-----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, SJWpxYDV9C0g5h8mFvj7Z4PJw5mbYV9yjikYRqsAJgr7wxxmHWxlPVSoY7JlmDe3 dH62X4MYZAg1LjJBb6CETQ== 0001012870-99-001622.txt : 19990518 0001012870-99-001622.hdr.sgml : 19990518 ACCESSION NUMBER: 0001012870-99-001622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYMPHONIX DEVICES INC CENTRAL INDEX KEY: 0000930481 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 770376250 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23767 FILM NUMBER: 99626660 BUSINESS ADDRESS: STREET 1: 2331 ZANKER ROAD CITY: SAN JOSE STATE: CA ZIP: 95131-1107 BUSINESS PHONE: 408-232-0710 MAIL ADDRESS: STREET 1: 2331 ZANKER ROAD CITY: SAN JOSE STATE: CA ZIP: 95131-1107 10-Q 1 FORM 10-Q FOR QUARTER ENDED 3/31/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999. OR [_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______. COMMISSION FILE NO. SYMPHONIX DEVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0376250 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2331 ZANKER ROAD SAN JOSE, CALIFORNIA 95131-1107 (Address of principal executive offices, including zip code) (408) 232-0710 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of April 30, 1999, 12,206,710 shares of the Registrant's Common Stock were outstanding. SYMPHONIX DEVICES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998............................................. 1 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998.............................. 2 Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 1999 and 1998.................... 3 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999....................................... 4 Notes to Condensed Consolidated Financial Statements.............. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk........25 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................26 Item 2. Changes in Securities and Use of Proceeds.........................26 Item 3. Defaults Upon Senior Securities...................................26 Item 4. Submission of Matters to a Vote of Security Holders...............26 Item 5. Other Information.................................................27 Item 6. Exhibits..........................................................27 -i- PART I. FINANCIAL INFORMATION Item 1. Financial Statements SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
March 31, December 31, 1999 1998 -------------------- -------------------- ASSETS Current assets: Cash and cash equivalents $ 8,591 $ 3,401 Short-term investments 12,201 21,916 Accounts receivable, net 266 228 Inventories 557 761 Prepaid expenses and other current assets 313 211 -------------------- -------------------- Total current assets 21,928 26,517 Property and equipment, net 2,018 2,100 Other assets 78 78 -------------------- -------------------- Total assets $ 24,024 $ 28,695 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 431 $ 684 Accrued compensation 674 1,060 Other accrued liabilities 612 751 Current portion of bank borrowings 125 - Current portion of capital lease obligations 189 227 -------------------- -------------------- Total current liabilities 2,031 2,722 Capital lease obligations, less current portion 64 98 Bank borrowings, less current portion 1,875 2,000 -------------------- -------------------- Total liabilities 3,970 4,820 -------------------- -------------------- Stockholders' equity: Common stock 12 12 Notes receivable from stockholders (484) (484) Deferred compensation (1,378) (1,517) Additional paid-in capital 58,045 58,040 Accumulated other comprehensive loss (51) (26) Accumulated deficit (36,090) (32,150) -------------------- -------------------- Total stockholders' equity 20,054 23,875 -------------------- -------------------- Total liabilities and stockholders' equity $ 24,024 $ 28,695 ==================== ====================
The accompanying notes are an integral part of these condensed consolidated financial statements SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three months ended March 31, 1999 1998 ---- ---- Revenue $ 115 $ - Costs and expenses: Cost of goods sold 951 - Research and development 1,862 1,798 Selling, general and administrative 1,492 1,115 -------- -------- Operating loss (4,190) (2,913) Interest income 269 254 Interest expense (19) (31) Net loss $ (3,940) $ (2,690) ======== ======== Basic and diluted net loss per common share $ (0.32) $ (0.36) ======== ======== Shares used in computing basic and diluted net loss per common share 12,205 7,451 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements -2- SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (unaudited) Three months ended March 31, ---------------------------- 1999 1998 ---- ---- Net loss $ (3,940) $ (2,690) Unrealized gains(losses) on short-term investments (12) 26 Translation adjustments (13) (10) --------- --------- Comprehensive loss $ (3,965) $ (2,674) ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements -3- SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three months ended March 31, ---------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net loss $(3,940) $(2,690) Adjustments to reconcile net loss to cash used in operating activities: Amortization of deferred compensation 139 139 Depreciation and amortization 200 111 Changes in operating assets and liabilities: Accounts receivable (38) - Inventories 204 (100) Prepaid expenses and other current assets (102) 159 Accounts payable (253) 476 Accrued compensation (386) (490) Other accrued liabilities (139) (41) ------- -------- Net cash used in operating activities (4,315) (2,436) ------- -------- Cash flows from investing activities Purchases of short-term investments (3,800) (14,120) Maturities of short-term investments 13,503 2,377 Purchases of property and equipment (118) (904) Net cash provided by (used in) investing activities 9,585 (12,647) ------- -------- Cash flows from financing activities Payments on capital lease obligations (72) (78) Proceeds from bank borrowings 2,000 2,000 Payments on bank borrowings (2,000) (2,000) Proceeds from issuance of common stock, net 5 28,404 ------- -------- Net cash provided by (used in) financing activities (67) 28,326 Net increase in cash and cash equivalents 5,203 13,243 Effect of exchange rates on cash and cash equivalents (13) (10) Cash and cash equivalents, beginning of period 3,401 4,908 ------- -------- Cash and cash equivalents, end of period $ 8,591 $ 18,141 ------- -------- The accompanying notes are an integral part of these condensed consolidated financial statements -4- SYMPHONIX DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements as of March 31, 1999 of Symphonix Devices, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999, or any future interim period. These financial statements and notes should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1998 and footnotes thereto, included in the Company's Annual Report on Form 10-K. 2. Computation of Basic and Diluted Net Loss per Common Share: Basic and diluted net loss per common share are computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options, warrants, and preferred stock are excluded from the computation of diluted net loss per common share, as their effect is antidilutive. Stock options and warrants to purchase 767,161 and 601,000 shares of common stock at prices ranging from $0.14 to $8.81 per share were outstanding at March 31, 1999 and 1998, respectively, but were not included in the computation of diluted net loss per common share because they were antidilutive. The aforementioned stock options and warrants could potentially dilute earnings per share in the future. 3. Inventories: Inventories Comprise (in thousands): March 31, 1999 December 31, 1998 -------------- ----------------- Raw materials $ 288 $ 418 Work in Progress 87 182 Finished goods 182 161 -------------- ----------------- $ 557 $ 761 ============== ================= -5- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached condensed consolidated financial statements and footnotes thereto, and with the Company's audited financial statements for the year ended December 31, 1998 and the footnotes thereto. The information set forth below contains forward-looking statements and 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 below under "Factors That May Affect Future Results." Overview Symphonix Devices, Inc. ("Symphonix" or the "Company") is a developer 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 products, the Vibrant P, Vibrant HF and Vibrant D soundbridges, are semi-implantable devices which mechanically drive the three small bones of the middle ear to overcome the user's hearing impairment. The Vibrant P soundbridge is a second generation product that is similar to the first generation 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. The Vibrant HF soundbridge is designed for people with a noise-induced high frequency hearing loss and the Vibrant D soundbridge incorporates digital signal processing. In September 1996, the Company initiated clinical trials of the first generation Vibrant soundbridge in both the United States and Europe. The Company initiated clinical trials of the Vibrant P soundbridge in Europe in July 1997 and in the United States in March 1998. In November 1998, the Company initiated clinical trials of the Vibrant HF soundbridge in both Europe and the United States. The Company has received permission to affix the CE mark in the European Union to the Vibrant P and Vibrant HF soundbridges, and began selling activities for the Vibrant P soundbridge in March 1998. The Company plans to commence selling activities for the Vibrant HF soundbridge in Europe after it has gathered clinical data on a limited number of patients. As of March 31, 1999, approximately 200 patients have been implanted with the Company's soundbridges. Results of Operations Revenue. Revenue of $115,000 was recorded in the quarter ended in March 31, 1999 for sales of Vibrant P soundbridge in Europe. No revenue was recorded in the quarter ended March 31, 1998. Cost of goods sold. Cost of goods sold was $951,000 for the quarter ended March 31, 1999 and represents the direct cost of the products sold as well as a portion of the manufacturing overhead. There was no cost of goods sold for the quarter ended March 31, 1998. -6- Research and Development Expenses. Research and development expenses of $1.9 million in the quarter ended March 31, 1999 were essentially unchanged from the quarter ended March 31, 1998. Research and development expenses consist primarily of personnel costs, professional services, materials, supplies and equipment in support of product development, clinical trials, regulatory submissions, preparation and filing of patent applications and the start-up of manufacturing. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $1.5 million in the quarter ended March 31, 1999 from $1.1 million in the quarter ended March 31, 1998. Selling, general and administrative expenses consist primarily of personnel costs, promotional costs, legal and consulting costs. These costs increased primarily due to administrative costs associated with the increased scope of the Company operations and becoming a public company. In addition, the Company continues to expand its international sales and marketing efforts. Costs associated with these activities impacted the quarter ended March 31, 1999 and are expected to increase over the remaining quarters of 1999. Deferred compensation of $2.3 million was recorded in 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 options grant dates. Deferred compensation expense of $139,000 attributed to such options was amortized during the quarter ended March 31, 1999. The remaining deferred compensation will be amortized over the vesting period of the options (generally four years). Interest Income (Expense). Interest income, net of expense, increased to $250,000 in the quarter ended March 31, 1999 from $223,000 in the quarter ended March 31, 1998. Increase is due mainly to higher average cash, cash equivalents and short-term investments balances. Interest earned in the future will depend on the Company's funding cycles and prevailing interest rates. Income Taxes. As a result of the net losses incurred, the Company has not incurred any income tax obligations. At December 31, 1998, the Company had net operating loss carryforwards of $25 million for federal and $19 million for state income tax purposes, which will expire at various dates through 2013 and through 2003, respectively, 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 carryforwards 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 carryforwards. Liquidity and Capital Resources Since inception, the Company has funded its operations and its capital investments from proceeds from its initial public offering completed in February 1998 totaling $28.4 million, from the private sale of equity securities, totaling $26.5 million, from equipment lease financing totaling $1.3 million and from bank borrowings totaling, net, $2.0 million. At March 31, 1999, the Company had $19.9 million in working capital, and its primary source of liquidity was $20.8 million in cash, cash equivalents and short-term investments. -7- Symphonix used $4.3 million in cash for operations in the quarter ended March 31, 1999, an increase of $1.9 million from the quarter ended March 31, 1998. This increase was primarily due to the increase in net loss. Capital expenditures, primarily related to the Company's research and development and manufacturing activities, were $118,000, and $904,000 in the quarters ended March 31, 1999 and 1998, respectively. At March 31, 1999, the Company did not have any material commitments for capital expenditures. In October 1997 the Company entered into a five-year lease for a new facility that commenced in January 1998. During the quarter ended March 31, 1998, the Company occupied the new facility and relocated its research and development and administrative activities to the new facility. The relocation of manufacturing activities to the new facility was completed in April 1998. Through December 31, 1998, the Company had incurred approximately $1.6 million in capital expenditures on leasehold improvements and furniture and fixtures related to the new facility. The Company has a loan agreement with a bank providing for borrowings of up to $2.0 million and for the issuance of letters of credit up to $250,000. At March 31, 1999, the Company had borrowings of $2.0 million and an outstanding letter of credit in the amount of $195,000 under the loan agreement. Borrowings under the loan agreement are repayable over four years commencing in January 2000. 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 on 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 its existing capital will be sufficient to fund its operations and its capital investments through 1999, there can be no assurance that the Company will not require additional financing prior to that time. In addition, 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, license to third parties the rights to commercialize certain products or technologies that the Company would otherwise seek to commercialize for itself, or 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. Year 2000 Compliance The Company has initiated planning for issues related to the upcoming new millennium. These issues derive from the use of software and hardware with embedded chips or processors that -8- use two digits to refer to a year and do not properly recognize a year that begins with "20" instead of the familiar "19". The use of such software and hardware occurs at many internal and external points in the Company's development, supply, manufacturing and distribution chain - both within the Company's internal operations as well as at important external partners, such as vendors and customers. The Company has developed a plan to address these issues and to enhance the Company's readiness for Year 2000. The Company's plan (the "Year 2000 Readiness Program") focuses on five areas: (1) network and facility infrastructure, (2) business applications software, (3) process control systems, (4) external partners, and (5) the Company's products. Within each area, the Year 2000 Readiness Program will involve (a) the identification of systems that may be susceptible to Year 2000 issues (the "identification phase"), (b) the assessment of the degree of readiness of those systems for the Year 2000 and an assessment of the risks that may be posed to the Company's business (the "assessment phase"), (c) the remediation of problems that are identified (the "remediation phase"), and (d) contingency planning. Network and facility infrastructure: Included in this category are the computer networks in the Company's San Jose, California headquarters and Basel, Switzerland European headquarters (including servers, computers, other network equipment and computer and network operating systems), together with general facility systems such as telephone and security systems. The Company has completed the identification phase and expects that the assessment phase will be completed during the second quarter of 1999, at which time remediation and contingency planning will be initiated as appropriate. Business applications software: Included in this category are various applications used in design, manufacturing, distribution and finance. The Company's primary business application is a company-wide system used for manufacturing planning, accounting, inventory management and sales transactions. The Company has completed the identification phase and expects that the assessment phase will be completed during the second quarter of 1999, at which time remediation and contingency planning will be initiated as appropriate. For many software applications, the Company will, in the assessment phase, rely on the software developer's representations regarding Year 2000 compliance of their software. There can be no assurance, however, that software applications represented by developers as being Year 2000 compliant will be free from Year 2000 errors and defects. Process control systems: Included in this category are instrumentation and systems used in design and manufacturing processes. The Company expects that the identification and assessment phases will be completed during the second quarter of 1999 at which time remediation and contingency planning will be initiated as appropriate. External partners: The Company intends to assess the possible effects on its operations of the Year 2000 compliance of certain relevant third parties, such as customers and service providers by using questionnaires and, in limited cases, site visits and interviews to solicit information from these parties. In the event the Company identifies a problem with respect to a particular vendor, then the Company may be forced to identify alternative sources of supply. However, the Company's -9- ability to seek alternative sources of supply is subject to FDA restrictions and may involve extensive validation processes. The failure to timely identify and validate an alternative supplier could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has completed the identification phase and expects to initiate the assessment phase by the second quarter of 1999. Symphonix products: The Company's products are regulated by the FDA and the FDA has advised manufacturers of medical devices to address readiness of their products for year 2000 issues. The Company has completed a preliminary assessment and has informed the FDA that the Company does not believe that any of its existing products are susceptible to Year 2000 issues. The Company does not expect to incur costs in its Year 2000 Readiness Program that will be material to its business, financial condition or results of operations. However, until the Company completes the identification and assessment phases of its program, the full extent of the remediation costs will not be known and there can be no assurance that such costs will not be material. The Company will utilize both internal and external resources, such as consultants and professional advisors, in implementing the Year 2000 Readiness Program and the Company currently estimates that the external resources required during the identification and assessment phases of the Year 2000 Readiness Program will cost approximately $50,000. Because the Year 2000 Readiness Program is an ongoing process, all cost estimates are subject to change. Specific contingency plans will be developed upon completion of the assessment phases and may include additional procurement of inventory to assure continued supply from vendors. Although the Company intends to complete all phases of its Year 2000 Readiness Program by December 31, 1999, there can be no assurance, even if this program is successfully completed on schedule, that disruptions in the Company's business will be avoided. The Year 2000 issues are pervasive in nature and involve highly technical issues, not all of which are under the Company's control. Possible consequences of Year 2000 issues that the Company is unable to adequately identify, assess or remediate include but are not limited to: delays in supplies from vendors, delays in shipment to customers, errors in processing transactions, deficiencies in management of inventory, delays in collection of funds from customers, and diversion of management time and effort to addressing difficulties that emerge. The goal of the Company's Year 2000 Readiness Program is to plan for and reduce the risk of such difficulties. There can be no assurance that the Year 2000 Readiness Program will be completed in a timely manner or will be successful. Recent Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative and hedging activities. The Company will adopt SFAS No. 133 as required for its first quarterly filing of the year 2000. -10- Factors That May Affect Future Results History of Losses and Expectation of Future Losses. At March 31, 1999, the Company had an accumulated deficit of $36.1 million. Since the Company's inception in 1994, substantially all of the Company's resources have been dedicated to research and development, establishment of a European sales and marketing organization and the initiation of sales and marketing activities in Europe. In March 1998, the Company received the authorization to affix the CE Mark to the Vibrant and Vibrant P soundbridges, permitting the initiation of commercial sales in the European Union ("EU"). Although the Company has commenced selling the Vibrant P soundbridge in Europe, through March 31,1999 the Company has not generated significant revenues from these sales. The Company received CE Mark approval for the Vibrant HF soundbridge in July 1998 and plans to commence selling the Vibrant HF soundbridge after it has gathered clinical data on a limited number of patients. In the United States, the Company's Vibrant P and Vibrant HF soundbridges will require additional clinical testing prior to the submission of a regulatory application for commercial use. All of the Company's other products will require additional development, and preclinical and clinical testing prior to the submission of a regulatory application for commercial use internationally and domestically. Since the Vibrant P soundbridge only recently became available for sale in the EU and is not currently available for sale in the United States, significant product revenues will not be realized for at least several years, if ever. The Company expects its operating losses to continue at least through the year 2000 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. There can be no assurance that any of the Company's soundbridges will be successfully commercialized internationally or in the United States or that the Company will achieve significant revenues from product 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. Limited Clinical Testing Experience. In the United States, the Company has received approval of an IDE and IDE supplements to conduct clinical trials of the Vibrant, Vibrant P, Vibrant HF and Vibrant D soundbridges but has not yet completed these trials. In Europe, the Vibrant and Vibrant P soundbridges have been the subject of limited clinical testing. The Company intends to conduct clinical testing of the external components of the Vibrant HF and Vibrant D soundbridges. The implanted components of the Vibrant HF and Vibrant D soundbridges are the same as the implanted components of the Vibrant P soundbridge which was tested in clinical trials previously conducted by the Company in Europe. None of the Company's other soundbridges under development have been tested in human clinical trials and these 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. -11- 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. 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. 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. 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 a reasonable cost or successfully commercialized. 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). -12- 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 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. The FDA has recently implemented a new streamlined PMA process called the modular PMA. Under the modular PMA process, modules reflecting the content requirements of a traditional PMA can be submitted as they are completed, allowing them to be reviewed and approved in a sequential manner. 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 for its labeling claims, and obtain marketing approval from the FDA. Phase I of the IDE study has been completed. Phase I was limited to two sites and five subjects and was intended to test the safety and provide preliminary evidence of the effectiveness of the device and the surgical procedure used to implant the device. In November 1997, the Company filed an IDE supplement summarizing the Phase I results, finalizing the study protocol and proposed labeling claims, providing technical information regarding the Vibrant P soundbridge, and requested permission to proceed to the pivotal study. In December 1997, the FDA approved the multi-center pivotal study in 55 subjects at up to 12 sites with the second generation Vibrant P soundbridge. In November 1998, the Company received FDA approval of an IDE supplement to include the Vibrant HF soundbridge in this study. The Company has enrolled 55 subjects in the study. However, because the IDE supplement allowing the inclusion of the Vibrant HF soundbridge was approved when enrollment was almost complete, only one of the -13- 55 subjects is to be fitted with a Vibrant HF soundbridge. To facilitate enrollment of a greater number of subjects who receive the Vibrant HF soundbridge, on December 22, 1998, the Company requested FDA approval of an IDE supplement to allow an additional 15 subjects. This IDE supplement was approved by the FDA on January 19, 1999 and the Company expects to enroll these additional subjects in 1999. In March, 1999 the FDA approved an IDE supplement permitting the evaluation of the Vibrant D soundbridge. Patients who have completed the clinical trial protocol for the Vibrant P soundbridge may be enrolled in the evaluation of the Vibrant D soundbridge. Thus, no additional subjects are planned for enrollment for the Vibrant D soundbridge. There can be no assurance that the Company's clinical trial effort will progress as expected, will 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 clinical trials will continue to 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. 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 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. -14- 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 CDHS and will be subject to periodic inspections by the FDA and by the CDHS. 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 soundbridge 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 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 -15- Company has received approval to affix the CE mark to the Vibrant P and Vibrant HF soundbridges. With regard to the Vibrant D soundbridge, the Company has submitted the technical data that its Notified Body has indicated will be required to satisfy the essential requirements of the AIMDD. To satisfy these requirements, the Company generally must complete a clinical trial conducted under European clinical trial standards (EN 540) to determine the safety and performance of the products. The Vibrant HF and Vibrant D soundbridges utilize the same implanted component as the Vibrant P soundbridge. Accordingly, the Notified Body did not require additional clinical data for the Vibrant HF soundbridge. The Notified Body has not yet, but may, request additional clinical data for the Vibrant D soundbridge. The Company must continue to pass annual EN ISO 9001, EN 46001 and AIMDD 2.3 quality system audits in order to retain the authorization to affix the CE mark to its products. 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. 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 the Company's ability to adequately train ear surgeons on the techniques for implanting the Company's soundbridges. 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, audiologist and surgeon recommendations as well as other factors, including the effectiveness, safety, reliability and invasiveness of the procedure as compared to established approaches. Prior to undergoing surgery for the implantation of the Company's soundbridge, a patient may speak with a number of medical professionals, including the patient's primary care physician, an audiologist, an ENT specialist, as well as surgeons who specialize in ear surgery. The failure by any of these medical professionals to favorably recommend the Company's products and the surgery required to implant the soundbridge could limit the number of potential patients who are introduced to an ear surgeon as candidates for the Company's soundbridges. Even if the Company's soundbridges are adopted by the medical community, a significant market may not -16- 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 will be accepted by the medical community or consumers, that acceptable reimbursement from third-party payors will be available 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. 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 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 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 Company believes that it will be competitive with respect to these factors. Nonetheless, because the Company's products are either under development or in the very early stages of commercialization, the relative competitive position of the Company in the future is difficult to predict. 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. -17- Limited Manufacturing Experience; Scale-Up Risk; Dependence on Key Suppliers. The Company currently manufactures its products in limited quantities for laboratory testing, for its clinical trials and for initial commercial sales. The manufacture of the Company's soundbridges 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 an environmentally controlled area. 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. The Company will need to expend significant capital resources and develop manufacturing expertise to establish commercial- scale manufacturing capabilities. 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, signal processing electronics and implant packaging are provided by single source suppliers. Certain components of the Vibrant P, Vibrant HF and Vibrant D soundbridges, the analog and digital signal processing microcircuits, are provided by sole 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. The Company's manufacturing facilities are subject to periodic inspection by regulatory authorities, and its operations must undergo Quality System ("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 -18- 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 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. Dependence upon Patents and Proprietary Technology. In the United States, the Company holds 9 issued patents and 11 pending patent applications, of which 3 have been allowed but not yet issued. Additionally, the Company has 1 issued and 17 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 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 -19- 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 -20- 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. 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 in the United States, if approved for marketing, and internationally and other factors not within the Company's control. On February 17, 1998, the Company completed an initial public offering of 2,300,000 shares of common stock. On February 27, 1998, the Company completed the sale of an additional 345,000 shares of common stock pursuant to the exercise by the underwriters of an over allotment option. Net proceeds to the Company totaled approximately $28.4 million. While the Company believes that the net proceeds of the offering, together with its previously existing capital resources and projected interest income, will be sufficient to fund its operations and its capital investments through 1999, there can be no assurance that the Company will not require additional financing prior to that time. In addition, 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. Lack of Sales, Marketing and Distribution Experience. The primary market for the Company's products in the United States 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 believes that it can address this market with a direct sales force. 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 Company's soundbridges 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. -21- The Company intends to position its 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. The Company has established a European sales and marketing organization which, as of March 31, 1999, is comprised of 7 marketing, sales and support personnel. These personnel are performing direct sales activities in Germany, France, the United Kingdom, Switzerland and Austria, and are supporting distributors in other European countries. In addition, the Company has hired a sales manager for South America. The Company's initial selling efforts in Europe have been targeted primarily at those ENT surgeons specializing in otology. While the Company intends to continue to market its products to these specialists, it also plans to focus on the referring physicians, audiologists and the general population of ENT surgeons in an attempt to increase the number of patients that are referred to specialist ear surgeons. The Company is also attempting to gather clinical and other data which it believes will be helpful in obtaining reasonable reimbursement levels for its products. The Company also has distributors in Sweden, Denmark, Italy, Spain, Portugal, Belgium, The Netherlands, Luxembourg, and certain countries in the middle east and North Africa. The Company has also established a distributor for certain countries in South America. 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 an adequate 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 entered into distribution agreements with only a limited number of international distributors. There can be no assurance that the Company will be able to enter into similar agreements with other 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 an adequate 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. 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, 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 -22- and place a high degree of scrutiny on coverage and payment decisions for new technologies and procedures. Hearing aids, which do not involve surgery and, in certain cases, are exempt from the requirement for 510(k) approval, 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 PMA approval, the Company's products may also be the 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 Company's soundbridges, 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. -23- Even after obtaining the necessary foreign regulatory approvals, market acceptance of the Company's products and products currently under development in international markets will 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. The Company believes that in Europe, the primary source of funding for products such as the Company's soundbridges is the various government sponsored healthcare programs. Requirements for the granting of reimbursement in many countries are not clearly specified and may involve the collection of additional clinical data in support of submissions to the appropriate health care administrations. There can be no assurance that any required data would be available on a timely basis or 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 EU as well as in 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. 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 has not entered into employment agreements with any of its key personnel in the United States. The Company is the beneficiary under a $1.0 million key man insurance policy on Harry S. Robbins, its President and Chief Executive Officer. Product Liability Risk; Possible Insufficiency of Insurance. The Company's business involves the inherent risk of product liability claims. The Company maintains limited product liability insurance at coverage levels which the Company believes to be commercially reasonable and adequate given the Company's current operations. 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 -24- Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company had no holdings of derivative financial or commodity instruments at March 31, 1999. A review of the Company's other financial instruments and risk exposures at that date revealed that the Company had exposure to interest rate risk. At March 31, 1999 the Company performed sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates should not materially adversely affect the Company's financial position, results of operations or cash flows. -25- PART II. OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. On February 17, 1998, the Company completed the sale of 2,300,000 Common Shares at a per share price of $12.00 in a firm commitment underwritten public offering. The offering was effected pursuant to a Registration Statement on Form S-1 (Registration No. 333-40339), which the United States Securities and Exchange Commission declared effective on February 12, 1998. The offering was underwritten by Cowen & Company and UBS Securities. On February 27, 1998 the Company completed the sale of an additional 345,000 Common Shares at a per share price of $12.00 pursuant to the exercise of the over-allotment option by the underwriters. Of the $31,740,000 in aggregate proceeds raised by the Company in connection with the February offering, (i) approximately $2,221,800 was paid to the underwriters in connection with underwriting discounts and commissions and (ii) approximately $1,120,000 was paid by the Company in connection with offering expenses, including legal, printing and filing fees. The Company has used the remaining proceeds of the offering in the following manner: Use of Proceeds --------------- Research & Development, including clinical trials $ 9,300,000 Development of sales and marketing organization $ 2,500,000 Leasehold improvements and capital expenditures $ 1,100,000 Working capital and general corporate $13,500,000 Temporary Investments Short-term investments $ 2,000,000 All amounts represent estimates of direct or indirect payments of amounts to third parties. No amounts were paid directly or indirectly for the above purposes to directors or officers of the Company, to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. The use of proceeds described above do not represent a material change in the use of proceeds described in the offering prospectus. Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None -26- Item 5. Other Information. None Item 6. Exhibits. (a) Exhibits 10.1 Joint Development and Supply Agreement between Symphonix Devices, Inc. and Topholm & Westermann ApS dated January 16, 1998* 10.2 Amendment to Joint Development and Supply Agreement between Symphonix Devices, Inc. and Topholm & Westermann ApS effective November 20, 1998* 27.1 Financial Data Schedule * Confidential treatment has been requested with respect to certain portions of this Exhibit. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. -27- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 14, 1999 SYMPHONIX DEVICES, INC. /s/ Harry S. Robbins -------------------- Harry S. Robbins President and Chief Executive Officer /s/ Alfred G. Merriweather -------------------------- Alfred G. Merriweather Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) -28- EX-10.1 2 JOINT DEVELOPMENT AND SUPPLY AGREEMENT EXHIBIT 10.1 CONFIDENTIAL TREATMENT REQUESTED CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE PORTIONS OF THIS AGREEMENT MARKED [*]. THE OMITTED PORTIONS OF THIS AGREEMENT HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. [LOGO FOR SYMPHONIX] Joint Development & Supply Agreement Topholm & Westermann ApS Vaerloese, Denmark and Symphonix Devices, Inc. San Jose, California January 16, 1998 1. Introduction This document outlines a joint development and supply agreement (this "Agreement") by, and between, Symphonix/(R)/ Devices, Inc., having a principle place of business at 3047 Orchard Parkway, San Jose, CA, 95134, USA ("Symphonix") and Topholm & Westermann ApS, having a principle place of business at Ny Vestergaardsvej 25, DK-3500 Vaerloese, Denmark ("T&W"). 2. Scope T&W has developed certain expertise and technology with regards to the design, application and manufacture of digital signal processing to acoustic hearing aid devices. Specifically, T&W has developed a technology referred to herein as the "SENSO", a digital signal processing hybrid microelectronic circuit for hearing aid application. In conjunction with this SENSO technology, T&W has also developed a hand held microcontroller-based programming device referred to as the "LP2" programmer. These devices work in conjunction to form a platform for digital signal processing based hearing aid systems. Symphonix has developed certain expertise and technology with regards to the design, development and manufacture of implantable and partially implantable hearing devices. In particular, Symphonix has developed the Vibrant/(R)/ soundbridge, a partially implantable hearing device comprising the implanted VORP prosthesis and the external Audio Processor. The Audio Processor comprises signal processing technology that may be directly or indirectly extrapolated from standard acoustic hearing aid devices. Symphonix desires to obtain access to the SENSO hybrid technology as well as the LP2 programmer technology for use in particular Vibrant soundbridge products. T&W desires to supply such technology and T&W expertise to Symphonix along with certain assistance and technological know-how required to implement, maintain and support the use of said technology in Symphonix products on the terms and conditions of this Agreement. 3. Joint Development & Transfer of Technology Symphonix and T&W agree to the following terms and conditions with regards to: 1) the development of a SENSO digital signal processing hybrid for use in the Symphonix Audio Processor application, and 2) the development of an LP2 hand held programmer for use in conjunction with the SENSO hybrid developed for the Audio Processor application. 3.1. SENSO Hybrid Development Symphonix and T&W shall work together to develop a final SENSO hybrid circuit specification (the "SENSO Specifications") suitable for use with the Vibrant soundbridge products for the purposes of developing a supply agreement, including the purchase requirements, testing and inspection requirements of hybrid circuits, and overall quality Page 2 of 14 assurance provisions for the purchase of these hybrids. As part of this effort, T&W agrees to deliver fully tested hybrids that are pre-programmed with "factory calibration" settings, in accordance with the written SENSO Specifications. Symphonix shall provide all necessary technical information to aide T&W to determine the appropriate "factory calibration" settings and T&W shall provide all necessary know-how to allow Symphonix to fine tune these settings at Symphonix facilities. T&W shall provide Symphonix with all specifications, schematics and other know-how necessary to support general testing, troubleshooting and functional analysis of the SENSO hybrid for production and general quality assurance purposes. 3.2. LP2 Programmer Development Symphonix and T&W shall work together to develop a final LP2 Programmer specification (the "LP2 Specifications") suitable for use with the Vibrant soundbridge products for the purposes of developing a supply agreement, including the purchase requirements, testing and inspection requirements of programmers, and overall quality assurance provisions for the purchase of these programmers. As part of this effort, T&W agrees to deliver fully assembled and tested programmers meeting the LP2 Specifications and labeled in accordance with artwork provided by Symphonix. In conjunction with each programmer, T&W shall provide a programmable read only memory chip (PROM) programmed with a modified version of the SENSO fitting software. The modifications shall be as agreed to and set forth in the LP2 Specification. Symphonix shall provide all necessary technical information to aid T&W to determine the modifications and settings for the fitting software and T&W shall provide the necessary know-how to allow Symphonix to verify these settings at Symphonix facilities. Symphonix further agrees to provide all sales packaging and accessories required for use with the LP2 programmer and to ensure that any visual resemblance of the Symphonix version of the LP2 programmer and ancillary manuals to the T&W programmer is minimized. T&W shall provide Symphonix with all specifications, schematics and other know-how necessary to support general testing, troubleshooting and functional analysis of the LP2 programmer for service and repair, as well as general quality assurance purposes. 3.3. Intellectual Property T&W hereby grants to Symphonix a non-exclusive, royalty-free license under T&W's interest in the SENSO hybrid and LP2 programmer (as same may be modified and/or improved hereunder) (i) to use, import, have imported, sell and otherwise distribute the SENSO hybrid as incorporated into Symphonix products; (ii) to use, import, have imported, sell and otherwise distribute LP2 programmers in conjunction with the marketing, sale and distribution of Symphonix products; and (iii) to use the SENSO hybrid and LP2 programmers for purposes of testing of Symphonix Products and developing specifications for Symphonix-specific SENSO hybrids and LP2 programmers as contemplated herein. The license granted Page 3 of 14 herein does not include the right to make or have made SENSO hybrids and LP2 programmers, and is applicable only to SENSO hybrids and LP2 programmers supplied to Symphonix by, or on behalf of, T&W. T&W represents that it has the right to grant the foregoing license. T&W shall own all right, title and interest in and to all SENSO and LP2 technology and all modifications and improvements thereto; provided, however, that T&W shall not disclose to, or use for the benefit of any third party, any modifications and/or improvements to the SENSO and LP2 technology designed, invented or otherwise developed as a result of the development work performed for Symphonix hereunder without the prior written consent of Symphonix. Hybrids purchased from T&W may never be used for air conduction hearing aids or sold to a third party for use in air conduction hearing aids. 4. Supply Agreement Symphonix and T&W agree to the following terms and conditions with regards to the supply, subsequent to the development work described in the section 3, of SENSO digital signal processing hybrids and LP2 programmers. 4.1. General Supply In accordance with the terms and conditions of this Agreement, T&W agrees to manufacture and supply to Symphonix, and Symphonix agrees to purchase from T&W LP2 Programmers and SENSO hybrids during the term of this Agreement. Symphonix and T&W agree that the supply of the SENSO hybrids and LP2 programmers developed as part of this agreement shall be in accordance with the terms and conditions set out in this Agreement. Symphonix will submit its orders for LP2 Programmers and SENSO hybrids on Symphonix's purchase order forms, specifying quantities ordered, shipping instructions, destinations and requested delivery dates. Any additional terms and conditions included in any such purchase order form, or in any order acknowledgment, invoice or other similar form, shall be of no force and effect and shall form no part of the agreement between the parties hereto unless such terms are expressly agreed by the parties in writing. 4.1.1. Pricing - ------ ------- The prices set forth below shall be F.O.B. point of origin. All prices are exclusive of sales, use and other taxes, export, import and other duties, which shall be paid by Symphonix F.O.B. point of origin. Prices shall be as set out below for the duration of this Agreement. The pricing structure of the SENSO and/or the LP2 may be revised if both parties mutually agree in writing to a new pricing structure. The 12-month periods referenced will be successive 12-month periods commencing with the placement of the first purchase order by Symphonix. Within such 12-month periods, pricing shall be based initially on the volumes anticipated in the forecast and purchase orders placed. As soon as it becomes evident that actual volumes are likely to indicate a different unit price, purchases shall be at that different price and retroactive price adjustments shall be invoiced to bring the price charged throughout the relevant 12-month period into line with the schedule set out below. SENSO Hybrids: [*] per hybrid, for quantities up to [*] units per 12 month period. Page 4 of 14 [*] per hybrid, quantities above [*] units per 12 month period. LP2 Programmers: [*] per programmer, minimum order size of [*] units. 4.1.2. Forecasting and Ordering - ------ ------------------------ At least semi-annually, Symphonix shall provide to T&W a forecast of anticipated purchases from T&W of SENSO hybrids and LP2 Programmers. Such forecasts shall be used for planning purposes and shall not be binding purchase commitments. Symphonix shall, during the term of this Agreement, place its purchase orders, specifying quantities ordered, shipping instructions, destinations and requested delivery dates. T&W will notify Symphonix in writing promptly of acceptance or rejection of a purchase order including an estimated shipment date. T&W's estimated shipment date shall not be later than the requested delivery date set forth in Symphonix's purchase order, provided that the products ordered are consistent with previously provided forecasts. If T&W has not provided a written statement of acceptance or rejection of a purchase order within ten (10) days after receipt thereof, T&W shall be deemed to have accepted such purchase order. Symphonix may cancel or reschedule purchase orders, but not within thirty (30) days prior to the scheduled delivery date. T&W agrees to use reasonable efforts to comply with rescheduling requests not made within the foregoing time period. T&W will submit an invoice to Symphonix for payment for each shipment under this Agreement and Symphonix will make payment to T&W thirty (30) days from the invoice date, provided that invoice date shall not be earlier than the shipment date. 4.2. Limit of Responsibility for Delivered Components T&W's responsibility is limited to the quality of the SENSO hybrids and LP2 programmer hardware when delivered to Symphonix. T&W shall be responsible for supplying product that conforms with the agreed SENSO Specifications and LP2 Specifications and to make right or replace any product or hardware determined to be in nonconformance with the agreed SENSO Specifications and LP2 Specifications. Upon approval by Symphonix, T&W will have no responsibility for any claims or problems caused by the modified fitting software when used in or with Symphonix products, except as noted in section 5 of this agreement. T&W agree to provide fair and reasonable technical support to Symphonix, on an as-requested basis, in order to help resolve technical issues or problems that may arise from time to time where Symphonix may need additional technical know-how for components, hardware or software delivered as part of this agreement. Symphonix agrees to remunerate T&W for this technical support at fair and reasonable rates for non-recurring engineering time. 4.3. Returns Symphonix shall have the right, within thirty (30) days after receipt of products supplied by T&W, to reject any lots or units which, upon inspection, fail to conform to the SENSO Specifications or LP2 Specifications, by returning such nonconforming products to T&W with written explanation of the non-conformity. Rejected lots will be shipped to T&W's manufacturing facility, freight collect. T&W shall, at its expense, promptly replace the Page 5 of 14 nonconforming products with conforming products within a period not to exceed thirty (30) days from the date of rejection, or issue a full credit to Symphonix for such defective products. Notwithstanding the foregoing, the parties recognize that it is possible for a shipment of products to fail to conform to the applicable Specifications in a manner which would not be discoverable upon reasonable inspection and testing ("Latent Defects"). As soon as either party becomes aware of a Latent Defect in any products it shall immediately notify the other party, in which case, Symphonix may reject the applicable products as provided in this Section until sixty (60) days after the discovery of such Latent Defect. 4.4. Continuation of Supply & Notification T&W agrees to supply Symphonix with the SENSO hybrids and LP2 Programmers as developed and described in this agreement, in accordance with the requirements of this agreement. T&W further agrees to provide Symphonix with a minimum of 180 days written notice of its intent to terminate the supply of either or both of the SENSO hybrid or LP2 Programmer as developed herein. During the 180 day period, Symphonix may place purchase orders in accordance with this Agreement. In addition, as a result of such notification of termination of supply, Symphonix may place and T&W shall accept a "one-time" purchase order in quantities adequate to cover Symphonix's reasonably anticipated requirements during the twelve (12) month period following the expiry of the 180-day notice period. Such order shall be delivered on a mutually agreed schedule over the twelve (12) month period following placement by Symphonix of the "one-time" purchase order. 5. Indemnification In the event that a claim, suit or proceeding is instituted against T&W seeking damages as a result of actual or alleged malfunction of any Symphonix product containing products, components or software supplied by T&W, Symphonix shall, upon request by T&W and at Symphonix's expense, defend or (at Symphonix's option) settle such claim, suit or proceeding, except as provided in the next paragraph. Symphonix shall have sole control of the defense of any such claim, suit or proceeding and/or settlement negotiations and Symphonix, agrees, subject to the limitations set forth below, to pay any final judgement entered pursuant thereto. If Symphonix fails to maintain reasonable control over such lawsuit or proceeding in a manner which does or will significantly affect the outcome of such lawsuit or proceeding, and Symphonix has not cured or commenced to cure such failure within forty-five (45) days after written notice thereof by T&W, T&W may, upon written notice to Symphonix, assume control of such lawsuit or proceeding until such time as Symphonix notifies T&W in writing of its intent to resume control thereof. If T&W assumes control of a lawsuit or proceeding pursuant to the foregoing sentence, T&W shall at all times act in good faith, using reasonable business judgement and shall use reasonable efforts to refrain from actions, statements or admissions which do or will adversely affect Symphonix or incur unnecessary or unreasonable expense. T&W agrees that Symphonix shall be relieved of the foregoing obligations unless T&W (i) notifies Symphonix promptly in writing of any such claim, suit or proceeding, (ii) gives Page 6 of 14 Symphonix written authorization to proceed as contemplated by this paragraph and (iii) gives Symphonix (at Symphonix expense) such information and assistance as Symphonix shall reasonably require in connection with the defense and/or settlement of such claim, suit or proceeding. T&W further agrees that Symphonix shall have no indemnification obligations hereunder in the event that the actual or alleged malfunction that is the subject of a claim for which indemnification hereunder is sought was caused by the gross negligence, recklessness or willful misconduct of T&W or its employees, agents or contractors, and in such event T&W shall refund to Symphonix any and all amounts paid by Symphonix pursuant to its indemnification obligations hereunder. 6. Mutual Non-disclosure Agreement & Confidentiality T&W and Symphonix agree to abide by the Mutual Non-disclosure Agreement provided for in Appendix A. T&W and Symphonix further agree that, except as necessary to comply with legal requirements, both parties shall keep as confidential the existence and terms of this Agreement. Neither party shall use the name, logos or trademarks of the other, or disclose the existence of this Agreement for marketing or promotional purposes without the express written consent of the other party. 7. Assignment Symphonix may assign its rights under this Agreement in whole or in part to any subsidiary or subsidiaries, which may be substituted directly for it. Either party may assign this Agreement to the successor of all or substantially all of its business assets related hereto. Neither party shall have any right to assign this Agreement except as expressly provided in this Section. It is expressly understood and agreed, however, that the assignor of any rights shall remain bound by all of the obligations of this agreement. 8. Payments In return for the engineering and development provided by T&W for purposes of developing the components, hardware and software described in sections 3.1 and 3.2 of this agreement, Symphonix agrees to pay a non-recurring engineering (NRE) charge of [*]. This NRE charge includes all development work, prototypes and documentation necessary to support this effort. Payment shall be made in the following manner: [*] payable upon execution of this agreement, and (ii) balance of US [*] upon final approval by Symphonix of SENSO hybrid prototypes, LP2 programmer hardware and modified fitting software (PROM). Symphonix further agrees to pay all reasonable and necessary travel expenses for T&W engineers to travel to Symphonix facilities in San Jose, CA, USA to support the development and implementation of the components, hardware and software described in this agreement. Such travel shall be pre-approved in writing by Symphonix prior to incurring any associated costs. Page 7 of 14 Payments shall be made for actual costs incurred and in no case without the submission of appropriate receipts or documentation for all reimbursable expenses. The payments and schedules for production shipments of SENSO hybrids and LP2 programmers shall be in accordance section 4. 9. Effective Date, Term and Termination This agreement shall become effective on the date indicated in Section 13. The term of this agreement, for the purposes of the joint development described in section 3, shall be to the completion of the development as determined by the written approvals for each of the SENSO and LP2 developments, or a period of 12 months, whichever comes first. The term of this agreement for purposes of the supply agreement described in section 4 shall continue until terminated by Symphonix with ninety (90) days written notice, or until terminated by T&W in accordance with section 4.4. The term of the Mutual Non-disclosure Agreement in Appendix A, shall be in accordance with that agreement. Material failure by T&W or Symphonix to comply with any of the obligations and conditions herein contained, unless such failure results from or is caused by applicable laws or regulations, shall entitle the other party to give the party in default written notice requiring it to cure such default. If such default is not cured within ninety (90) days after the receipt of such notice, the notifying party shall be entitled (without prejudice to any of its other rights conferred on it by this Agreement) to terminate this Agreement by giving notice to take effect immediately. The right of either party to terminate this Agreement, as provided herein, shall not be affected in any way by its waiver of, or failure to take action with respect to, any previous default. In the event any applicable federal, state or local laws or any regulation, order or policy issued under any such laws, is changed (or judicial interpretation thereof is developed or changed) in a way which will have a material adverse effect on the benefits anticipated by one or more parties to the Agreement, the adversely affected party may notify the other party in writing of such change and the effect of the change. Upon such notice, the parties shall enter into good faith negotiations to revise the Agreement to compensate for such change. 10. Notices Any notice or report required or permitted to be given or made under this agreement by one of the parties hereto to the other shall be in writing and shall be deemed to have been sufficiently given or made for all purposes if mailed by registered international mail, postage prepaid, addressed to such other party at its respective address as follows: For Symphonix: Symphonix Devices, Inc. 3047 Orchard Parkway San Jose, CA 95134 USA Page 8 of 14 For T&W: Topholm & Westermann ApS Ny Vestergaardsvej 25 DK-3500 Vaerloese Denmark 11. Entire Agreement & Amendments This Agreement together with the Mutual Non-disclosure Agreement (Appendix A) constitutes a final written expression of all the terms of the Agreement among the parties, and is a complete and exclusive statement of the terms. Any representations, promises, warranties, or statements made by the parties that differ in any way from the terms of this Agreement shall have no force or effect. The parties specifically represent that there are no additional or supplemental agreements among them. No addition to or modification of any provision of this Agreement shall be binding unless made in writing and signed by all parties. 12. Governing Law This Agreement shall be construed in accordance with the laws of the State of California, United States of America, without reference to conflict of laws principles. 13. Approval Agreed to and effective this day January 16, 1998 by and between Symphonix Devices, Inc. and Topholm &Westermann, ApS. For Symphonix Devices, Inc.; For Topholm & Westermann ApS; /s/ Harry S. Robbins /s/ Jan Topholm - ----------------------------------- ----------------------------------- Harry S. Robbins, President and CEO Name and Title Page 9 of 14 Appendix A Mutual Non-disclosure Agreement Page 10 of 14 MUTUAL NONDISCLOSURE AGREEMENT THIS MUTUAL NONDISCLOSURE AGREEMENT is made and entered into as of January 16, 1998 by and between Symphonix Devices, Inc., a California corporation and Topholm & Westermann, ApS, a corporation organized under the laws of the country of Denmark. 1. Purpose. The parties have entered into that certain Development and ------- Supply Agreement dated January 16, 1998 (the "Development Agreement") and in connection therewith, each party may disclose to the other certain confidential technical and business information which the disclosing party desires the receiving party to treat as confidential. 2. "Confidential Information" means any information disclosed by either ------------------------ party to the other party, either directly or indirectly, in writing, orally or by inspection of tangible objects (including without limitation documents, prototypes, samples, plant and equipment), which is designated as "Confidential," "Proprietary" or some similar designation. Confidential Information shall include without limitation the items set forth in the Appendix attached hereto, whether or not so designated upon disclosure. Information communicated orally shall be considered Confidential Information if such information is confirmed in writing as being Confidential Information within a reasonable time after the initial disclosure. Confidential Information may also include information disclosed to a disclosing party by third parties. Confidential Information shall not, however, include any information which (i) was publicly known and made generally available in the public domain prior to the time of disclosure by the disclosing party; (ii) becomes publicly known and made generally available after disclosure by the disclosing party to the receiving party through no action or inaction of the receiving party; (iii) is already in the possession of the receiving party at the time of disclosure by the disclosing party as shown by the receiving party's files and records immediately prior to the time of disclosure; (iv) is obtained by the receiving party from a third party without a breach of such third party's obligations of confidentiality; (v) is independently developed by the receiving party without use of or reference to the disclosing party's Confidential Information, as shown by documents and other competent evidence in the receiving party's possession; or (vi) is required by law to be disclosed by the receiving party, provided that the receiving party gives the disclosing party prompt written notice of such requirement prior to such disclosure and assistance in obtaining an order protecting the information from public disclosure. 3. Non-use and Non-disclosure. Each party agrees not to use any -------------------------- Confidential Information of the other party for any purpose other than the purposes contemplated by the Development Agreement. Each party agrees not to disclose any Confidential Information of the other party to third parties or to such party's employees, except to those employees of the receiving party who are required to have such information in order to perform in accordance with the Development Agreement. Neither party shall reverse engineer, disassemble or de- compile any prototypes, software or other tangible objects which embody the other party's Confidential Information and which are provided to the party hereunder. 4. Maintenance of Confidentiality. Each party agrees that it shall take ------------------------------ reasonable measures to protect the secrecy of and avoid disclosure and unauthorized use of the Confidential Page 11 of 14 Information of the other party. Without limiting the foregoing, each party shall take at least those measures that it takes to protect its own most highly confidential information and shall ensure that its employees who have access to Confidential Information of the other party have signed a non-use and non- disclosure agreement in content similar to the provisions hereof, prior to any disclosure of Confidential Information to such employees. Neither party shall make any copies of the Confidential Information of the other party unless the same are previously approved in writing by the other party. Each party shall reproduce the other party's proprietary rights notices on any such approved copies, in the same manner in which such notices were set forth in or on the original. 5. No Obligation. Nothing herein shall obligate either party to proceed ------------- with any transaction between them, and each party reserves the right, in its sole discretion, to terminate the discussions contemplated by this Agreement concerning the business opportunity. 6. No Warranty. ALL CONFIDENTIAL INFORMATION IS PROVIDED "AS IS". EACH ----------- PARTY MAKES NO WARRANTIES, EXPRESS, IMPLIED OR OTHERWISE, REGARDING ITS ACCURACY, COMPLETENESS OR PERFORMANCE. 7. Return of Materials. All documents and other tangible objects ------------------- containing or representing Confidential Information which have been disclosed by either party to the other party, and all copies thereof which are in the possession of the other party, shall be and remain the property of the disclosing party and shall be promptly returned to the disclosing party upon the disclosing party's written request. 8. No License. Except as provided in the Development Agreement nothing ---------- in this Agreement is intended to grant any rights to either party under any patent, mask work right or copyright of the other party, nor shall this Agreement grant any party any rights in or to the Confidential Information of the other party except as expressly set forth herein. 9. Term. The obligations of each receiving party hereunder shall survive ---- until such time as all Confidential Information of the other party disclosed hereunder becomes publicly known and made generally available through no action or inaction of the receiving party. 10. Remedies. Each party agrees that any violation or threatened -------- violation of this Agreement may cause irreparable injury to the other party, entitling the other party to seek injunctive relief in addition to all legal remedies. Page 12 of 14 11. Miscellaneous. This Agreement shall bind and inure to the benefit of ------------- the parties hereto and their successors and assigns. This Agreement shall be governed by the laws of the State of California, without reference to conflict of laws principles. This document contains the entire agreement between the parties with respect to the subject matter hereof, and neither party shall have any obligation, express or implied by law, with respect to trade secret or proprietary information of the other party except as set forth herein. Any failure to enforce any provision of this Agreement shall not constitute a waiver thereof or of any other provision. This Agreement may not be amended, nor any obligation waived, except by mutual agreement in writing signed by both parties hereto. SYMPHONIX DEVICES, INC. TOPHOLM & WESTERMANN, ApS. By: /s/ Harry S. Robbins By: /s/ Jan Topholm ------------------------- ------------------------- Name: Harry S. Robbins Name: Jan Topholm ----------------------- ----------------------- Title: President & CEO Title: President ---------------------- ---------------------- Page 13 of 14 APPENDIX A ---------- Symphonix: ---------- Confidential Information disclosed by Symphonix shall include all information disclosed by Symphonix relating to implantable hearing devices and products. Topholm & Westermann: -------------------- Confidential Information disclosed by Topholm & Westermann shall include all information disclosed by T&W relating to the SENSO digital signal processing technology and the LP2 programmer technology. Page 14 of 14 EX-10.2 3 AMENDMENT TO JOINT DEVELOPMENT EXHIBIT 10.2 CONFIDENTIAL TREATMENT REQUESTED CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE PORTIONS OF THIS AGREEMENT MARKED [*]. THE OMITTED PORTIONS OF THIS AGREEMENT HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Amendment to Joint Development & Supply Agreement dated January 16, 1998 between Topholm & Westermann ApS Vaerloese, Denmark & Symphonix Devices, Inc. San Jose California In accordance with Section 11 of the aforementioned agreement, the parties agree to amend the Joint Development & Supply agreement as follows: Section 4.1.1. Pricing The LP2 Programmer price shall be revised to US $[*] per programmer, minimum order size of [*] units. Reason: This price increase of US $5 per unit is to cover the cost of a Symphonix-specific programmer overlay and logo sticker to be applied and provided as part of the delivered programmer unit. Symphonix shall provide the custom artwork, which shall be implemented by T&W and its subcontractors. Section 10. Notices Symphonix's notification address shall be: Symphonix Devices, Inc. 2331 Zanker Road San Jose, CA 95131 USA Reason: Symphonix has moved its US operations as shown. There are no other changes to the original agreement dated January 16, 1998. Approval Agreed to and effective this day November 20, 1998 by and between Symphonix Devices, Inc. and Topholm & Westermann ApS. For Symphonix Devices, Inc.; For Topholm & Westermann ApS; /s/ Alfred Merriweather /s/ Jan Topholm - ------------------------- ------------------------- Alfred Merriweather, CFO Name & Title EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 8,501 12,201 266 0 557 21,928 0 0 0 2,031 0 0 0 12 20,042 24,024 115 115 951 951 3,239 0 19 (3,940) 0 (3,940) 0 0 0 (3,940) (0.32) (0.32)
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