or computed in any manner with respect to the operation of 11 the Project, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Project, then only that part of such Real Property Tax that is fairly allocable to the Project shall be included within the meaning of the term "Real Property Taxes". Only the amount of the installment then due in each fiscal year of any bond or assessment payable in installments over a period of time shall be included as part of the Real Property Taxes each year. Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. ARTICLE 9 --------- INSURANCE --------- 9.1 Tenant's Insurance: Tenant shall maintain insurance complying with ------------------ all of the following: A. Tenant shall procure, pay for and keep in full force and effect the following: (1) Commercial general liability insurance, including property damage, against liability for personal injury, bodily injury, death and damage to property occurring in or about, or resulting from an occurrence in or about, the Premises with combined single limit coverage of not less than the amount of Tenant's Liability Insurance Minimum specified in Section P of the Summary, --------- which insurance shall contain a "contractual liability" endorsement insuring Tenant's performance of Tenant's obligation to indemnify Landlord contained in (P)10.3; (2) Fire and property damage insurance in so-called "all risk" form insuring Tenant's Trade Fixtures and Tenant's Alterations for the full actual replacement cost thereof; and (3) Workers' compensation insurance with limits at least as required by State law, and employers' liability with limits of $500,000 each accident. B. Where applicable and required by Landlord, each policy of insurance required to be carried by Tenant pursuant to this (P)9.1: (i) shall name Landlord and such other parties in interest as Landlord reasonably designates as additional insured; (ii) shall be primary insurance which provides that the insurer shall be liable for the full amount of the loss up to the total amount of liability set forth in the declarations without the right of contribution from any other insurance coverage of Landlord; (iii) shall be in a form satisfactory to Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord; (v) shall provide that such policy shall not be subject to cancellation, lapse or change that will reduce coverage except after at least 30 days prior written notice to Landlord so long as such provision of 30 days notice is reasonably obtainable, but in any event not less than 10 days prior written notice; (vi) shall not have a "deductible" in excess of such amount as is reasonably approved by Landlord and which is then customary in the marketplace; (vii) shall contain a cross liability endorsement; and (viii) shall contain a "severability" clause. If Tenant has in full force and effect a blanket policy of liability insurance with the same coverage for the Premises as described above, as well as other coverage of other premises and properties of Tenant, or in which Tenant has some interest, such blanket insurance shall satisfy the requirements of this (P)9.1. C. A copy of each paid-up policy evidencing the insurance required to be carried by Tenant pursuant to this (P)9.1 (appropriately authenticated by the insurer) or a certificate of the insurer, certifying that such policy has been issued, providing the coverage required by this (P)9.1, and containing the provisions specified herein, shall be delivered to Landlord prior to the time Tenant or any of its Agents enters the Premises and upon renewal of such policies, but not less than 5 days prior to the expiration of the term of such coverage. Landlord may, at any time, and from time to time, inspect and/or copy any and all insurance policies required to be procured by Tenant pursuant to this (P)9.1 if a claim if filed or threatened against Landlord. If the original five year Lease Term is extended by the parties and any Lender or insurance advisor reasonably determines at any time during such extension that the amount of coverage required for any policy of insurance Tenant is to obtain pursuant to this (P)9.1 is not adequate, then Tenant shall increase such coverage for such insurance to such amount as such Lender or insurance advisor reasonably deems adequate, not to exceed the level of coverage for such insurance commonly carried by comparable businesses similarly situated. 9.2 Landlord's Insurance: Landlord shall have the following obligations -------------------- and options regarding insurance: A. Landlord shall maintain a policy or policies of fire and property damage insurance in so-called "all risk" form insuring Landlord (and such others as Landlord may designate) against loss of rents for a period of not less than 12 months and from physical damage to the Project with coverage of not less than the full replacement cost thereof. Landlord may so insure the Project separately, or may insure the Project with other property owned by Landlord which Landlord elects to insure together under the same policy or policies. Such fire and property damage insurance (i) may be endorsed to cover loss caused by such additional perils against which Landlord may reasonably elect to insure, including earthquake and/or flood, and to provide such additional coverage as Landlord reasonably requires, and (ii) shall contain reasonable "deductibles" which, in the case of earthquake and flood insurance, may be up to 10% of the replacement value of the property insured or such higher amount as is then commercially reasonable. Landlord shall not be required to cause such insurance to cover any Trade Fixtures or Tenant's Alterations of Tenant, but Landlord's insurance shall cover the initial Tenant Improvements (excluding the clean room equipment). 12 B. Landlord shall maintain a policy or policies of commercial general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Project, with combined single limit coverage in such amount as Landlord from time to time determines is reasonably necessary for its protection. C. Tenant's Obligation to Reimburse: If Landlord's insurance rates -------------------------------- for the Building are increased at any time during the Lease Term as a result of the nature of Tenant's use of the Premises, Tenant shall reimburse Landlord for the full amount of such increase immediately upon receipt of a bill from Landlord therefor. 9.4 Release and Waiver of Subrogation: Notwithstanding anything to the --------------------------------- contrary in this Lease, the parties hereto release each other, and their respective agents and employees, successors, assigns and subtenants, from any liability for injury to any person or damage to property that is caused by or results from any risk insured against under any valid and collectible insurance policy carried by either of the parties which contains a waiver of subrogation by the insurer and is in force at the time of such injury or damage or any insurance policy which is required to be maintained by the parties under this Lease without regard to the negligence or willful misconduct of the party or entity so released, subject to the following limitations: (i) the foregoing provision shall not apply to the commercial general liability insurance described by subparagraphs (P)9.1A and (P)9.2B; (ii) such release shall apply to liability resulting from any risk insured against or covered by self-insurance maintained or provided by Tenant to satisfy the requirements of (P)9.1A.2 to the extent permitted by this Lease; and (iii) Landlord or Tenant, as the case may be, shall not be released from any such liability to the extent any damages resulting from such injury or damage are not covered by the recovery obtained by Landlord or Tenant for such insurance, as applicable, but only to the extent of the applicable deductible and to the extent such damage or claim is caused by Landlord or Landlord's Agents or Tenant or any of Tenant's Agents, respectively. This release shall be in effect only so long as the applicable insurance policy contains a clause to the effect that this release shall not affect the right of the insured to recover under such policy. Each party shall use reasonable efforts to cause each insurance policy obtained by it to provide that the insurer waives all right of recovery by way of subrogation against the other party and its agents and employees in connection with any injury or damage covered by such policy. However, if any insurance policy cannot be obtained with such a waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is to be obtained does not pay such additional cost, then the party obtaining such insurance shall notify the other party of that fact and thereupon shall be relieved of the obligation to obtain such waiver of subrogation rights from the insurer with respect to the particular insurance involved. ARTICLE 10 ---------- LIMITATION ON LANDLORD'S ------------------------ LIABILITY AND INDEMNITY ----------------------- 10.1 Limitation on Landlord's Liability: Landlord shall not be liable to ---------------------------------- Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement of rent (except as expressly provided otherwise herein), for any injury to Tenant or Tenant's Agents, damage to the property of Tenant or Tenant's Agents, or loss to Tenant's business resulting from any cause, including without limitation any: (i) failure, interruption or installation of any HVAC or other utility system or service; (ii) failure to furnish or delay in furnishing any utilities or services when such failure or delay is caused by fire or other peril, the elements, labor disturbances of any character, or any other accidents or other conditions beyond the reasonable control of Landlord; (iii) limitation, curtailment, rationing or restriction on the use of water or electricity, gas or any other form of energy or any services or utility serving the Project; (iv) vandalism or forcible entry by unauthorized persons or the criminal act of any person; or (v) penetration of water into or onto any portion of the Premises or the Building through roof leaks or otherwise. Notwithstanding the foregoing but subject to (P)9.4, Tenant is not releasing Landlord from, and Landlord shall be liable to Tenant for, any such injury, damage or loss which is proximately caused by Landlord's or Landlord's Agents willful misconduct or active negligence. 10.2 Limitation on Tenant's Recourse: If Landlord is a corporation, trust, ------------------------------- partnership, joint venture, unincorporated association or other form of business entity: (i) the obligations of Landlord shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals or representatives of such business entity; and (ii) Tenant shall not have recourse to the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders, principals or representatives except to the extent of their interest in the Project (including any net sale proceeds from the sale of the Project or Building. Tenant shall have recourse only to the interest of Landlord in the Project and shall not have recourse to any other assets of Landlord. 10.3 Indemnification: Subject to section 9.4 of this Lease, Tenant shall --------------- hold harmless, indemnify and defend Landlord, and its employees, agents and contractors, with competent counsel reasonably satisfactory to Landlord (and Landlord agrees to accept counsel that any insurer requires be used), from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments arising by reason of any death, bodily injury, personal injury or property damage resulting from (i) any cause or causes whatsoever (other than to the extent caused by the willful misconduct or active negligence of Landlord or Landlord's Agents) occurring in or about or resulting from an occurrence in or about the Premises during the Lease Term, or (ii) the negligence or willful misconduct of Tenant or its agents, employees and contractors, wherever the same may occur. Landlord shall not be indemnified for and shall indemnify, defend, protect and hold harmless Tenant against all actions, 13 claims, judgments, attorneys fees, demands, damages, liabilities, losses, penalties, costs or expenses suffered by Tenant by reason of injury to any person to the extent caused by the willful misconduct or active negligence of Landlord and Landlord's Agents, except as set forth in section 9.4). The provisions of this (P)10.3 shall survive the expiration or sooner termination of this Lease. ARTICLE 11 ---------- DAMAGE TO PREMISES ------------------ 11.1 Landlord's Duty to Restore: If the Premises are damaged by any peril -------------------------- after the Effective Date, Landlord shall restore the Premises unless the Lease is terminated by Landlord pursuant to (P)11.2 or by Tenant pursuant to (P)11.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord pursuant to (P)9.2 shall be paid to and become the property of Landlord. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Premises, to the extent then allowed by Law, to substantially the same condition in which the Premises were immediately prior to such damage. Landlord's obligation to restore shall be limited to the Premises and the original Tenant Improvements installed as of the Commencement Date, excluding Tenant's clean room equipment, any Tenant's Alterations, Trade Fixtures and/or personal property constructed or installed by Tenant in the Premises. The original Tenant Improvements installed by Tenant shall at all times be and remain at all times the property of Landlord (excluding the clean room equipment). Since Landlord will own the original Tenant Improvements (excluding the clean room equipment), such improvements will be insured under Landlord's all risk insurance for the Building. Tenant shall forthwith replace or fully repair all Tenant's Alterations, Trade Fixtures and clean room equipment installed by Tenant and existing at the time of such damage or destruction, and all insurance proceeds received by Tenant from the insurance carried by it pursuant to (P)9.1A(2) shall be used for such purpose. Tenant's obligations to repair or replace Tenant's Alterations, Tenant's Trade Fixtures and clean room and clean room equipment pursuant to this Section shall be limited to the extent of the insurance proceeds actually received by Tenant and subject to Tenant's right to terminate the Lease as set forth in Section 11.3 below. Tenant shall be entitled to retain all insurance proceeds and settlements it receives in connection with the damage or destruction of Tenant's Trade Fixtures and clean room equipment and any other property insurance maintained by Tenant. 11.2 Landlord's Right to Terminate: Landlord shall have the right to ----------------------------- terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Tenant of a written notice of election to terminate within 30 days after the date of such damage: A. The Project is damaged by an Insured Peril to such an extent that the estimated cost to restore in excess of the insurance proceeds received by Landlord exceeds 50% of the then actual replacement cost thereof, provided, however that if less than 33% of the Building is damaged or destroyed in connection with the Project damage, Landlord may not terminate this Lease (except as provided in section 11.2B below); B. During the original five year Lease Term, the Building is damaged by an Insured Peril to such an extent that the estimated cost to restore exceeds 60% of the then actual replacement cost thereof; or during any extension period beyond the original five year Lease Term, the Building is damaged by an Insured Period to such an extent that the estimated cost to restore exceeds 33%of the actual replacement cost thereof, C. The Building is damaged by an Uninsured Peril to such an extent that the estimated cost to restore exceeds 10% of the then actual replacement cost thereof; provided, however, that Landlord may not terminate this Lease pursuant to this (P)11.2C if one or more tenants of the Building agree in writing to pay the amount by which the cost to restore the damage exceeds such amount and subsequently deposit such amount with Landlord within 30 days after Landlord has notified Tenant of its election to terminate this Lease; D. The Premises are damaged by any peril within 12 months of the last day of the Lease Term to such an extent that the estimated cost to restore equals or exceeds an amount equal to six times the Base Monthly Rent then due; provided, however, that Landlord may not terminate this Lease pursuant to this (P)11.2D if Tenant notifies Landlord within 15 days after the date of the casualty of its desire to extend as provided in Addendum No. 1 (notwithstanding any time limits in Addendum No. 1 before which Tenant may provide such notice) and Tenant accepts Landlord's Renewal Terms (as defined in Addendum No. 1) within five (5) business days after receipt of Landlord's Renewal; or E. Either the Project or the Building is damaged by any peril and, because of the Laws then in force, (i) cannot be restored at reasonable cost (which for purposes hereof shall not exceed the amount of the insurance proceeds paid to Landlord) to substantially the same condition in which it was prior to such damage, or (ii) cannot be used for the same use being made thereof before such damage if restored as required by this Article. F. As used herein, the following terms shall have the following meanings: (i) the term "Insured Peril" shall mean a peril actually insured against (or required by Landlord to be insured against pursuant to this Lease) and for which the insurance proceeds actually received by Landlord are sufficient (except for any "deductible" amount specified by such insurance) to restore at least 80% of the Project under then existing building codes to the condition existing immediately prior to the damage; and (ii) the term "Uninsured Peril" shall mean any 14 peril which is not an Insured Peril. Notwithstanding the foregoing, if the "deductible" for earthquake or flood insurance exceeds 10% of the replacement cost of the improvements insured, such peril shall be deemed an "Uninsured Peril". Notwithstanding anything to the contrary in this Lease, Landlord shall not be obligated to spend more than the insurance proceeds its receives to restore any damage to the Premises, Building and/or Project. G. If Landlord terminates this Lease and to the extent it is Landlord's obligation to insure the Tenant Improvements under this Lease, Tenant shall be entitled to a portion of Landlord's insurance proceeds equal to the unamortized cost of the Tenant Improvements paid for by Tenant (in excess of Landlord's Allowance as described in Exhibit B attached hereto), amortized on a --------- straight line basis over the initial five (5) year term if the Lease Term is terminated during the initial five year term or over the entire Lease Term (as extended) if the Lease Term is extended, not to exceed ten (10) year amortization period, less a portion of Landlord's deductible amortized on a straight line basis over the same period as the improvements (except (i) deductibles which Landlord already has a right of reimbursement from Tenant, and (ii) earthquake and flood deductibles. Any payment due Tenant hereunder shall be limited to the extent of the insurance proceeds actually received by Landlord. 11.3 Tenant's Right to Terminate: If the Premises are damaged by any --------------------------- peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to (P)11.2, then within thirty (30) days after the date of the damage, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the right to terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Landlord of a written notice of election to terminate within 30 days after Tenant receives from Landlord the estimate of the time needed to complete such restoration. A. The Premises or parking lot area for the Building are damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises or parking lot cannot be substantially completed within 180 days after the date of such damage. If Landlord provides notice that the restoration can be completed within said 180 days and Landlord fails to substantially complete the restoration work to the condition existing prior to the damage or destruction, except for any delay caused by Tenant or any of Tenant's Agents or a Force Majeure Delay (as such terms are defined in Exhibit B attached), then Tenant may again terminate this Lease; provided, however, that Tenant provides notice of such election to terminate within 10 days after the earlier of (i) the end of said 180 day time period, or (ii) after receipt of written notice from Landlord of the delay; or B. The Premises or parking area by the Building are damaged by any peril within 12 months of the last day of the Lease Term and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises cannot be substantially completed within 90 days after the date of such damage. 11.4 Abatement of Rent: In the event of damage to the Premises which does ----------------- not result in the termination of this Lease, the Base Monthly Rent and the Additional Rent shall be temporarily abated during the period of restoration in proportion to the degree to which Tenant cannot use the Premises for its intended purpose as a result of such damage. Tenant shall not be entitled to any compensation or damages from Landlord for loss of Tenant's business or property or for any inconvenience or annoyance caused by such damage or restoration. Tenant hereby waives the provisions of California Civil Code Sections 1932(2) and 1933(4) and the provisions of any similar law hereinafter enacted. ARTICLE 12 ---------- CONDEMNATION ------------ 12.1 Landlord's Termination Right: Landlord shall have the right to ---------------------------- terminate this Lease if, as a result of a taking by means of the exercise of the power of eminent domain (including a voluntary sale or transfer by Landlord to a condemnor under threat of condemnation), (i) all or any part of the Premises is so taken, or (ii) more than 50% of the Common Area is so taken. Any such right to terminate by Landlord must be exercised within a reasonable period of time, to be effective as of the date possession is taken by the condemnor. 12.2 Tenant's Termination Right: Tenant shall have the right to terminate -------------------------- this Lease if, as a result of any taking by means of the exercise of the power of eminent domain (including any voluntary sale or transfer by Landlord to any condemnor under threat of condemnation), (i) 10% or more of the Premises is so taken and that part of the Premises that remains cannot be restored within a reasonable period of time and thereby made reasonably suitable for the continued operation of the Tenant's business, or (ii) there is a taking affecting the Common Area and, as a result of such taking, Landlord cannot provide parking spaces within reasonable walking distance of the Premises equal in number to at least 90% of the number of spaces allocated to Tenant by (P)2.1, whether by rearrangement of the remaining parking areas in the Common Area (including construction of multi-deck parking structures or restriping for compact cars where permitted by Law) or by alternative parking facilities on other land. Tenant must exercise such right within a reasonable period of time, to be effective on the date that possession of that portion of the Premises or Common Area that is condemned is taken by the condemnor. 12.3 Restoration and Abatement of Rent: If any part of the Premises or --------------------------------- the Common Area is taken by condemnation and this Lease is not terminated, then Landlord shall restore the remaining portion of the Premises and Common Area, the interior improvements constructed by Landlord, and the Tenant Improvements (excluding 15 the clean room equipment) as they existed as of the Commencement Date, excluding any Tenant's Alterations, Trade Fixtures, clean room equipment and/or personal property constructed or installed by Tenant. Thereafter, except in the case of a temporary taking, as of the date possession is taken the Base Monthly Rent and Additional rent shall be reduced in the same proportion that the floor area of that part of the Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original floor area of the Premises. 12.4 Temporary Taking: If any portion of the Premises is temporarily ---------------- taken and such taking materially and adversely affects Tenant's ability to use the Premises for the Permitted Use, then Tenant shall have the right to terminate this Lease, effective on the date possession is taken by the condemnor. 12.5 Division of Condemnation Award: Any award made as a result of any ------------------------------ condemnation of the Premises or the Common Area shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to receive any condemnation award that is made directly to Tenant for the following: (i) for the taking of personal property or Trade Fixtures belonging to Tenant and the unamortize cost of Tenant's Alterations that Tenant has the right to remove from the Premises (so long as such Tenant's Alterations does not reduced the amount of Landlord's award), (ii) for the interruption of Tenant's business or its moving costs, (iii) for loss of Tenant's goodwill; or (iv) for any temporary taking where this Lease is not terminated as a result of such taking, (iv) the unamortized cost (on a straight line basis), allocable to the remainder of the Lease Term, of the initial Tenant Improvements installed at Tenant's expense (i.e., over the amount of Landlord's Allowance under Exhibit B --------- attached hereto), which are not removable.. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of California Code of Civil Procedure Section 1265.130 and the provisions of any similar law hereinafter enacted allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. ARTICLE 13 ---------- DEFAULT AND REMEDIES -------------------- 13.1 Events of Tenant's Default: Tenant shall be in default of its -------------------------- obligations under this Lease if any of the following events occurs (an "Event of Tenant's Default"): A. Tenant shall have failed to pay Base Monthly Rent or Additional Rent when due, and such failure is not cured within 3 days after delivery of written notice from Landlord specifying such failure to pay; or B. Tenant shall have failed to perform any term, covenant, or condition of this Lease except those requiring the payment of Base Monthly Rent or Additional Rent, and Tenant shall have failed to cure such breach within 30 days after written notice from Landlord specifying the nature of such breach where such breach could reasonably be cured within said 30 day period, or if such breach could not be reasonably cured within said 30 day period, Tenant shall have failed to commence such cure within said 30 day period and thereafter continue with due diligence to prosecute such cure to completion; or C. Tenant shall have sublet the Premises or assigned its interest in the Lease in violation of the provisions contained in Article 14; or D. The occurrence of the following: (i) the making by Tenant of any general arrangements or assignments for the benefit of creditors; (ii) Tenant becomes a "debtor" as defined in 11 USC (S)101 or any successor statute thereto (unless, in the case of a petition filed against Tenant, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this Section 13.1E is contrary to any applicable Law, such provision shall be of no force or effect; or E. Tenant shall have failed to deliver documents required of it pursuant to (P)15.4 or (P)15.6 within the time periods specified therein. 13.2 Landlord's Remedies: If an Event of Tenant's Default occurs, ------------------- Landlord shall have the following remedies, in addition to all other rights and remedies provided by any Law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: A. Landlord may keep this Lease in effect and enforce by an action at law or in equity all of its rights and remedies under this Lease, including (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required of Tenant or perform Tenant's obligations and be reimbursed by Tenant for the cost thereof with interest at the Agreed Interest Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to compel Tenant to perform its obligations under this Lease and in accordance with applicable law. Notwithstanding anything contained in this Lease, in the event of a breach of an obligation by Tenant which results in a condition which poses an imminent danger to safety of persons or damage to property, or a threat to insurance 16 coverage, then if Tenant does not cure such breach within 3 days after delivery to it of written notice from Landlord identifying the breach, Landlord may cure the breach of Tenant and be reimbursed by Tenant for the cost thereof with interest at the Agreed Interest Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. B. In accordance with applicable law, Landlord may enter the Premises and release them to third parties for Tenant's account for any period, whether shorter or longer than the remaining Lease Term. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in releasing the Premises, including brokers' commissions, expenses of altering and preparing the Premises required by the releasing. Tenant shall pay to Landlord the rent and other sums due under this Lease on the date the rent is due, less the rent and other sums Landlord received from any releasing. No act by Landlord allowed by this subparagraph shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. Notwithstanding any releasing without termination, Landlord may later elect to terminate this Lease because of the default by Tenant. C. Landlord may terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this (P)13.2C shall not relieve Tenant from its obligation to pay sums then due Landlord or from any claim against Tenant for damages or rent previously accrued or then accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease, constitute a termination of this Lease: (i) appointment of a receiver or keeper in order to protect Landlord's interest hereunder; (ii) consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or (iii) any other action by Landlord or Landlord's Agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including without limitation any action taken to maintain and preserve the Premises or any action taken to relet the Premises or any portions thereof to the extent such actions do not affect a termination of Tenant's right to possession of the Premises. D. In the event Tenant breaches this Lease and abandons the Premises, this Lease shall not terminate unless Landlord gives Tenant written notice of its election to so terminate this Lease. No act by or on behalf of Landlord intended to mitigate the adverse effect of such breach, including those described by (P)13.C, shall constitute a termination of Tenant's right to possession unless Landlord gives Tenant written notice of termination. Should Landlord not terminate this Lease by giving Tenant written notice, Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rent as it becomes due under the Lease as provided in California Civil Code Section 1951.4. E. In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord's election, to damages in an amount as set forth in California Civil Code Section 1951.2 as in effect on the Effective Date. For purposes of computing damages pursuant to California Civil Code Section 1951.2, (i) an interest rate equal to the Agreed Interest Rate shall be used where permitted, and (ii) the term "rent" includes Base Monthly Rent and Additional Rent. Such damages shall include: (1) 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 Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%); and (2) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including the following: (i) expenses for cleaning, repairing or restoring the Premises; (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, including installation of leasehold improvements (whether such installation be funded by a reduction of rent, direct payment or allowance to a new tenant, or otherwise); (iii) broker's fees, advertising costs and other expenses of reletting the Premises; (iv) costs of carrying the Premises, such as taxes, insurance premiums, utilities and security precautions; (v) expenses in retaking possession of the Premises; and (vi) attorneys' fees and court costs incurred by Landlord in retaking possession of the Premises and in releasing the Premises or otherwise incurred as a result of Tenant's default. F. Nothing in this (P)13.2 shall limit Landlord's right to indemnification from Tenant as provided in (P)7.2 and (P)10.3. Any notice given by Landlord in order to satisfy the requirements of (P)13.1A or (P)13.1B above shall also satisfy the notice requirements of California Code of Civil Procedure Section 1161 regarding unlawful detainer proceedings. 13.3 Waiver: One party's consent to or approval of any act by the other ------ party requiring the first party's consent or approval shall not be deemed to waive or render unnecessary the first party's consent to or approval of any subsequent similar act by the other party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach unless such waiver is in writing and signed by Landlord. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or of any other provisions herein contained. 17 13.4 Limitation On Exercise of Rights: At any time that an Event of -------------------------------- Tenant's Default has occurred and remains uncured, (i) it shall not be unreasonable for Landlord to deny or withhold any consent or approval requested of it by Tenant which Landlord would otherwise be obligated to give, and (ii) Tenant may not exercise any option to extend. 13.5 Waiver by Tenant of Certain Remedies: Tenant waives the provisions ------------------------------------ of Sections 1932(1), 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. Tenant hereby waives any right of redemption or relief from forfeiture under the laws of the State of California, or under any other present or future law, including the provisions of Sections 1174 and 1179 of the California Code of Civil Procedure. ARTICLE 14 ---------- ASSIGNMENT AND SUBLETTING ------------------------- 14.1 Transfer By Tenant: The following provisions shall apply to any ------------------ assignment, subletting or other transfer by Tenant or any subtenant or assignee or other successor in interest of the original Tenant (collectively referred to in this (P)14.1 as "Tenant"): A. Tenant shall not do any of the following (collectively referred to herein as a "Transfer"), whether voluntarily, involuntarily or by operation of law, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed: (i) sublet all or any part of the Premises or allow it to be sublet, occupied or used by any person or entity other than Tenant; (ii) assign its interest in this Lease; (iii) mortgage or encumber the Lease (or otherwise use the Lease as a security device) in any manner; or (iv) materially amend or modify an assignment, sublease or other transfer that has been previously approved by Landlord. Tenant shall reimburse Landlord for all reasonable and actual costs and attorneys' fees incurred by Landlord in connection with the evaluation, processing, and/or documentation of any requested Transfer, whether or not Landlord's consent is granted, not to exceed $1,500.00 for any Transfer. Landlord's reasonable costs shall include the cost of any review or investigation performed by Landlord or consultant acting on Landlord's behalf of (i) Hazardous Materials (as defined in Section 7.2E of this Lease) used, stored, released, or disposed of by the potential Subtenant or Assignee, and/or (ii) violations of Hazardous Materials Law (as defined in Section 7.2E of this lease) by the Tenant or the proposed Subtenant or Assignee, provided such costs in addition to the cost set forth in the preceding sentence do not exceed in the aggregate $1,500.00 for each Transfer. Any Transfer so approved by Landlord shall not be effective until Tenant has delivered to Landlord an executed counterpart of the document evidencing the Transfer which (i) is in a form reasonably approved by Landlord, (ii) contains the same terms and conditions as stated in Tenant's notice given to Landlord pursuant to (P)14.1B, and (iii) in the case of an assignment of the Lease, contains the agreement of the proposed transferee to assume all obligations of Tenant under this Lease arising after the effective date of such Transfer and to remain jointly and severally liable therefor with Tenant. Any actual Transfer without Landlord's consent shall constitute an Event of Tenant's Default under section 13.1.B of this Lease (subject to the notice and cure period set forth therein, except that the cure period shall be limited to 30 days after Tenant's receipt of the notice from Landlord) and shall be voidable at Landlord's option. Landlord's consent to any one Transfer shall not constitute a waiver of the provisions of this (P)14.1 as to any subsequent Transfer or a consent to any subsequent Transfer. No Transfer, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease nor to be a consent to any Transfer. B. At least 30 days before a proposed Transfer is to become effective, Tenant shall give Landlord written notice of the proposed terms of such Transfer and request Landlord's approval, which notice shall include the following: (i) the name and legal composition of the proposed transferee; (ii) a current financial statement of the transferee, financial statements of the transferee covering the preceding three years if the same exist, and (if available) an audited financial statement of the transferee for a period ending not more than one year prior to the proposed effective date of the Transfer, all of which statements are prepared in accordance with generally accepted accounting principles; (iii) the nature of the proposed transferee's business to be carried on in the Premises, including without limitation, its proposed use at the Premises and any Hazardous Materials such transferee's may use, generate or store in the operation of its business as noted in the completed Hazardous Materials Questionnaire referred to below; (iv) all consideration to be given on account of the Transfer; (v) a current financial statement of Tenant; and (vi) a completed Landlord's standard Hazardous Materials Questionnaire (said information collectively shall be referred to as the "Transfer Information"). Tenant shall provide to Landlord such other information as may be reasonably requested by Landlord ("Transfer Supplemental Information") within 5 days after Tenant's receipt of such notice from Landlord, which request by Landlord for additional information must be given within 5 days after Landlord's receipt of the Transfer Information. Landlord shall respond in writing to Tenant's request for Landlord's consent to a Transfer within the later of (i) 20 days after Landlord's receipt of such request together with the Transfer Information, or (ii) 5 days after Landlord's receipt of the Transfer Supplemental Information. If Landlord fails to respond in writing within said period, Landlord will be deemed to have consented to such Transfer. Tenant shall immediately notify Landlord of any material modification to the proposed terms of such Transfer. If Landlord disapproves a Transfer, Landlord shall set forth its reasons in writing to Tenant. C. In the event that Tenant seeks to make any Transfer, Landlord shall have the right to terminate this Lease or, in the case of a sublease of less than all of the Premises, terminate this Lease as to that part of the Premises proposed to be so sublet, upon written notice to Tenant within the time period provided in Section 18 14.1B for Landlord to respond to Tenant's request for consent. Tenant shall have the right to rescind its request for consent to the Transfer (and thereby rescind Landlord's election to terminate) upon written notice to Landlord within ten (10) days after receipt of Landlord's notice to terminate. If Landlord elects to terminate this Lease (or, in the case of a partial sublease, terminate this Lease as to the portion to be so sublet), the Lease shall so terminate in its entirety (or as to the space to be so sublet) thirty (30) days after Landlord has notified Tenant in writing of such election. Upon such termination, Tenant shall be released from any further obligation under this Lease if it is terminated in its entirety, or shall be released from any further obligation under the Lease with respect to the space proposed to be sublet in the case of a proposed partial sublease. In the case of a partial termination of the Lease, the Base Monthly Rent and Tenant's Share shall be reduced to an amount which bears the same relationship to the original amount thereof as the area of that part of the Premises which remains subject to the Lease bears to the original area of the Premises. Landlord and Tenant shall execute a cancellation and release with respect to the Lease to effect such termination. Tenant acknowledges that if Landlord elects to terminate as provided above, Landlord is thereafter free to lease the Premises (or, in the case of a partial sublease, the portion proposed to be so sublet) to whomever it pleases on whatever terms are acceptable to Landlord, including, without limitation, any transferee proposed by Tenant in connection with the request for consent to the Transfer. D. If Landlord consents to a Transfer proposed by Tenant, Tenant may enter into such Transfer, and if Tenant does so, the following shall apply: (1) Tenant shall not be released of its liability for the performance of all of its obligations under the Lease. (2) If Tenant assigns its interest in this Lease, then Tenant shall pay to Landlord 80% of all Subrent (as defined in (P)14.1D(5)) received by Tenant over and above (i) the Base Monthly Rent and Additional Rent under this Lease, and (ii) all Permitted Transfer Costs related to such assignment. In the case of assignment, the amount of Subrent owed to Landlord shall be paid to Landlord on the same basis, whether periodic or in lump sum, that such Subrent is paid to Tenant by the assignee. (3) If Tenant sublets any part of the Premises, then with respect to the space so subleased, Tenant shall pay to Landlord 80% of the positive difference, if any, between (i) all Subrent paid by the subtenant to Tenant, less (ii) the sum of all Base Monthly Rent and Additional Rent allocable to the space sublet and all Permitted Transfer Costs related to such sublease. Such amount shall be paid to Landlord on the same basis, whether periodic or in lump sum, that such Subrent is paid to Tenant by its subtenant. In calculating Landlord's share of any periodic payments, all Permitted Transfer Costs shall be first recovered by Tenant. (4) Tenant's obligations under this (P)14.1D shall survive any Transfer. At the time Tenant makes any payment to Landlord required by this (P)14.1D, Tenant shall deliver an itemized statement of the method by which the amount to which Landlord is entitled was calculated, certified by Tenant as true and correct. Landlord shall have the right at reasonable intervals to inspect Tenant's books and records relating to the payments due hereunder. Upon request therefor, Tenant shall deliver to Landlord copies of all bills, invoices or other documents upon which its calculations are based. Landlord may condition its approval of any Transfer upon obtaining a certification from both Tenant and the proposed transferee of all Subrent and other amounts that are to be paid to Tenant in connection with such Transfer. (5) As used in this (P)14.1D, the term "Subrent" shall mean any consideration of any kind received (from time to time) by Tenant as a result of the Transfer, if such sums are related to Tenant's interest in this Lease or in the Premises, including payments from or on behalf of the transferee (in excess of the book value thereof) for Tenant's fixtures and leasehold improvements. The term "Subrent" shall not include any payments or other consideration received by Tenant in connection with Tenant's assets, Tenant's Trade Fixtures, Tenant's Alterations, the portion of the initial Tenant Improvements paid for by Tenant (i.e., over the amount of Landlord's Allowance), or any inventory, accounts, goodwill, equipment, furniture, furnishings or general intangibles of Tenant, whatsoever. As used in this (P)14.1D, the term "Permitted Transfer Costs" shall mean (i) all reasonable advertising, leasing commissions and attorneys' fees paid to third parties not affiliated with Tenant in order to obtain the Transfer in question, (ii) all reasonable attorneys' fees incurred by Tenant with respect to the Transfer in question, and (iii) the unamortized cost on a straight line basis of any of the initial Tenant Improvements paid for by Tenant (i.e., over the amount of Landlord's Allowance), the cost of any Tenant Trade Fixtures, any special improvements made to the Premises by Tenant for any such subtenant or assignee. E. Except as provided in Section 14.1F, if Tenant is a corporation, the following shall be deemed a voluntary assignment of Tenant's interest in this Lease: (i) any dissolution, merger, consolidation, or other reorganization of or affecting Tenant, whether or not Tenant is the surviving corporation; and (ii) if the capital stock of Tenant is not publicly traded, the sale or transfer to one person or entity (or to any group of related persons or entities) stock possessing more than 50% of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, any withdrawal or substitution (whether voluntary, involuntary or by operation of law, and whether occurring at one time or over a period of time) of any partner owning 25% or more (cumulatively) of any interest in the capital or profits of the partnership, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant's interest in this Lease. F. Notwithstanding anything contained in (P)14.1, so long as Tenant otherwise complies with the provisions of (P)14.1 Tenant may enter into any of the following transfers (a "Permitted Transfer") without 19 Landlord's prior written consent, and Landlord shall not be entitled to terminate the Lease pursuant to (P)14.1C or to receive any part of any Subrent resulting therefrom that would otherwise be due it pursuant to (P)14.1D: (1) Tenant may sublease all or part of the Premises or assign its interest in this Lease to any corporation which controls, is controlled by, or is under common control with the original Tenant to this Lease; (2) Tenant may assign its interest in the Lease to a corporation which results from a merger, consolidation or other reorganization whether or not Tenant is the surviving corporation, so long as the surviving corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction; and (3) Tenant may assign this Lease to a corporation which purchases or otherwise acquires all or substantially all of the assets of Tenant, so long as such acquiring corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction. The term "corporation" as used in this Section 14.1.F shall be deemed to include any subsidiary, affiliate, division or other entity and the reference to sale of Tenant's assets refers to those assets located within the Premises. For the purpose of this Lease, any sale or transfer of Tenant's capital stock, including without limitation, a transfer in connection with the merger, consolidation or non-bankruptcy reorganization of Tenant and any sale through any national market system or public exchange, or any re-incorporation by Tenant in another state, shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises. 14.2 Transfer By Landlord: Landlord and its successors in interest shall -------------------- have the right to transfer their interest in this Lease and the Project at any time and to any person or entity. In the event of any such transfer, the Landlord originally named herein (and, in the case of any subsequent transfer, the transferor) from the date of such transfer, shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer. After the date of any such transfer, the term "Landlord" as used herein shall mean the transferee of such interest in the Premises. ARTICLE 15 ---------- GENERAL PROVISIONS ------------------ 15.1 Landlord's Right to Enter: Landlord and its agents may enter the ------------------------- Premises at any reasonable time after giving at least 24 hours' prior notice to Tenant (and immediately in the case of emergency) for the purpose of: (i) inspecting the same; (ii) posting notices of non-responsibility; (iii) supplying any service to be provided by Landlord to Tenant; (iv) showing the Premises to prospective purchasers, mortgagees or tenants; (v) making necessary alterations, additions or repairs; (vi) performing Tenant's obligations when Tenant has failed to do so after written notice from Landlord; (vii) placing upon the Premises during the last six (6) months of the Lease Term ordinary "for lease" signs; and (viii) responding to an emergency. Landlord shall have the right to use any and all means Landlord may deem necessary and proper to enter the Premises in an emergency. Any entry into the Premises obtained by Landlord in accordance with this (P)15.1 shall not be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises. Any entry by Landlord and Landlord's Agents shall not impair Tenant's operations more than reasonably necessary. 15.2 Surrender of the Premises: Upon the expiration or sooner termination ------------------------- of this Lease, Tenant shall vacate and surrender the Premises to Landlord in the same condition as existed at the Commencement Date, except for (i) reasonable wear and tear, (ii) damage caused by any peril or condemnation, and (iii) contamination by Hazardous Materials for which Tenant is not responsible pursuant to (P)7.2A or (P)7.2B. In this regard, normal wear and tear shall be construed to mean wear and tear caused to the Premises by the natural aging process which occurs in spite of prudent application of the best standards for maintenance, repair and janitorial practices, and does not include items of neglected or deferred maintenance. In any event, Tenant shall cause the following to be done prior to the expiration or the sooner termination of this Lease: (i) all interior walls shall be painted or cleaned so that they appear freshly painted; (ii) all tiled floors shall be cleaned and waxed; (iii) all carpets shall be cleaned and shampooed; (iv) all broken, marred, stained or nonconforming acoustical ceiling tiles shall be replaced; (v) all windows shall be washed; (vi) the HVAC system shall be serviced by a reputable and licensed service firm and left in good operating condition and repair as so certified by such firm; and (vii) the plumbing and electrical systems and lighting shall be placed in good order and repair (including replacement of any burned out, discolored or broken light bulbs, ballasts, or lenses). If Landlord so requests, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any Tenant's Alterations which Tenant is required to remove pursuant to (P)5.2 and repair all damage caused by such removal. If the Premises are not so surrendered at the termination of this Lease, Tenant shall be liable to Landlord for all costs incurred by Landlord in returning the Premises to the required condition, plus interest on all costs incurred at the Agreed Interest Rate. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 20 15.3 Holding Over: This Lease shall terminate without further notice at ------------ the expiration of the Lease Term. Any holding over by Tenant after expiration of the Lease Term shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after such expiration with the written consent of Landlord shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that Base Monthly Rent shall be increased to an amount equal to 150% of the Base Monthly Rent payable during the last full calendar month of the Lease Term. 15.4 Subordination: The following provisions shall govern the relationship ------------- of this Lease to any Security Instrument: A. The Lease is subject and subordinate to all Security Instruments existing as of the Effective Date. However, if any Lender so requires, this Lease shall become prior and superior to any such Security Instrument. B. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Effective Date. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. C. Tenant shall upon request execute any document or instrument reasonably required by any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily and reasonably requires in connection with such agreements, including provisions that the Lender not be liable for (i) the return of any security deposit unless the Lender receives it from Landlord, and (ii) any defaults on the part of Landlord occurring prior to the time the Lender takes possession of the Project in connection with the enforcement of its Security Instrument. Tenant's failure to execute any such document or instrument within 10 days after written demand therefor shall constitute an Event of Tenant's Default. Tenant approves as reasonable the form of subordination agreement attached to this Lease as Exhibit G. --------- 15.5 Mortgagee Protection and Attornment: In the event of any default on ----------------------------------- the part of the Landlord, Tenant will use reasonable efforts to give notice by registered mail to any Lender whose name has been provided to Tenant and shall offer such Lender a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or judicial foreclosure or other appropriate legal proceedings, if such should prove necessary to effect a cure. Tenant shall attorn to any purchaser of the Premises at any foreclosure sale or private sale conducted pursuant to any Security Instrument encumbering the Premises, or to any grantee or transferee designated in any deed given in lieu of foreclosure. 15.6 Estoppel Certificates and Financial Statements: At all times during ---------------------------------------------- the Lease Term, each party agrees, following any request by the other party, promptly to execute and deliver to the requesting party within 15 days following delivery of such request an estoppel certificate: (i) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to the certifying party's knowledge, any uncured defaults on the part of any party hereunder or, if there are uncured defaults, specifying the nature of such defaults, and (iv) certifying such other information about the Lease as may be reasonably required by the requesting party. A failure to deliver an estoppel certificate within 15 days after delivery of a request therefor shall be a conclusive admission that, as of the date of the request for such statement: (i) this Lease is unmodified except as may be represented by the requesting party in said request and is in full force and effect, (ii) there are no uncured defaults in the requesting party's performance, and (iii) no rent has been paid more than 30 days in advance. At any time during the Lease Term Tenant shall, upon 15 days' prior written notice from Landlord, provide Tenant's most recent financial statement and financial statements covering the 24 month period prior to the date of such most recent financial statement to any existing Lender or to any potential Lender or buyer of the Premises. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. 15.7 Reasonable Consent: Whenever any party's approval or consent is ------------------ required by this Lease before an action may be taken by the other party, such approval or consent shall not be unreasonably withheld or delayed. 15.8 Notices: Any notice required or desired to be given regarding this ------- Lease shall be in writing and may be given by personal delivery, by courier service, or by mail. A notice shall be deemed to have been given (i) on the third business day after mailing if such notice was deposited in the United States mail, certified or registered, postage prepaid, addressed to the party to be served at its Address for Notices specified in Section Q or Section R of the --------- --------- Summary (as applicable), (ii) when delivered if given by personal delivery, and (iii) in all other cases when actually received at the party's Address for Notices. Either party may change its address by giving notice of the same in accordance with this (P)15.8, provided, however, that any address to which notices may be sent must be a California address. 15.9 Attorneys' Fees: In the event either Landlord or Tenant shall bring --------------- any action or legal proceeding for an alleged breach of any provision of this Lease, to recover rent, to terminate this Lease or otherwise to enforce, protect or establish any term or covenant of this Lease, the prevailing party shall be entitled to recover as a part of such action or proceeding, or in a separate action brought for that purpose, reasonable attorneys' fees, court costs, and experts' fees as may be fixed by the court. 21 15.10 Corporate Authority: If Tenant is a corporation, Tenant represents ------------------- and warrants that the person signing this Lease is duly authorized to execute and deliver this Lease on behalf of such corporation in accordance with the by- laws of such corporation (or partnership in accordance with the partnership agreement of such partnership) and that this Lease is binding upon such corporation (or partnership) in accordance with its terms. Tenant is a duly authorized and existing corporation, it is qualified to do business in California, and has full right and authority to enter into this Lease. 15.11 Miscellaneous: Should any provision of this Lease prove to be ------------- invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. Any executed copy of this Lease shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms "shall", "will" and "agree" are mandatory. The term "may" is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless a provision of this Lease expressly requires reimbursement. Landlord and Tenant agree that (i) the gross leasable area of the Premises includes any atriums, depressed loading docks, covered entrances or egresses, and covered loading areas, (ii) each has had an opportunity to determine to its satisfaction the actual area of the Project and the Premises, (iii) all measurements of area contained in this Lease are conclusively agreed to be correct and binding upon the parties, even if a subsequent measurement of any one of these areas determines that it is more or less than the amount of area reflected in this Lease, and (iv) any such subsequent determination that the area is more or less than shown in this Lease shall not result in a change in any of the computations of rent, improvement allowances, or other matters described in this Lease where area is a factor. Where a party hereto is obligated not to perform any act, such party is also obligated to restrain any others within its control from performing said act, including the Agents of such party. Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of the provisions of this Lease. 15.12 Termination by Exercise of Right: If this Lease is terminated -------------------------------- pursuant to its terms by the proper exercise of a right to terminate specifically granted to Landlord or Tenant by this Lease, then this Lease shall terminate 30 days after the date the right to terminate is properly exercised (unless another date is specified in that part of the Lease creating the right, in which event the date so specified for termination shall prevail), the rent and all other charges due hereunder shall be prorated as of the date of termination, and neither Landlord nor Tenant shall have any further rights or obligations under this Lease except for those that have accrued prior to the date of termination or those obligations which this Lease specifically provides are to survive termination. This (P)15.12 does not apply to a termination of this Lease by Landlord as a result of an Event of Tenant's Default. 15.13 Brokerage Commissions: Each party hereto (i) represents and --------------------- warrants to the other that it has not had any dealings with any real estate brokers, leasing agents or salesmen, or incurred any obligations for the payment of real estate brokerage commissions or finder's fees which would be earned or due and payable by reason of the execution of this Lease, other than to the Retained Real Estate Brokers described in Section S of the Summary, and (ii) --------- agrees to indemnify, defend, and hold harmless the other party from any claim for any such commission or fees which result from the actions of the indemnifying party. Landlord shall be responsible for the payment of any commission owed to the Retained Real Estate Brokers pursuant to the separate written commission agreement between Landlord and the Retained Real Estate Brokers for the payment of a commission as a result of the execution of this Lease. 15.14 Force Majeure: Any prevention, delay or stoppage due to strikes, ------------- lock-outs, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay or stoppage, of any obligation hereunder except the obligation of Tenant to pay rent or any other sums due hereunder. 15.15 Entire Agreement: This Lease constitutes the entire agreement ---------------- between the parties, and there are no binding agreements or representations between the parties except as expressed herein. Tenant acknowledges that neither Landlord nor Landlord's Agents has made any legally binding representation or warranty as to any matter except those expressly set forth herein, including any warranty as to (i) whether the Premises may be used for Tenant's intended use under existing Law, (ii) the suitability of the Premises or the Project for the conduct of Tenant's business, or (iii) the condition of any improvements. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease. This instrument shall not be legally binding until it is executed by both Landlord and Tenant. No subsequent change or addition to this Lease shall be binding unless in writing and signed by Landlord and Tenant. 22 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with the intent to be legally bound thereby, to be effective as of the Effective Date. LANDLORD: TENANT: SILICON VALLEY PROPERTIES, L.L.C. SYMPHONIX DEVICES, INC. a Delaware limited liability company a California corporation By: Divco SVP Group, LLC, By: /s/ Harry Robbins --------------------------- a Delaware limited liability company Harry Robbins Its Manager Title: President By: /s/ Scott Smithers Dated: October 29, 1997 ------------------------------- Name: Scott Smithers Its: President Dated: October 28, 1997 23 EXHIBIT A SITE PLAN OF THE PROJECT AND OUTLINE OF PREMISES EXHIBIT B IMPROVEMENT AGREEMENT EXHIBIT B --------- IMPROVEMENT AGREEMENT --------------------- 1. Defined Terms. All defined terms referred to in this Exhibit B shall ------------- have the same meaning as defined in that certain Lease by and between Silicon Valley Properties, L.L.C., as Landlord, and Symphonix Devices, Inc., as Tenant (the "Lease") to which this Exhibit is a part, except where expressly defined to the contrary. 2. Additional Definitions. Each of the following terms shall have the ---------------------- following meaning: Architect: Ambiance Associates, HPC or CAS Architects, or another --------- architectural firm approved in writing by Landlord in its reasonable discretion to prepare the "Preliminary Plans" and "Construction Plans" (as such terms are hereinafter defined). Contractor: The general contractor selected by Tenant and approved by ---------- Landlord in its reasonable discretion to construct the Tenant Improvements. Landlord hereby approves of Hollander Smith, Devcon Construction, South Bay Construction and Permian Builders. Tenant may select as the Contractor any one of these specified contractors to construct the Tenant Improvements without any further approval of Landlord. The contractor selected and approved by the parties under this paragraph shall be referred to as the "Contractor" in this Exhibit. Construction Contract: The construction contract to be entered into --------------------- by Tenant and its Contractor in form, scope and substance satisfactory to Tenant and approved in writing by Landlord in its reasonable discretion in accordance with section 4.1 of this Exhibit. Construction Costs- All costs and expenses to construct the Tenant ------------------ Improvements, including, without limitation, and only to the extent applicable or deemed necessary by Tenant to construct the Tenant Improvements, all fees and expenses for: (a) architectural/space planning services utilized by Tenant in the preparation of any space plan; (b) architects, engineers and consultants in the preparation of the Preliminary Plans, Construction Plans, including mechanical, electrical, plumbing and structural drawings and of all other aspects of the Construction Plans, and for processing governmental applications and applications for payment, observing construction of the work, and other customary engineering, architectural, interior design and space planning services; (c) surveys, reports, environmental and other tests and investigations of the site and any improvements thereon; (d) labor, materials, equipment and fixtures supplied by the general contractor, its subcontractors and/or materialmen; (e) the furnishing and installation of all heating, ventilation and air conditioning duct work, terminal boxes, distributing defusers and accessories required for completing the heating, ventilation and air- conditioning system in the Premises (including costs of meter control for after- hour usage, if required by Landlord in its reasonable discretion); (f) all electrical circuits, wiring, lighting fixtures, and tube outlets furnished and installed throughout the Premises, including costs of meter and key control for after-hour electrical power usage; (g) all window and floor coverings in the Premises; (h) all fire and life safety control systems, such as fire walls, sprinklers and fire alarms, including piping, wiring and accessories installed within the Premises; (i) all plumbing, fixtures, pipes and accessories installed within the Premises; (j) fees charged by the city and/or county where the Building is located (including, without limitation, fees for building permits and plan checks) required for the Tenant Improvements; (k) supervision and administration fee payable to Landlord's agent and property manager and/or representative, which fee shall not exceed in the aggregate five percent (5%) of the amount of Landlord's Allowance or $7,615.00; 1 (l) all taxes, fees, charges and levies by governmental and quasi-governmental agencies for authorization, approvals, licenses and permits; and all sales, use and excise taxes for the materials supplied and services rendered in connection with the installation and construction of the Tenant Improvements; (m) all costs and expenses incurred to comply with all laws, rules, regulations or ordinances of any governmental authority for any work at the Building in order to construct the Tenant Improvements, excluding all Construction Costs incurred to comply with ADA as defined below, which ADA work constitutes Special Work as described below, the cost of which shall be paid for by Landlord, at its sole cost and expense as provided in this Exhibit B; and (n) all other costs and expenses incurred by Tenant in connection with the construction of the Tenant Improvements. The term Construction Costs shall not include any fees, costs, expenses of Tenant's furniture, trade fixtures, telephone and computer systems and related facilities, or equipment. Notwithstanding the foregoing, the foregoing definition of Construction Costs is not meant to impose an obligation on Tenant to construct such items, but merely to define and include such costs in the event such costs are actually incurred in the construction of the Tenant Improvements. Design Problem: shall mean when the preliminary plans or Working -------------- Drawings (or any revision to any) for the Tenant Improvements that have been submitted to Landlord for its approval are reasonably determined by Landlord's architect (i) to have a material adverse effect on the structure of the Building or to the Building's electrical, plumbing, life safety, mechanical, heating, air-conditioning and ventilation systems that serves other space in the Building other than the Premises; (ii) not be in compliance with any applicable federal, state and local laws, ordinances, rules, regulations and building codes (collectively, the "Applicable Laws"); or (iii) to have an adverse effect on the exterior appearance of the Building (each, a "Design Problem"). Electrical Upgrade shall consist of upgrading the electrical service ------------------ to the Premises from 800 amps, 277/480 volts, 3 phase, to 1200 amps, 277/480 volts, 3 phase. Force Majeure Delay: shall mean any delay by reason of (i) ------------------- governmental preemption of priorities or other controls in connection with a national or other public emergency, civil disturbance or riot, or (ii) earthquake, fire and flood, or (iii) a delay with Landlord and Tenant in approving the Preliminary Plans or Construction Plans beyond the time periods set forth in sections 3.1 and 3.2, respectively, unless due to a Design Problem. Tenant shall notify Landlord within five (5) days after Tenant knows of an event constituting a Force Majeure Delay and of the length of the delay as reasonably determined by the Architect (except no notice shall be required in the event of a delay under clause (iii) of this definition). Landlord's Allowance: The amount of $152,300.00 to be paid by -------------------- Landlord for the Construction Costs for the Tenant Improvements, excluding from the total cost of the Tenant Improvements all costs incurred for the Electrical Upgrade and the Special Work (hereinafter defined). Any unused portion of Landlord's Allowance for the Tenant Improvements (exclusive of the Electrical Upgrade and the Special Work) shall remain the property of Landlord, and Tenant shall have no interest in said funds. If the Construction Costs for the Tenant Improvements (excluding all costs incurred for the Electrical Upgrade and the Special Work) exceed $152,300.00, Tenant shall be solely responsible for payment of such excess costs, subject to the terms of this Exhibit, which require Landlord to pay for any such costs. Landlord Delay: shall mean a delay incurred by Tenant in -------------- Substantially Completing the Tenant Improvements due to (a) a delay by Landlord or its architect in providing written notice of approval or disapproval of the Preliminary Plans and Construction Plans within the time periods and as provided in section 3 of this Exhibit B ("Plan Response Delay"), or any delay by Landlord or Landlord's Agents in approving the Preliminary Budget or Construction Budget beyond the time period set forth in section 4.5 of this Exhibit, (b) any changes required by Landlord in or to previously approved work as shown in the Construction Plans, or (c) unreasonable interference with the construction of the Tenant Improvements by Landlord or Landlord's Agents. Tenant shall notify Lessor within five (5) days after Tenant knows of an event constituting such a Landlord Delay (except for any under clause (a) above for which no such notice shall be required) and of the length of the delay as reasonably determined by the Architect. Special Work: Special Work consists of the following work: ------------ 1. The removal of the floor covering and equipment in the computer room to leave the floor in a slab condition in the areas noted as No. 1 in Exhibit B-1; 2. The installation of a grade level door (which shall be of Building standard quality) in the area noted as No. 2 in Exhibit B-1; 3. Remove the walls marked by "xxx" as noted in the vault area in Exhibit B-1; 2 4. Remove the Halon System in the vault and computer room areas shown in Exhibit B-1 5. Install a sprinkler system (which shall be of Building standard quality) in the vault and computer room areas shown in Exhibit B-1; 6. Remove the second set of double doors (interior set) at the front entrance of the Premises in the area noted as No. 4 in Exhibit B-1; and 7. All improvements, alterations, changes and other work to the Premises to comply with the current requirements of the Americans With Disabilities Act , 42 U.S.C. (S)(S) 12101-12213 ("ADA") as it applies as of the Effective Date of the Lease excluding any changes required based on Tenant's particular use of the Premises or any of Tenant's Alterations. Attached hereto as Exhibit B-2 is a list of the ADA alterations that Landlord hereby agrees to ----------- pay for, at its sole cost and expense, and which shall constitute items of Special Work, to bring the Building into compliance with ADA. All improvements and installations under this paragraph shall be with materials of at least Building standard quality. Substantial Completion, Substantially Complete, and Substantially ----------------------------------------------------------------- Completed (or similar phrase): The foregoing shall mean when the following have - ----------------------------- occurred: (a) the Tenant has delivered to Landlord a certificate from the Architect, in a form approved by Landlord in its reasonable discretion, that the Tenant Improvements have been Substantially Completed substantially in accordance with the Construction Plans, except "punch list" items which may be completed within thirty (30) days without impairing Tenant's use of the Premises or a material portion thereof; and (b) Tenant has obtained and delivered to Landlord a final certificate of occupancy (or all building permits with all inspections approved), if applicable, and all other approvals and permits for the Premises from the appropriate governmental authority permitting occupancy of the Premises. Tenant Improvements: The improvements to be constructed in accordance ------------------- with the Construction Plans. The Tenant Improvements shall comply in all respects with all applicable laws, statutes, ordinances, building codes and regulations (collectively, "Applicable Laws"). Landlord acknowledges and agrees that part of the Tenant Improvements will consist of the installation of HVAC equipment and exhaust vents on the roof of the Building and making minor penetrations in the roof in connection with such installation such HVAC equipment and exhaust vents. Landlord hereby acknowledges that Tenant intends to construct a clean room in the Premises and approves of Tenant's construction of said clean room as part of the Tenant Improvements, subject to Landlord's right to approve the Preliminary Plans and Construction Plans, as described below. 3. Preparation of Plans. -------------------- 3.1 Preliminary Plans. As soon as is reasonably possible after the ----------------- Effective Date of the Lease, Tenant shall submit to its Architect all additional information, including occupancy requirements for the Premises ("Information"), necessary to enable the Architect to prepare preliminary plans for the Tenant Improvements showing, among other things, all demising walls, corridors, entrances, exits, doors, interior design and partition, clean room, and the locations of all display and storage rooms and bathrooms. Tenant shall cause the Architect to prepare preliminary plans for the Tenant Improvements and shall deliver two copies of same to Landlord for its review and written approval in its reasonable discretion. Within five (5) business days after receipt of the preliminary plans, Landlord shall notify Tenant in writing that (i) Landlord approves of such preliminary plans or (ii) Landlord disapproves of such preliminary plans, the basis for disapproval and the changes requested by Landlord. If Landlord disapproves of the preliminary plans in any respect, the parties shall confer and negotiate in good faith to reach written agreement on the preliminary plans within five (5) business days thereafter for the first (1/st/) disapproval and three (3) business days thereafter. Upon such agreement, Tenant shall cause the preliminary plans to be revised and shall submit the revised plans to Landlord for its review and approval as provided in this section. Landlord shall approve or reasonably disapprove such revised preliminary plans within three (3) business days after Landlord's receipt of such preliminary plans. If Landlord disapproves the preliminary plans, the parties shall again meet and confer in accordance with this paragraph until the parties agree on the preliminary plans. If Landlord fails to approve the second set of revised preliminary plans within said three (3) business day time period, then each day after the end of said three (3) business day time period shall constitute a Force Majeure Delay (which will delay the Commencement Date in the Lease one (1) day for each day of delay), unless such disapproval or failure to agree is based on a Design Problem. If Landlord disapproves of the second set of preliminary plans due to a Design Problem, Tenant may terminate this Lease upon delivery of written notice to Landlord within five (5) business days after Landlord's disapproval of such second set of preliminary plans, whereupon this Lease shall terminate and shall be null and void. After approval of the preliminary plans as provided above, the preliminary plans shall be referred to as the " Preliminary Plans." If Landlord fails to approve or disapprove of the preliminary plans within the time periods set forth above, Landlord shall be deemed to have approved the proposed preliminary plans. Landlord shall not unreasonably withhold its approval or consent to any preliminary plans. 3 3.2 Construction Plans. Tenant shall cause the Architect to prepare ------------------ final working drawings, which shall be consistent with the Preliminary Plans, compatible with the design, construction and equipment of the Building, comply with all Applicable Laws and contain all such information as may be required for obtaining all permits and other governmental approvals for the construction of the Tenant Improvements (the "Working Drawings"). Tenant shall submit two copies of the Working Drawings to Landlord for its review and approval in its reasonable discretion. Within five (5) business days after receipt of the Working Drawings, Landlord shall notify Tenant in writing that (i) Landlord approves of such Working Drawings, or (ii) Landlord disapproves of such Working Drawings, the basis for disapproval and the changes requested by Landlord. If Landlord disapproves of the Working Drawings in any respect, the parties shall confer and negotiate in good faith to reach written agreement on the Working Drawings within five (5) business days thereafter for the first (1/st/) disapproval and three (3) business days thereafter. Upon such agreement, Tenant shall cause the Working Drawings to be revised and shall submit the revised Working Drawings to Landlord for its review and approval as provided in this section. Landlord shall approve or reasonably disapprove of such revised Working Drawings within three (3) business days after delivery of such Working Drawings to Landlord. If Landlord disapproves the revised Working Drawings, the parties shall again meet and confer in accordance with this paragraph until the parties agree on the Working Drawings. If Landlord disapproves of the second set of Working Drawings within said three (3) business day time period, then each day after the end of said three (3) business day time period shall constitute a Force Majeure Delay (which will delay the Commencement Date in the Lease one (1) day for each day of delay), unless such disapproval or failure to agree is based on a Design Problem. If Landlord disapproves of the second (2/nd/) set of Working Drawings due to a Design Problem, Tenant may terminate this Lease upon deliver of written notice to Landlord within five (5) business days after Landlord's disapproval of such second set of preliminary plans, whereupon this shall terminate and shall be null and void. If Landlord fails to approve or disapprove of the Working Drawings within the time periods set forth above, Landlord shall be deemed to have approved the proposed Working Drawings. The Working Drawings approved in writing by the parties shall be referred to as the "Construction Plans." 3.3 General. It is the responsibility of Tenant to assure that the ------- Construction Plans and the Tenant Improvements constructed thereunder conform to all of the Applicable Laws, subject to Tenant's right to reimbursement from Landlord for the cost incurred to bring the Premises into compliance with the ADA (as described in the definition of Special Work). Tenant shall submit to Landlord one (1) reproducible and two (2) prints of the Construction Plans. 4. Construction of Tenant Improvements. ----------------------------------- 4.1 Construction Contract. Tenant shall enter into the Construction --------------------- Contract with Contractor to construct the Tenant Improvements. In addition, any subcontractor performing any work on the life safety or alarm systems or work affecting the roof shall be subject to Landlord's prior written approval in its good faith discretion and Landlord may require the Tenant use Landlord's contractor or a specific subcontractor for any such work. The Construction Contract shall require, among other things, that the Contractor (a) obtain and deliver to Landlord evidence of insurance required by Landlord as specified in section 5.3 of this Exhibit B, and (b) execute, obtain and deliver to Tenant lien waivers in the form required under Applicable Law from the Contractor and all of its subcontractors and suppliers, and (c) monthly progress payments, with a ten percent (10%) retention, and (d) provide for a guaranteed maximum price for the Special Work and the Electrical Upgrade. The Construction Contract as it applies to the Special Work and the Electrical Upgrade shall be subject to the prior written approval of Landlord in its reasonable discretion. Landlord shall provide written notice of approval or disapproval within three (3) business days after Tenant's request for such approval. If Landlord disapproves of the portion of the Construction Contract in which it is permitted to approve or disapprove of, Landlord shall set forth its reasons for disapproval in writing within said three (3) business day period and shall follow the disapproval procedure set forth in Section 3.1 and3.2 of this Exhibit. If Landlord fails to approve or disapprove within the applicable time period set forth herein, Landlord shall be deemed to have approved the Construction Contract. 4.2 Information Provided by Landlord. Acceptance or approval of any -------------------------------- plan, drawing or specification, including, without limitation, the Preliminary Plans and the Construction Plans, by Landlord shall not constitute the assumption of any responsibility by Landlord for the accuracy or sufficiency of such plans and material, and Tenant shall be solely responsible therefor. Tenant agrees and understands that the review of all plans pursuant to the Lease or this Exhibit by Landlord is to protect the interests of Landlord in the Building, and Landlord shall not be the guarantor of, nor responsible for, the correctness, completeness or accuracy of any such plans or compliance of such plans with Applicable Laws. 4.3 No Responsibility of Landlord. Landlord's approval of any plans, ----------------------------- including, without limitation, the Preliminary Plans or the Construction Plans, shall not: (i) constitute an opinion or agreement by Landlord that such plans and Tenant Improvements are in compliance with all Applicable Laws, (ii) impose on Landlord any responsibility for a design and/or construction defect or fault in the Tenant Improvements, or (iii) constitute a representation or warranty regarding the accuracy, completeness or correctness thereof. 4.4 Changes. After approval of the Construction Plans by Landlord ------- and Tenant, any changes in the Construction Plans shall require the prior written consent of Landlord and Tenant which shall not be unreasonably withheld and the parties shall follow the same process as was required under sections 3.2 for 4 approval of the change in the Construction Plans, unless the change is required by Applicable Law in which case each party shall provide its written approval or disapproval (including the basis therefor) within three (3) business days after receipt of request of the change together with the applicable construction drawing showing the change. If Landlord disapproves of the change required to comply with Applicable Law and the parties do not resolve the matter within five (5) business days after Tenant's receipt of written notice of Landlord's disapproval, then Tenant shall have the right to terminate this Lease upon delivery of written notice to Landlord within five (5) business days after the end of such five (5) business day time period. Any change requested by Tenant that is approved in writing by Landlord shall be prepared by the Architect and shall be subject to the review and approval of Landlord in its reasonable discretion. If a change is requested by Landlord to the Tenant Improvements following completion and approval by the parties of the Construction Plans, Landlord shall pay any increased Construction Costs to effectuate such change, at Landlord's sole cost and expense in addition to the Landlord's Allowance and Landlord's obligation to pay for its share of the Electrical Upgrade and the entire cost of the Special Work as set forth in this Agreement. If a change is requested by Tenant to the Tenant Improvements following the completion and approval of the Construction Plans or if required under the Applicable Laws (except with respect to ADA cost described in section 2 under the definition of Special Work which shall be at Landlord's sole cost and expense, unless the change is required due to a change in the Tenant Improvements made by Tenant after approval of the Construction Plans), Tenant shall pay for any increased Constructed Costs to effectuate the change, at its sole cost and expense. 4.5 Construction Budget for Tenant Improvements. As soon as is ------------------------------------------- reasonably possible, Tenant and its Architect shall prepare a preliminary construction budget for the Construction Costs to construct the Special Work and the Electrical Upgrade, if applicable. The preliminary construction budget shall be subject to the prior written approval of Landlord within three (3) business days after its receipt, which shall not be unreasonably withheld, and when approved shall be referred to herein as the "Preliminary Budget." The bid from the selected Contractor shall be used to prepare the final construction budget for all Construction Costs for the Special Work and the Electrical Upgrade. Landlord and Tenant shall agree on a construction budget (the "Construction Budget") for all costs to be incurred in connection with completion of the Special Work and the Electrical Upgrade work, only. Landlord shall not have the right to approve or disapprove of Tenant's construction budget for the rest of the Tenant Improvements, which budget shall be approved by Tenant, in its reasonable discretion. If the actual Construction Costs for the Special Work or Electrical Upgrade is more than ten percent (10%) of the cost provided in the Construction Budget for said work, Tenant shall notify Landlord in writing of said increase and Landlord shall pay for such increase to the extent such increase in cost is permitted under the Construction Contract and is not due to a change order by Tenant or otherwise caused by Tenant or Tenant's Agents. By approving the Construction Budget, Landlord shall be deemed to have consented to pay for the entire cost of the Special Work set forth in the Construction Budget and one half of the cost of the Electrical Upgrade set forth in the Construction Budget, plus any actual increases in said Construction Budget, not to exceed ten percent (10%) of the Construction Budget for the Special Work and the Electrical Upgrade, if any, to the extent such increase in cost is permitted under the Construction Contact and is not due to a change order by Tenant or otherwise caused by Tenant or Tenant's Agents. For example, if the Construction Budget for the Special Work is $20,000, Landlord's obligation to pay for the Special Work shall be the actual cost of such work, not to exceed $22,000. Pursuant to the terms of the Lease, Landlord is obligated to insure the Tenant Improvements (except for the clean room equipment) under Landlord's casualty policy from and after the Commencement Date. Notwithstanding anything to the contrary in this Exhibit B, Tenant shall provide written notice of the total costs to construct the Tenant Improvements (excluding the clean room equipment), together with such supporting information that Landlord's insurer may request, prior to the Commencement Date (or at least an estimate if the Tenant Improvements are not Substantially Completed prior to the Commencement Date with a final statement of such costs after all work is completed). 4.6 Building Permits and Approvals. After approval by Landlord and ------------------------------ Tenant of the Construction Plans, Tenant or its Contractor shall submit the Construction Plans to the appropriate governmental body for plan checking and all building permits and other governmental and quasi-governmental approvals. 4.7 Conduct of Work. Tenant shall confine the construction activity --------------- to within the Premises as much as possible and shall work in an orderly manner removing trash and debris from the Premises on a daily basis. At no time will pipes, wires, boards or other construction materials cross public areas where harm could be caused to the public. All such work shall be undertaken in strict compliance with all Applicable Laws. If Tenant fails to comply with these requirements, Landlord shall have the right, but not the obligation, to remedy such problem (at Tenant's cost) as deemed reasonably necessary by Landlord to protect the public. Tenant shall complete construction of the Tenant Improvements free and clear of all liens, security interests and encumbrances of any kind caused to be recorded against all or any portion of the Project by Tenant in connection with the construction of the Tenant Improvements. (a) Pre-construction Submittals to Landlord. A minimum of two --------------------------------------- (2) days prior to the commencement of construction, Tenant shall submit the following items to Landlord: 5 (1) A certificate setting forth the proposed commencement date of construction and the estimated completion dates; (2) Certificates of all insurance required under the Lease and this Exhibit; (3) Copies of all building permits, and all other permits and approvals required by governmental agencies to construct the Tenant Improvements; provided, however, that Tenant may commence demolition work in the Premises prior to obtaining all necessary building permits to construct the Tenant Improvements; and (4) A copy of the signed construction contract with the Contractor; (b) Delays. Tenant shall with reasonable diligence prosecute ------ construction of the Tenant Improvements to complete all work by the outside date of January 1, 1998 for the Commencement Date. Any delay in completing such work, including any delay as a result of governmental delays, acts of God and other events beyond the control of Tenant, shall not extend or delay the time for the commencement of payment Rent or any other sum under the Lease, except as expressly provided to the contrary in this Exhibit B for a Landlord Delay or Force Majeure Delay or a casualty. (c) Correction of Work. Landlord may reject any portion of the ------------------ Tenant Improvements which is not in conformity with the Construction Plans. Landlord shall not be responsible for correcting the portions of the Tenant Improvements which were defective or not in compliance with the Construction Plans, as the same may be amended by change order approved by the Landlord and Tenant; all such work shall be the responsibility of Tenant at its sole cost and expense. 4.8 Notice of Completion; Copy of Record set of Plans. Within ten ------------------------------------------------- (10) days after completion of construction of the Tenant Improvements, Tenant shall cause a notice of completion (or the equivalent notice required under local law to provide notice to all contractors, subcontractors and materialmen that the work is completed and the time for filing any mechanic's lien is running) to be recorded in the Official Records of the County where the Building is located, and shall furnish a copy thereof to Landlord upon such recordation. If Tenant fails to do so within such period and after ten (10) days written notice from Landlord, Landlord may execute and file the same on behalf of Tenant as Tenant's agent for such purpose, at Tenant's sole cost and expense. At the conclusion of construction: (i) Tenant shall cause the Architect and Contractor (A) to update the Construction Plans as necessary to reflect all changes made to the Construction Plans during the course of construction, (B) to certify to the best of their knowledge that the "record-set" of Construction Plans are true and correct, which certification shall survive the expiration or termination of this Lease, and (C) to deliver to Landlord two (2) sets of copies of such record set of Construction Plans within ninety (90) days following issuance of a certificate of occupancy for the Premises; and (ii) Tenant shall deliver to Landlord a copy of all signed building permits and certificates of occupancy, and all warranties, guaranties, and operating manuals and information relating to the improvements, equipment and systems in the Premises. 4.9 Storage During Construction. Storage of construction material, --------------------------- tools, equipment and debris shall be confined to the Premises and any other areas which may be designated for such purposes by Landlord. Landlord shall not be responsible for any loss or damage to Tenant's and/or Tenant's contractors' equipment. 4.10 Miscellaneous. Construction shall comply in all respects with ------------- the Applicable Laws. Tenant shall apply and pay for all utility services furnished to the Premises. The Tenant Improvements shall be subject to the inspection of Landlord and its supervisory personnel, provided such inspection shall not unreasonably interfere with the construction of the Tenant Improvements. 5. Tenant's Construction Parties and Insurance. The Contractor and all ------------------------------------------- subcontractors, laborers, materialmen, and suppliers used by Tenant collectively shall be referred to as "Tenant's Construction Parties." 5.1 Indemnity. Tenant's indemnity of Landlord as set forth in --------- section 10.3 of the Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Tenant's Construction Parties, or anyone directly or indirectly employed by any of them, arising in connection with the construction of the Tenant Improvements. 5.2 Requirements of Tenant's Construction Parties. Tenant's --------------------------------------------- Contractor shall warrant to Tenant and for the benefit of Landlord that the portion of the Tenant Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. Tenant's Contractor shall be responsible for the replacement or repair, without additional charge, of all work done or furnished in accordance with its contract that shall become defective within one (1) year after the later to occur of (i) completion of the work performed by such contractor or subcontractors, or (ii) the date when the Tenant Improvements have been Substantially Completed. The correction of such work shall include, without additional charge, all additional expenses and damages incurred in connection with such removal or replacement of all or any part of the Tenant Improvements, and/or the Building and/or Common Areas that may 6 be damaged or disturbed thereby. All such warranties as to material or workmanship of or with respect to the Tenant Improvements shall be contained in the Construction Contract or subcontract and shall be written such that such warranties shall inure to the benefit of both Landlord and Tenant, as their respective interests may appear, and can be directly enforced by either. Tenant covenants to give to Landlord any assignment which may be necessary to effect such right of direct enforcement. 5.3 Insurance Requirements. In addition to the insurance ---------------------- requirements set forth in the Lease, Tenant shall comply with the following requirements: (1) General Coverages. Tenant's Contractor shall carry worker's ----------------- compensation insurance covering all of their respective employees, and shall also carry commercial liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in the section 9.1.A(1), 9.1.A(3) and 9.1.B of the Lease. (2) Special Coverage. Tenant shall carry "Builder's All Risk" ---------------- insurance in an amount equal to the cost of the Tenant Improvements. Such insurance shall include an extended coverage endorsement for excess liability and Products and Completed Operation Coverage insurance, in an amount equal to, or not less than $1,000,000 per incident, $2,000,000 in aggregate, and with companies with a rating at least equal to the rating of companies required to be carried by Tenant as set forth in section 9.1B of the Lease. (3) General Terms. Certificates for all insurance carried ------------- pursuant to the foregoing sections shall be delivered to Landlord before the commencement of construction of the Tenant Improvements and before the Contractor's equipment is moved onto the site. All such policies of insurance must contain a provision that the company writing said policy will give Landlord thirty (30) days' prior written notice of any cancellation or lapse of the effective date or any reduction in the amounts of such insurance. Tenant's Contractor shall maintain all of the foregoing insurance coverage in force until the Tenant Improvements are fully completed and accepted by Landlord, except for any Products and Completed Operation Coverage insurance required by Landlord, which is to be maintained for three (3) years following completion of the work and acceptance by Landlord and Tenant. All policies carried under this section shall insure Landlord and Tenant, as their interests may appear. All insurance, except Workers' Compensation, maintained by Tenant's Construction Parties shall preclude or waive subrogation claims by the insurer against anyone insured thereunder. To the extent required under the Construction Contract, Landlord hereby releases Tenant's Contractor and waives all right of recovery by way of subrogation in accordance with Section 9.4 of the Lease that Landlord's insurance company may or could have against Tenant's Contractor with respect to any insurance maintained by Landlord in connection with the Project, except worker's compensation insurance. To the extent required under the Construction Contract, Landlord shall obtain waivers of subrogation in favor of Tenant's Construction Parties for Landlord's fire and property damage policy. Such insurance shall provide that it is primary insurance as respects the Landlord and that any other insurance maintained by Landlord is excess and noncontributing with the insurance required hereunder. The requirements for the foregoing insurance shall not derogate from the provisions for indemnification of Landlord by Tenant under the Lease or this Exhibit. (4) Casualty. In addition to the provisions of Article 11 of the -------- Lease regarding a casualty to the Premises, Building or Project, the following provisions shall apply with respect to any casualty at the Premises or Building prior to the Commencement Date or Substantial Completion of the Tenant Improvements, if later. If the Premises or any portion of the Building (which will materially interfere with Tenant's use of the Premises or construction of the Tenant Improvements) is damaged or destroyed prior to the Commencement Date of the Lease, Tenant shall have the right to terminate the Lease if Landlord's architect or contractor estimate in its reasonable opinion of the time to restore is more than 90 days. Tenant shall provide written notice of termination within ten (10) days after receipt of Landlord's notice of the estimated time to restore. If the Lease is so terminated, Tenant shall be entitled to the proceeds of all of Tenant's builder's risk insurance, but Landlord shall not have to pay for Landlord's Allowance or the cost of the Special Work or its share of the Electrical Upgrade. In such event, Tenant shall also be responsible for payment of all claims from the Contractor for payments due under the Construction Contract. If the Premises or Building is damaged or destroyed prior to the Commencement Date or Substantial Completion of the Tenant Improvements if later, and the Lease is not terminated pursuant to this Section, Landlord shall promptly and diligently complete construction of the Building, and Tenant shall cause its Contractor to restore and complete the Tenant Improvements. Under no circumstances shall Landlord be obligated to expend more than the amount of the insurance proceeds received by Landlord for such casualty. In the event of a casualty and the Lease is not terminated, the Commencement Date shall be postponed one day for each day of delay caused by such casualty. 6. Payments. -------- 6.1 Basic Tenant Improvements. Tenant shall pay for the Tenant ------------------------- Improvements, minus the Landlord's Allowance, Landlord's share of the Electrical Upgrade and the entire cost of the Special Work, which Landlord shall pay as hereinafter provided. Since the Construction Costs for the Tenant Improvements (excluding the Electrical Upgrade and the Special Work) will exceed the amount of Landlord's Allowance, Tenant shall be solely responsible for such additional costs, except for additional costs resulting from change orders required by Landlord and any Landlord Delay (other than a Plan Response Delay as defined in clause (a) of the definition of 7 Landlord Delay). Landlord shall make one payment of the Landlord's Allowance within fifteen (15) days after receipt by Landlord of (i) the final certificate of occupancy, if applicable, for the Premises, (ii) copies of all applicable building permits reflecting final sign-off by the local governmental authority, (iii) a copy of the as-built or marked Construction Plans for the Tenant Improvements, (iv) unconditional lien waivers from the general contractor and all subcontractors and suppliers and (v) receipt and approval by Landlord of the Architect's certificate referred to in the definition of Substantial Completion in this Exhibit, which approval shall not be unreasonably withheld. 6.2 Electrical Upgrade. Tenant shall have the option to elect not to ------------------ construct the Electrical Upgrade. If Tenant elects to construct the Electrical Upgrade, such election must be made and the work done before the commencement of the fourth (4/th/) year of the Lease Term and any budget and the contractor to perform such work shall be subject to the written approval of Landlord and Tenant. Tenant's right to construct the Electrical Upgrade shall be conditioned upon no Event of Tenant's Default existing at such time. Landlord and Tenant shall each pay for one-half (1/2) of the Construction Costs for the Electrical Upgrade. Landlord shall pay to Tenant, within fifteen (15) days after request from Tenant and after completion of the Electrical Upgrade, Landlord's share of the Construction Costs for the Electrical Upgrade. 6.3 Special Work. Landlord shall be solely responsible for payment ------------ of all the Construction Costs for the Special Work in addition to Landlord's Allowance and Landlord's share of the Electrical Upgrade; provided, however, that any additional costs for the Special Work due to any delay caused by Tenant or changes requested by Tenant following approval of the Construction Plans shall be paid by Tenant. Landlord shall pay to Tenant, within fifteen (15) days after request from Tenant and after completion of the Special Work, all Construction Costs for the Special Work. 6.4 Security for Payment: If Landlord fails to make any payment -------------------- required by Landlord under this Exhibit B within fifteen (15) days after Landlord's receipt of written notice from Tenant that such payment is due (which shall be in addition to the initial notice and 15-day grace period under section 6.1 or 6.2) pursuant to the terms of this Exhibit B, such payment shall accrue interest at the Agreed Interest Rate from the date due until the date paid. If Landlord fails to make any payment required hereunder within said time period, notwithstanding anything to the contrary in the Lease or this Exhibit, Tenant shall be entitled to deduct from the Rent an amount equal to the amount then owed by Landlord under the terms of this Exhibit until Landlord's obligations under this Exhibit have been paid in full. 7. HVAC Work. There are currently three (3) air-conditioning units --------- servicing the Premises. At the request of Tenant, Landlord has agreed to replace two (2) of the air-conditioning units at this time with air-conditioning units of the same tonnage capacity (i.e., 30-ton air-conditioning units) and the cost of such work shall be amortized and paid by Tenant as provided in section 5.4A. and 5.4B of the Lease. Landlord will also be performing certain repair and maintenance work to the third HVAC unit in order for such HVAC unit to be in good working order as of the Commencement Date, and the cost of such work shall be borne by Landlord. All such work shall be substantially completed by the Commencement Date subject to any Force Majeure Delay and any delay caused by Tenant or Tenant's Agents. The vendor or contractor to perform such work shall be selected by Landlord in its sole and absolute discretion. As of the date hereof, Landlord anticipates using Air Com Mechanical to perform such work, but Landlord reserves the right to select any other vendor or contractor. 8. Exterior Lighting. The electricity for the exterior lighting at the ----------------- Building is currently connected to the meter serving the Premises. Landlord has agreed to split the electricity for the Building's exterior lighting so that the Building exterior lighting for the Premises will be connected to Tenant's meter and the Building's exterior lighting for the remainder of the Building will be connected to the other meter for the remaining space in the Building. Such work shall be completed by the Commencement Date, subject to any Force Majeure Delay and any delay caused by Tenant or Tenant's Agents. The cost of such work shall be treated as a Common Operating Expenses for calendar year 1997. 8 EXHIBIT B-1 ----------- PREMISES' FLOOR PLAN WITH NOTATION FOR SPECIAL WORK --------------------------------------------------- [FLOOR PLAN APPEARS HERE] 7 EXHIBIT B-2 ----------- LIST OF ADA WORK ---------------- A. Main Entry Doors. 1. 10" kickplate is missing from existing pair of doors. 2. Adjust door closing hardware to appropriate force. B. Handicapped Parking Adjacent to Main Entry. 1. Provide a van stall and adjacent stripped zone. 2. Provide a total of four handicapped parking stalls (including the van stall described in paragraph 1 above). 3. Provide access to main entry door without walking behind another parked vehicle. C. Site. 1. Provide appropriate signage indicating "handicapped accessibility." D. Exterior Exit Doors. 1. Provide new lever hardware at all existing doors. 2. Modify thresholds at all existing doors to provide level landing on both sides of door. E. Interior Doors. 1. Provide new lever hardware at all existing doors. F. Toilet Rooms. 1. Provide accessible toilet stalls with correct floor clearances and fixture height. 2. Modify countertops and sinks with correct clearances and fixture hardware. 3. Modify urinals with correct floor clearance and fixture height. G. Coffee Bars. 1. Modify countertop and base cabinets with correct clearances. EXHIBIT C INTENTIONALLY DELETED EXHIBIT D ACKNOWLEDGMENT OF COMMENCEMENT DATE EXHIBIT "D" ----------- ACKNOWLEDGMENT OF COMMENCEMENT DATE This Acknowledgment of Commencement Date is made as of _______________, 19___, by and between the parties hereto with regard to that certain Lease dated as of October 27, 1997, by and between Silicon Valley Properties, L.L.C., a Delaware limited liability company as Landlord ("Landlord"), and Symphonix Devices, Inc., a California corporation, as Tenant ("Tenant"), affecting those premises located at 2331 Zanker Road, San Jose, California 95131. The parties hereto agree as follows: 1. The "Tenant Improvements" required to be constructed by Tenant have been "Substantially Completed" (as such terms are defined in Exhibit B to the Lease), subject to the completion of the following punchlist items: _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 2. The Commencement Date of the Lease Term is _______________, 19___, and the Lease Term shall expire on __________________, ____, unless sooner terminated or extended according to the terms of the Lease. LANDLORD: TENANT: SILICON VALLEY PROPERTIES, L.L.C. a Delaware limited liability company SYMPHONIX DEVICES, INC. a California corporation By: Divco SVP Group, LLC, a Delaware limited liability company By: _____________________ Its Manager Harry Robbins Title: President By: __________________________ Name: Scott Smithers Dated: ________________ Its: President Dated: ____________________ 1 EXHIBIT E INTENTIONALLY DELETED EXHIBIT F SIGN CRITERIA EXHIBIT "F" ----------- SIGN CRITERIA ------------- These criteria have been established for the purpose of assuring an outstanding business complex and for the mutual benefits of all tenants. Conformance will be strictly enforced, and any installed non-conforming or unapproved signs must be brought into conformance at the expense of the tenant. A. GENERAL REQUIREMENTS -------------------- 1. The Lessee shall submit a sketch of his proposed utilization of the Orchard Park designated sign to Silicon Valley Properties for written approval. 2. Lessee's sign base and frame shall be constructed by Silicon Valley Properties' agent. The sign base shall be installed by Silicon Valley Properties' agent at Lessee's expense. All tenant lettering shall be done by the agent at Lessee's expense. 3. Lessee shall be responsible for the fulfillment of all requirements of these criteria. B. GENERAL SPECIFICATIONS ---------------------- 1. No electrical or audible signs will be permitted. Internally illuminated signs may be installed by modification of the existing or designated sign base. Final details for modification and installation must be given written approval by the Lessor. 2. If the sign is lighted, the light source for the illumination of the sign shall be concealed from view, and the light source shall not travel from such light source straight to the viewers eye. Instead, it shall be visible only from a reflecting or diffusing surface. No part of the sign's light shall revolve, rotate, move or create the illusion of same. 3. The sign's dimensions will be in accordance with the established sign program for the building. 4. Placement of the sign and method of attachment will be directed by Silicon Valley Properties. Sign copy will be restricted to company name, logo & address numbers. The style, color and size of the individual company's name may vary. 5. Upon the removal of any sign, any damage to the building or sign base must be repaired by the Lessee, unless such removal is *** by Landlord or Landlord's Agent. 6. Tenants may place gold leaf lettering on the interior window area, not to exceed more than 144 square inches (gross area). The letters are not to exceed 3 inches in height. 7. Except as provided herein, no advertising placards, banners, pennants, names, insignia, trademarks or other descriptive material shall be affixed or maintained upon the glass panes or exterior walls of the building. [ILLUSTRATION OF SAN JOSE ORCHARD BUSINESS PARK STANDARD DIRECTIONAL SIGN] [ILLUSTRATION OF STANDARD DIRECTIONAL SIGN] REAR MAN DOORS -------------- In order to insure uniformity in the printing of company names or receiving and shipping signs on rear man doors, we have made the following specifications: 1. The business name is to be the same as the name used on the tenant identification sign. In addition to the names, the words "shipping" and "receiving" and the tenant's logo may be used. 2. The letters will be 2 inches high, black or white and in a specified uniform style. 3. The proposed sign is to be approved by Silicon Valley Properties, L.L.C. prior to installation to insure conformance. [ILLUSTRATION OF UNAUTHORIZED PARKING SIGN] SPECIFICATIONS FOR ADDRESS NUMBERS ON BUILDINGS ----------------------------------------------- 1. Height: S 2. Color: Contrasting to background of building and matching accent trim on building. 3. Location: Viewable from the street upper corner of building. 4. Example: IBM building at the corner of Brokaw Road and Zanker Road. 5. Composition: Metal 6. Print: Primer plus two costs of finish paint. 7. Approval: By Silicon Valley Properties in writing previous to installation. May desire approval from San Jose Fire Department, Station #5 on North Tenth Street, telephone 277-4363. VISITOR PARKING SPACE DESIGNATION --------------------------------- Signs designating visitor parking spaces are allowed in parking areas of single user buildings only and conform to the following criteria: 1. A maximum of 3 inches high and consisting of only the word "Visitor". 2. Painted with a flat white exterior paint. 3. Applied to either the curb or bumpers of the approved designated spaces. 4. Painted by the tenant at tenant's expense but with the prior written approval of Silicon Valley Properties, L.L.C. 5. Repainted a minimum of every three years. 6. Upon request from Silicon Valley Properties, L.L.C., removed at the termination of the Lease. No other designated parking signs are acceptable. [ILLUSTRATION OF TYPICAL NO PARKING SIGN] [ILLUSTRATION TO TENANT IDENTIFICATION SIGN] EXHIBIT H HAZARDOUS MATERIALS QUESTIONNAIRE EXHIBIT "H" ----------- Hazardous Materials Questionnaire ACKNOWLEDGEMENT --------------- THE UNDERSIGNED HEREBY ACKNOWLEDGES THAT IT (Mark One): _________ Does not use any hazardous materials other than minor amounts of reproduction and janitorial chemicals consistent with routine office uses. (No need to fill out the attached Hazardous Material Questionnaire.) _________ Does not use hazardous materials in a manner or in a quantity requiring the preparation of a hazardous material management plan or any other documents under California Health and Safety Code Section 25503.5. (Please fill out the attached Hazardous Material Questionnaire.) _________ Uses only those chemicals identified in the attached questionnaire in accordance with the provisions of the attached hazardous materials management plan, which has been approved by the Fire Department of the City of _____________ and is in full force and effect. (Please fill out the attached Hazardous Material Questionnaire and attach copy of your Hazardous Materials Management Plan.) THE UNDERSIGNED FURTHER ACKNOWLEDGES THAT IT HAS COMPLIED IN ALL RESPECTS TO THE PROVISIONS OF LOCAL, STATE AND FEDERAL LAW AND THE HAZARDOUS MATERIALS MANAGEMENT PLAN ATTACHED HERETO IN CONNECTION WITH ITS STORAGE, USE AND DISPOSAL OF HAZARDOUS MATERIALS AND THAT IT HAS DISPOSED OF HAZARDOUS MATERIALS ONLY BY (1) DISCHARGE TO APPROPRIATELY TREATED WASTE TO A PUBLICLY OWNED TREATMENT WORK IN ACCORDANCE WITH A VALID AND ENFORCEABLE WASTE DISCHARGE PERMIT AND (2) DELIVERY OF HAZARDOUS WASTES TO A PROPERLY LICENSED WASTE DISPOSAL AGENT. IN WITNESS WHEREOF, the undersigned, an authorized officer of the afformentioned company has executed this acknowledgement as of the date written below. ___________________________ Company a _________________________ By: _______________________ ___________________________ (Print Name and Title) 1. BUSINESS ACTIVITY ----------------- Type of Business Activity(ies): Hazardous Materials Activities - ------------------------------- ------------------------------- (check all that apply) check all that apply) _________ machine shop ________ degreasing _________ light assembly ________ chemical etching _________ research and development ________ wastewater treatment _________ product service or repair ________ painting _________ photographic processing ________ stripping _________ vehicle maintenance or repair ________ metal treatment or finishing _________ auto/body ________ printing: _________ engine/drive train type: ______________________ _________ manufacturing: ________ warehouse product:_____________________ ________ analytical wet chemistry lab _________ integrated circuit: ________ plating _________ manufacturing ________ chemical mixing/synthesis _________ assembly ________ lathe/mill machining _________ chemical/pharmaceutical products ______ manufacturing ______ distribution _________ printed circuit: _______ manufacturing _______ assembly _____ other:______________________ _____ other: ____________ 2. HAZARDOUS MATERIALS USAGE/STORAGE AND PRODUCTION ------------------------------------------------ What chemicals, if any, are involved in your operations (please list the types of products, the maximum quantity stored on-site and the annual quantity used). ================================================================================ MATERIAL MAX. QUANTITY ON-SITE ANNUAL QTY. USED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ If this table provides insufficient space, please see additional pages as necessary. 2 2.1 Is it intended that operations at the proposed facility would involve Hazardous Materials manufacturing? Do not include hazardous wastes. see Section 5. Yes ____ No ____ 2.2 Is it intended that operations at the proposed facility would include Hazardous Materials use and/or storage that would require completion of a Hazardous Materials Business Plan? Yes ____ No ____ If YES, please attach copies of HMMP/HMBP in process or plan for currentformer facility. 2.3 Is it intended that operations at the proposed facility would include installation of any aboveground or underground storage tanks (including fuel tanks)? Yes ____ No ____ 3. WASTEWATER DISCHARGES --------------------- 3.1 Is it intended that operations at the proposed facility would discharge wastes to any sanitation systems or body of water, or that the facility would otherwise be required to obtain a wastewater discharge Permit, a NPDES Permit, or any other permit or approval from a Governmental Agency concerning wastewater discharges? Yes ____ No ____ If YES, please attach copies of each such permit and complete Schedule 3. 4. AIR EMISSIONS ------------- 4.1 Is it intended that operations at the proposed facility would emit any air contaminant (including, but not limited to volatile organic compounds, sulfur oxides, carbon monoxide, nitrogen oxides, lead, particulate matter, toxic air contaminants regulated by the California Air Resources Board, or hazardous air pollutants listed under Section 112 of the federal Clean Air Act)? Yes ____ No ____ If YES, please complete Schedule 4 for each emission and each source. 4.2 Is it intended that operations at the proposed facility would require obtaining an air emissions permit or other permit or approval from a Governmental Agency concerning air emissions in order to conduct its business? Yes ____ No ____ If YES, please attach copies of each such permit and approval and complete Schedule 4. 5. HAZARDOUS WASTE --------------- 5.1 Is it intended that operations at the proposed facility would generate any "hazardous waste" as defined in RCRA. California Code of Regulations, Title 22, or other government regulations? Yes _____ No _____ If YES, please complete Schedule 3. 5.2 Is it intended that operations at the proposed facility would file with any local, state or federal environmental agency a generator's notification of hazardous waste (e.g., an RCRA 3010 notification) and hazardous waste generator's reports? Yes _____ No _____ If YES, please attach a copy of such notification. 5.3 Is it intended that operations at the proposed facility would require obtaining an EPA hazardous waste generator's identification number? Yes _____ No _____ 5.4 Is it intended that operations at the proposed facility would require retention of copies of hazardous waste manifests for hazardous waste transported off-site? Yes _____ No _____ 5.5 Is it intended that operations at the proposed facility would require obtaining a "Part A" or "Part B" Application for a hazardous waste treatment, storage or disposal facility ("TSD") permit with any Governmental Agency under RCRA or any similar state or local Law for the proposed Facility? Yes _____ No _____ If YES, please attach a copy of each application in progress. 5.6 Is it intended that operations at the proposed facility would require a permit under California Code of Regulations Title 22 Tiered Permitting Program, including a standardized permit, conditional authorization, conditional exemption, or variance? Yes _____ No _____ If Yes, please attach a copy of the disclosure or application in progress. 6. GOVERNMENT COMPLIANCE AND HAZARDOUS MATERIAL RELEASES AND SPILLS AT ------------------------------------------------------------------- EXISTING FACILIT(IES) --------------------- 6.1 Has the Company ever received from any Governmental Agency any notice of violation of any environmental law? Yes _____ No _____ If YES describe fully: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ 6.2 Has there ever been an occasion in any of the existing facilities when a liquid or solid waste material, fuel or other Hazardous Material was accidentally or intentionally spilled or released: Outside of the building? Yes _____ No _____ Within the building? Yes _____ No _____ If you have answered "yes" to any of the foregoing, please describe the events(s) in detail, including the Hazardous Materials involved, whether the event was reported to any Governmental Agency, the responsive action taken any claim(s) that have resulted from the event, and all other relevant information concerning the spill or release. Attach additional sheets, as necessary. _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ SILICON VALLEY PROPERTIES, L.L.C. PRE-LEASE HAZARDOUS MATERIALS QUESTIONNAIRE General Instructions: Please provide all requested information, based on review of the Company's records and interviews with Company personnel likely to possess the information requested. If there is insufficient space to respond to a question, please attach a separate page referring to the question number. Use "N/A" if the question is not applicable to your facility, or write "Unknown" if the information is not available in the Company's files and is not known by the person completing this questionnaire. As used herein, the term "Government Agency" shall mean any local, state, or federal governmental or quasi-governmental agency, authority, entity, subdivision or court. The term "Hazardous Material" shall mean any chemical, substance, vapor, smoke, radiation, or material which is listed as "hazardous" or "toxic" under any Law or which is otherwise regulated or prohibited under any Law, including petroleum hydrocarbons and substances regulated under Proposition 65. The term "Law" shall mean any local, state, or federal regulation, statute, law, order, or ordinance. Tenant/Company Name ____________________________________________________________ Address of Former/Current Facility: ________________________________________________________________________________ ________________________________________________________________________________ Main Address of New Premises leased from Silicon Valley Properties, L.L.C.: ________________________________________________________________________________ ________________________________________________________________________________ (This questionnaire should address all activities to be conducted at the New Premises including multiple buildings leased by Tenant within the same Project.) Description of products manufactured and/or activities to be conducted on the Property: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ The undersigned acknowledges that the information contained within this Hazardous Materials Questionnaire is true and correct to the best of his/her knowledge and belief. The undersigned further acknowledges that the Company has complied in all respects to the provisions of local, state and federal law and the Hazardous Materials Management Plan attached (if applicable) in connection with its storage, use, and disposal of hazardous materials and that is has disposed of hazardous materials only by (1) discharge of appropriately treated waste in accordance with a valid and enforceable waste discharge permit and (2) delivery of hazardous wastes to a properly licensed waste disposal agent. By: ___________________________________ ____________________________________ Signature of individual completing Print Name and Title questionnaire Date: _________________________________ Phone Number: ______________________ Address (if different from above): _____________________________________________ SCHEDULE 2.1 [TABLE FOR IDENTIFYING ON-SITE HAZARDOUS MATERIALS STORAGE AREAS] SCHEDULE 2.2 [TABLE FOR IDENTIFYING STORAGE TANKS] SCHEDULE 3 [TABLE FOR IDENTIFYING DISCHARGES TO SEWERS OR WATER BODIES] SCHEDULE 4 AIR EMISSIONS ------------- [TABLE FOR IDENTIFYING AIR EMISSIONS] SCHEDULE 5 [TABLE FOR IDENTIFYING HAZARDOUS WASTE GENERATION] ADDENDUM NO. 1 ADDENDUM NO. 1 This ADDENDUM NO. 1 (this "Addendum") is made in connection with and is a part of that certain Lease, dated as of October 27, 1997, by and between SILICON VALLEY PROPERTIES, L.L.C., a Delaware limited liability company, as Landlord, and SYMPHONIX DEVICES, INC., as Tenant, (the "Lease"). 1. Definitions and Conflict. All capitalized terms referred to in this ------------------------ Addendum shall have the same meaning as provided in the Lease, except as expressly provided to the contrary in this Addendum. In case of any conflict between any term or provision of the Lease and any exhibits attached thereto and this Addendum, this Addendum shall control. 2. Letter of Credit Security Deposit. Pursuant to the terms of the Lease, --------------------------------- a Security Deposit of $299,216.48 is required from Tenant. In lieu of depositing cash for the full amount of the Security Deposit, Tenant shall have the right to deposit a letter of credit for up to $243,680.00 (with the balance of the Security Deposit in the form of cash). Said letter of credit shall be in the form of an irrevocable, unconditional and clean standby letter of credit and otherwise in the form set forth below (the "Letter of Credit"). The initial amount of the Security Deposit that may be in the form of the Letter of Credit (the "Maximum Letter of Credit Amount") is subject to reduction as provided in section 2.2 below. The term Security Deposit shall mean the cash portion of the Security Deposit and the Letter of Credit. 2.1 Form of Letter of Credit. The Letter of Credit shall be issued ------------------------- by Silicon Valley Bank or a national bank acceptable to Landlord in its reasonable discretion, with offices in the San Francisco Bay Area that will accept and pay on any draw on the Letter of Credit. The Letter of Credit shall be issued for a term of at least twelve (12) months (with a term during the last year of the Lease Term of at least one full month following the expiration of the Lease Term) and shall be in a form and with such content acceptable to Landlord in its sole and absolute discretion. Any Letter of Credit that Tenant delivers to Landlord in replacement of an existing Letter of Credit shall be in an amount equal to the replaced Letter of Credit (prior to any draws) so that the cash and Letter of Credit together equal the amount of the Security Deposit specified in the Lease under section M of the Summary of Basic Lease Terms (subject to reduction as provided in section 2.2 below). Any such replacement Letter of Credit shall be delivered to and received by Landlord no later than thirty (30) days prior to the expiration of the term of the Letter of Credit then in effect. If Tenant fails to deposit a replacement Letter of Credit or renew the expiring Letter of Credit, Landlord shall have the right to draw upon the expiring Letter of Credit for the full amount thereof and hold the same as Security Deposit; provided, however, that if Tenant provides a replacement Letter of Credit that meets the requirements of this section, Landlord shall promptly return to Tenant in cash that amount of the Letter of Credit that had been drawn upon by Landlord. The Letter of Credit shall expressly permit full and partial draws. If for any reason the Letter of Credit does not permit partial draws, then Landlord shall have the right to make a full draw on the Letter of Credit, notwithstanding that the full amount may not be required to cure any Event of Tenant's Default. The Letter of Credit shall designate Landlord as beneficiary and shall be transferable by beneficiary to any transferee, successor, and assign (including any lender of Landlord) at no cost or expense to beneficiary. The Letter of Credit shall provide that it may be drawn by Landlord (or its assignee) upon presentation by Landlord to the issuing bank (at its offices in the San Francisco Bay Area) of a sight draft(s), together with a written statement executed by a duly authorized officer, partner, member or manager of Landlord stating that (i) an Event of Tenant's Default under the Lease has occurred, (ii) Landlord has given Tenant written notice and opportunity to cure the Event of Tenant's Default in accordance with the Lease and such Event of Tenant's Default has not be cured by Tenant. The amount of the draw requested by Landlord shall be payable by the bank without further inquiry or any other documentation or further action required of the bank, Landlord, or Tenant. All costs and expenses to obtain the Letter of Credit and all renewals shall be borne by Tenant. If the Letter of Credit is drawn upon by Landlord, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to amount required under the Lease and this Addendum. Subject to the reduction in section 2.2 hereof, at all times the Security Deposit, whether in the form of cash and/or Letter of Credit, shall be in the amount specified in section M of the Summary of Basic 1 Lease Terms. The use, application or retention of the Letter of Credit, or any portion thereof, by Landlord shall not prevent Landlord from exercising any other right or remedy provided by this Lease or by law, it being intended that Landlord shall not first be required to use all or any part of the Letter of Credit or cash portion of the Security Deposit, and such use shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled. Tenant shall not be entitled to any interest on the cash portion of the Security Deposit. The exercise of any rights of Landlord to the Security Deposit shall not constitute a waiver of nor relieve Tenant from any liability or obligation for any Event of Tenant's Default. If the Letter of Credit permits partial draws, Landlord shall only draw upon the Letter of Credit in the actual amount necessary to remedy a cure of said default, and not any excess. If Landlord draws upon the entire amount of the Letter of Credit, Tenant may deliver a replacement Letter of Credit to Landlord, instead of depositing cash with Landlord, equal to the original amount of the Letter of Credit (subject to reduction as provided in section 2.2 of this Addendum). 2.2 Reduction after Time. So long as Tenant has not committed any -------------------- Event of Tenant's Default under this Lease, then (i) the amount of the Maximum Letter of Credit Amount may be reduced twenty percent (20%) after each anniversary of the Commencement Date; provided that an Event of Tenant's Default or breach by Tenant of any provision of the Lease does not exist and no such event or breach occurred during the year immediately prior to the effective date of the reduction under this section. If Tenant is entitled to reduce the amount of the Letter of Credit pursuant to this paragraph and Tenant delivers to Landlord written notice of its request to so reduce the amount of the Letter of Credit, then Tenant may, not less than (10) days after Landlord's receipt of such notice, either obtain and deliver a new or amended Letter of Credit to replace or amend, as the case may be, the then existing Letter of Credit, in an amount required under this section. 2.3 Return or Transfer of Letter of Credit. Within thirty (30) days -------------------------------------- after the expiration or earlier termination of the Lease, Landlord shall promptly return the refundable portion of the Security Deposit, including the Letter of Credit, to Tenant. In the event of a transfer of the Premises, Building or Project by Landlord, Landlord or any subsequent transferor shall deliver the refundable portion of the Security Deposit, including both the cash portion and the Letter of Credit, to the successor landlord or transferee. 3. Extension Opportunity. Subject to the provisions of this section 3 and --------------------- its subsections, Tenant shall have the first opportunity to extend the initial Lease Term for one additional period of five (5) years commencing immediately following the expiration of the initial Lease Term (the "Extension Period"). As one of the conditions precedent for the Extension Period, Tenant must provide written notice of its desire to extend the Lease Term for the Extension Period, which notice must be received by Landlord no later than 180 days nor more than 240 days prior to the end of the initial Lease Term (the "Extension Notice"). All of the terms and provisions of the Lease will apply during the Extension Period, except that the Base Monthly Rent will be increased as hereinafter provided and any allowance, credit or payment by Landlord for any tenant or other improvements that may have been paid or granted or work done by Landlord in connection with the commencement of the Lease Term shall not apply. After receipt of Tenant's Extension Notice, Landlord within a reasonable period of time not to exceed 15 days shall notify Tenant of the Base Monthly Rent that would be applicable during the Extension Period ("Landlord's Renewal Terms"). Landlord's Renewal Terms shall be based on the projected fair market rent for the Premises as of the commencement date for the Extension Period but not less than the Base Monthly Rent payable during the last month of the initial Lease Term. Landlord shall base its determination of fair market rent based on the base monthly rent generally applicable to similar leases in like buildings for space of comparable size, age, quality of the Premises in the San Jose, California area within the boundaries of Highways 237, 880 and 101, determined as of the first day of the Extension Period by giving due consideration for the quality of the Premises and improvements therein, for a term comparable to the Extension Period at the time the commencement of the Extension Period is scheduled to commence, without any deduction for amortization or cost of Tenant improvements or commissions whether or not incurred by Landlord, and otherwise subject to the terms and conditions of this Lease that will be applicable during the Extension Period. In determining the 2 fair market rent, Landlord shall not consider the initial Tenant Improvements s paid for by Tenant (i.e., the amount in excess of the Landlord's Allowance), and any Tenant Alterations made to the Premises by Tenant (which Tenant is required to remove at the expiration or earlier termination of the Lease. Tenant shall have a period of five (5) business days after receipt of Landlord Renewal Terms to provide written notice of acceptance or rejection of the Landlord's Renewal Terms. The failure of Tenant to provide such notice within said time or to provide a notice with different terms shall be deemed a rejection. Tenant acknowledges and agrees that any right to extend is expressly limited to the terms and provisions of this section 3 and its subsections, including, without limitation, the provisions regarding the change in Base Monthly Rent. No court, arbitrator, mediator, appraiser or other third party shall have the right to determine the terms and conditions for any extension or renewal, including, without limitation the increase in Base Monthly Rent or the then fair market rent for the Premises. 3.1 Effect of Rejection. If Tenant rejects or is deemed to have ------------------- rejected Landlord's Renewal Terms, then Tenant shall not have any right to renew or extend the Lease Term and Landlord may lease all or any part of the Premises to any other party on the same or different terms that proposed in Landlord's Renewal Terms. Tenant expressly acknowledges and agrees that Landlord shall not in any manner be restricted to offering the Premises on the same or similar terms as contained in Landlord's Renewal Terms. 3.2 Effect of Acceptance. If Tenant accepts the Landlord's Renewal -------------------- Terms as provided above the parties shall execute an amendment to this Lease within ten (10) days after Tenant's notice of acceptance. 3.3 Right Personal. The provisions of this section 3 and its -------------- subsections are personal to the original party signing this Lease as Tenant and any transferee under a Transfer permitted under Section 14.1F of the Lease, but shall not apply to any assignee or sublessee or any other party. 3.4 No Defaults. If an Event of Tenant's Default has occurred three ----------- (3) or more times during initial Lease Term (including any applicable Extension Period), or if there exists an Event of Tenant's Default under any term or provision of this Lease on the date of giving Tenant's Extension Notice, or if there exists an Event of Tenant's Default under any term or provision of this Lease on the date of the applicable Extension Period is to commence, the Extension Period at the option of Landlord in its sole and absolute discretion shall not commence and this Lease shall expire at the end of the initial Lease Term. 4. Surrender and Removal of Tenant Improvements. Notwithstanding anything -------------------------------------------- to the contrary in the Lease, Tenant shall not be required to remove the initial Tenant Improvements constructed by Landlord pursuant to Exhibit B to the Lease. --------- The removal by Tenant of any Tenant's Alterations shall be governed by Article 5 of the Lease. Tenant's obligations with respect to surrender of the Premises shall be fulfilled if Tenant surrenders possession of the Premises in the condition existing at the completion of construction of the initial Tenant Improvements as described on Exhibit B attached to this Lease, excepting --------- ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those released, emitted or stored by Tenant or Tenant's Agents during the Lease Term in violation of applicable Hazardous Materials Laws), Tenant's Alterations and initial Tenant Improvements (to the extent removal of Tenant's Alterations and initial Tenant Improvements are not required as provided in the Lease). 5. Notices of Event of Tenant's Default. The cure periods set forth in ------------------------------------ the Lease for any default, breach, requirement for compliance or Event of Tenant's Default, including, without limitation, those cure or time periods for performance set forth in Sections 13.1, 15.4 and 15.6 of the Lease, shall not start to run until written notice of such event or matter has been delivered (or deemed delivered) to Tenant in accordance with the notice provision set forth in Section 15.8 of this Lease or applicable Law. Any reference in the Lease to the term "default" used in the context of whether or not Tenant is in default, shall be deemed to refer to an Event of Tenant's 3 Default as defined in Article 13 of the Lease, so that Tenant is given the required notice and opportunity to cure as set forth therein. 6. Breach by Landlord. In the event Landlord fails to perform any of its ------------------ obligations under the Lease within thirty (30) days after receipt of written notice from Tenant (or such longer period of time if such default cannot reasonably be cured within said thirty (30) day period, provided, Landlord commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion), except in the case of an emergency, in which event no cure period shall be permitted, Tenant may cure any default of Landlord, at Landlord's cost, and Landlord shall pay to Tenant the cost of such cure, plus interest at the Agreed Interest Rate, within thirty (30) days after demand by Tenant. 7. Subordination, Recognition and Attornment. As a condition precedent to ----------------------------------------- this Lease for the benefit of Tenant, within 60 days after the Effective Date of the Lease, Landlord shall obtain from any holder of a Security Instrument a written agreement in a form reasonable acceptable to Tenant providing for the recognition of Tenant's rights, interests and options under the Lease in the event of a foreclosure or termination of the holder's Security Instrument (the "NDA"). Tenant shall execute reasonable documents subordinating its interest in the Lease in accordance with Section 15.4 provided any such Lender agrees to recognize all of Tenant's rights, interests and options under this Lease in writing. Tenant shall also attorn to a purchaser of the Premises at any foreclosure or private sale or to any grantee or transferee, in the event such party agrees to recognize Tenant's rights, interests and options under this Lease in writing. If Landlord does not obtain the NDA within said time period, Tenant shall have the right, as its sole and exclusive remedy, to elect upon written notice to Landlord within ten (10) days after the end of said time period to obtain the NDA, to terminate the Lease, in which case neither party shall have any liability to the other. 8. Utilities. Landlord represents and warrants to its best knowledge that --------- the Premises are separately metered for electricity and gas; however, the electricity for the Premises also provides electricity for the exterior lighting of the Building, which Landlord is changing as provided in Exhibit B to the Lease. 9. Outdoor Patio. As outlined in Exhibit A to the Lease, there is a small ------------- outdoor patio area in the rear of the Premises (the "Outdoor Patio"). The Outdoor Patio is not considered part of the Premises but Tenant agrees at its expense to maintain the Outdoor Patio during the Lease Term. Landlord shall have the right, after at least thirty (30) days prior written notice to Tenant, to elect to maintain the Outdoor Patio as part of the Common Area. 4 EX-10.10 15 OPTION VESTING AGREEMENT Exhibit 10.10 OPTION VESTING AGREEMENT This Agreement is made and entered into effective as of ______, 19__, by and between Symphonix Devices, Inc. (the Company) and the employee whose name appears at the end of this Agreement (the "Employee"). The Company has reviewed the current vesting provisions contained in the stock option agreements issued to the Employee. The Company desires to amend each stock option agreement granted by the Company under the 1994 Stock Option Plan (the "Option") prior to the date of this Agreement in order to add additional provisions relating to the exercise of shares of Common Stock (the "Shares") subject to each Option. NOW, THEREFORE, the parties agree as follows. 1. Definitions. The following terms referred to in this Agreement shall have ----------- the following meanings: (a) Change of Control. "Change of Control" shall mean (i) the closing of ----------------- a merger, reorganization, sale of shares or sale of substantially all of the assets of the Company in which the shareholders of the Company immediately prior to the closing of the transaction own less than 50% of the voting power of the surviving or controlling entity (or its parent) immediately after the transaction, or (ii) the date of the approval by the Shareholders of the Company of a plan of complete liquidation of the Company. (b) Involuntary Termination. "Involuntary Termination" shall mean (i) ----------------------- without the Employee's express written consent, the assignment to the Employee of any duties, or the removal from or reduction or elimination of the Employee's duties or responsibilities which in either case is inconsistent with the Employee's position, organization level, duties, responsibilities, compensation and status with the Company immediately prior to the Change of Control; (ii) without the Employee's express written consent, a substantial reduction of the facilities and prerequisites (including office space and location) available to the Employee immediately prior to such reduction; (iii) a reduction by the Company in the base cash salary of the Employee as in effect immediately prior to such reduction; (iv) a major reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction with the result that the Employee's overall benefits package is significantly reduced; (v) the relocation of the Employee to a facility or a location more than thirty miles from the employee's then-present location, without the Employee's express written consent; (vi) any purported termination of the Employee by the Company; or (vii) the failure of the Company to obtain the assumption of this Agreement by any successors as required by Section 1(c). (c) Company Successors. Any successor to the Company (whether direct or ------------------ indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company's business and assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and assets which executes and delivers the assumption agreement described in this section or which becomes bound by the terms of this Agreement by operation of law. (d) Option. "Option" shall mean any option exercisable for Common Stock ------ of the Company which was granted to the Employee under the 1994 Stock Option Plan prior to the date of this Agreement. (e) Shares. "Shares" shall mean shares of Common Stock of the Company ------ issuable upon exercise of an Option. 2. Accelerated Vesting. ------------------- (a) Twelve months following a Change of Control all of the Shares subject to each Option held by the Employee shall vest and become exercisable and the Employee shall have the right to exercise all or any portion of the Shares subject to each Option. (b) If there is an Involuntary Termination of the Employee during the twelve months following a Change of Control, then all of the Shares subject to each Option held by the Employee shall vest and become exercisable and the Employee shall have the right to exercise all or any portion of the Shares subject to each Option. (c) This Agreement will not apply to options or other securities issued by the Company to the Employee after the date of this Agreement. 3. Miscellaneous. ------------- (a) This Agreement shall be governed by the internal laws of the State of California. The parties expressly consent to the personal jurisdiction of state and federal courts located in California for any lawsuit filed there and arising from or relating to this Agreement. (b) This Agreement sets forth the entire agreement and understanding between the Company and the optionee relating to the subject matter herein and merges all prior discussions between them. -2- The parties have executed this Agreement as of the date set forth above. SYMPHONIX DEVICES, INC. ______________________________________ (Name of Optionee) ______________________________________ (Signature of Optionee) By:_________________________ Title: Chief Executive Officer -3- EX-10.11 16 LICENSE AGREEMENT Exhibit 10.11 LICENSE AGREEMENT ----------------- THIS AGREEMENT, made and effective this 1st day of June, 1995, by and between BAPTIST MEDICAL CENTER OF OKLAHOMA, INC., a corporation of the State of Oklahoma, having its principal office and place of business at 3300 Northwest Expressway, Oklahoma City, Oklahoma 73112 (hereinafter referred to as "BAPTIST") and SYMPHONIX DEVICES, INC., a corporation of the State of California, having its principal office and place of business at 3047 Orchard Parkway, San Jose, California 95134 (hereinafter referred to as "LICENSEE"). WITNESSETH THAT: WHEREAS, BAPTIST represents that it owns certain Patent Rights (hereinafter defined) relating to a magnetic transcutaneous mount for external device of an associated implant; WHEREAS, BAPTIST desires to grant to LICENSEE, under the terms, covenants, conditions and limitations hereinafter set forth, a non-exclusive license for a specific field under the Patent Rights; and WHEREAS, LICENSEE is desirous of taking such license under BAPTIST's Patent Rights under the terms, covenants, conditions and limitations hereinafter set forth; NOW, THEREFORE, in consideration of the mutual and reciprocal agreements and promises hereinafter set forth and for other good and valuable consideration, the parties hereto agree and have agreed as follows: ARTICLE I DEFINITIONS ----------- As used in this Agreement: (A) "Patent Rights" shall mean United States Patent No. Re.32,947 and, if any, any reissue or reexamination application filed on said United States Patent, any reissue or reexamined patent issuing thereon, and any extension of said United States Patent. (B) "Licensed Products" shall mean any article, apparatus, device or method claimed in the Patent Rights and used or usable in the field of implantable auditory prostheses for the mechanical stimulation of the middle ear and cochlea. ARTICLE II WARRANTY -------- BAPTIST hereby warrants that it has the right to grant the license herein granted. ARTICLE III GRANT ----- BAPTIST hereby grants to LICENSEE, subject to the terms, covenants, conditions and limitations set forth in this Agreement, a non-exclusive license to make, have made for it, use, lease and sell Licensed Products under the Patent Rights. The non-exclusive license hereby granted is without any right to sublicense. BAPTIST retains all rights of enforcement of the Patent Rights. ARTICLE IV LICENSING FEE ------------- At the time LICENSEE sends executed duplicate originals of this Agreement to BAPTIST for execution by BAPTIST, LICENSEE shall send with said executed duplicate originals payment to BAPTIST of Twenty Thousand Dollars ($20,000.00), to be kept in escrow by BAPTIST's attorneys until receipt by LICENSEE of a fully executed original of this Agreement. Upon receipt of the payment by BAPTIST, LICENSEE shall have a fully paid-up license, subject to the other terms of this Agreement. ARTICLE V TERM AND TERMINATION -------------------- (A) This Agreement shall expire with the expiration of the last to expire of the patent(s) within the Patent Rights. (B) Upon default by either party hereto in the performance of any obligation hereunder to be performed by such party, the other party shall give notice in writing to the party in default specifying the thing or matter in default. Unless such default be cured within two (2) months following the giving of such notice, the party giving such notice may give further written notice to the other party terminating this Agreement; in such event, this Agreement shall terminate on the date specified in such further notice, which date shall be no earlier than two (2) months from the date of such further notice. (C) No expiration or termination of this Agreement shall relieve either party of any obligation accrued to the date of expiration or termination or relieve the party in default from liability for damages for breach of this Agreement. Waiver by either party of a single default or breach or a succession of defaults or breaches shall not deprive such party of any right to terminate this Agreement arising by reason of any subsequent default or breach. ARTICLE VI PATENT MARKING -------------- LICENSEE agrees to use reasonable efforts to mark every Licensed Product made, or sold, or leased by it under this Agreement; the format of such marking shall be in accordance with the statutes of the United States relating to the marking of patented articles. ARTICLE VII INDEMNIFICATION --------------- LICENSEE agrees to defend, indemnify and hold harmless, and LICENSEE hereby does indemnify and hold harmless, BAPTIST against any and all claims of liability arising from the manufacture or use or sale or lease by LICENSEE of Licensed Products, excluding claims of liability for acts exclusively within the control of BAPTIST. This indemnification shall survive expiration or termination of this Agreement. ARTICLE VIII MISCELLANEOUS ------------- (A) This Agreement shall be construed in accordance with the laws of the State of Oklahoma. (B) The provisions of this Agreement shall be deemed separable. Therefore, if any part of this Agreement is rendered void, invalid or unenforceable, such rendering shall not affect the validity and enforceability of the remainder of this Agreement unless the part or parts which are void, invalid or unenforceable as aforesaid shall substantially impair the value of the whole Agreement to either party. (C) This Agreement sets forth the entire agreement between the parties relating to the subject matter contained herein and may not be modified, amended or discharged except as expressly stated in this Agreement or by a written agreement signed by the parties hereto. (D) This Agreement is personal to the parties. This Agreement and the rights and obligations herein granted to and undertaken by LICENSEE shall not be assignable by act of LICENSEE or by operation of law. This Agreement and the rights and obligations herein granted to and undertaken by BAPTIST shall not be assignable by act of BAPTIST or by operation of law. The foregoing notwithstanding, this Agreement and any rights and powers created herein may be assigned with any assignment of the Patent Rights or with any transfer of either party's business or entire assets. This Agreement shall be binding upon and inure to the benefit of the parties hereto, LICENSEE's successors, trustee(s) or receiver(s) in bankruptcy, and permitted assigns, and BAPTIST's successors, trustee(s) or receiver(s) in bankruptcy and permitted assigns. (E) Nothing herein shall prohibit BAPTIST from granting other licenses under the Patent Rights. (F) The relationship between BAPTIST and LICENSEE is that of independent contractors. BAPTIST and LICENSEE are not joint venturers, partners, principal and agent, master and servant, employer or employee, and have no relationship other than as independent contracting parties. BAPTIST shall have no power to bind or obligate LICENSEE in any manner, except as is expressly set forth in this Agreement. Likewise, LICENSEE shall have no power to bind or obligate BAPTIST in any manner, except as is expressly set forth in this Agreement. (G) Any matter or disagreement under this Agreement shall be resolved by arbitration submitted to a mutually selected single arbitrator to decide any such matter or disagreement. The arbitrator shall conduct the arbitration in accordance with the Rules of the American Arbitration Association, unless the parties agree otherwise. If the parties are unable to mutually select an arbitrator, the arbitrator shall be selected in accordance with the procedures of the American Arbitration Association. The decision and award rendered by the arbitrator shall be final and binding. Judgment upon the award may be entered in any court having jurisdiction thereof. Any arbitration pursuant to this section shall be held in Oklahoma City, Oklahoma, or such other place as may be mutually agreed upon in writing by the parties. (H) Any and all communications required as provided for in this Agreement shall be in writing and sent by First Class mail, postage prepaid, and addressed to the last known address of the parties to be served therewith. Notice sent by Certified Mail - Return Receipt Requested shall be presumed to have been received. Any notice to be given to LICENSEE shall be addressed to: Symphonix Devices, Inc. 3047 Orchard Parkway San Jose, California 95134 Any notice to be given to BAPTIST shall be addressed to: President Baptist Medical Center of Oklahoma, Inc. 3300 Northwest Expressway Oklahoma City, Oklahoma 73112 Any change in address shall be promptly communicated in writing from either party to the other party. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate effective as of the date and year first shown above. BAPTIST MEDICAL CENTER OF OKLAHOMA, INC. ("BAPTIST") By /s/ Thomas N. Lynn ---------------------------- Attest /s/ Barbara Jones - ---------------------- SYMPHONIX DEVICES, INC. ("LICENSEE") BY /s/ Harry S. Robbins --------------------------- PRESIDENT Attest: /s/ Geoffrey R. Ball - --------------------------- EX-11.1 17 COMPUTATION OF NET LOSS PER SHARE EXHIBIT 11.1 SYMPHONIX DEVICES, INC. COMPUTATION OF NET LOSS PER SHARE
CUMULATIVE PERIOD FROM PERIOD FROM CUMULATIVE MAY 17, 1994 MAY 17, 1994 PERIOD FROM (DATE OF (DATE OF MAY 17, 1994 INCEPTION) YEAR ENDED INCEPTION) NINE MONTHS ENDED (DATE OF TO DECEMBER 31, TO SEPTEMBER 30, INCEPTION) TO DECEMBER 31, ------------------------ DECEMBER 31, ------------------------ SEPTEMBER 30, 1994 1995 1996 1996 1996 1997 1997 ------------ ----------- ----------- ------------ ----------- ----------- ------------- (unaudited) (unaudited) Weighted average common shares outstanding for the period............. 1,770,726 1,961,551 2,190,040 2,021,812 2,104,243 2,546,285 2,145,509 Common equivalent shares pursuant to Staff Accounting Bulleting No. 83................. 851,441 851,441 851,441 851,441 851,441 851,441 851,441 Shares used in per share calculation............ 2,622,167 2,812,992 3,041,481 2,873,253 2,955,684 3,397,726 2,996,950 ========= =========== =========== ============ =========== =========== ============ Net loss................ $(752,224) $(3,651,811) $(6,108,556) $(10,512,591) $(4,392,914) $(5,624,976) $(16,137,567) ========= =========== =========== ============ =========== =========== ============ Net loss per share...... $ (0.29) $ (1.30) $ (2.01) $ (3.66) $ (1.49) $ (1.66) $ (5.38)
There is no difference between primarily and fully dilutive loss per share for each period. EX-21.1 18 LIST OF SUBSIDIARY OF REGISTRANT EXHIBIT 21.1 LIST OF SUBSIDIARY OF REGISTRANT Symphonix Devices AG EX-27.1 19 FINANCIAL DATA SCHEDULE
5 YEAR 9-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 SEP-30-1997 6,539,156 4,980,136 4,570,723 6,547,994 0 0 0 0 0 0 11,186,573 11,842,144 1,394,339 1,695,249 637,228 1,000,959 11,951,404 12,557,356 1,117,562 1,496,880 0 0 0 0 8,445 9,195 2,384 2,714 10,227,441 10,642,681 11,951,404 12,557,356 0 0 0 0 0 0 0 0 6,446,132 5,973,570 0 0 86,113 80,250 (6,108,556) (5,624,976) 0 0 0 0 0 0 0 0 0 0 (6,108,556) (5,624,976) (2.01) (1.66) 0 0
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